M&T Bank Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012 unless otherwise noted. Amounts are U.S. dollars.
Business context and results
M&T is a regional banking company with commercial, real estate, consumer, mortgage banking, trust and retail banking operations. First-quarter net income was $274 million, or $1.98 per diluted common share, versus $206 million, or $1.50, in Q1 2012. Management’s non-GAAP net operating income was $285 million, or $2.06 per diluted share; it excludes specified acquisition-related expenses and intangible amortization.
Key financial metrics
| Metric | Q1 2013 / March 31, 2013 | Comparable period |
|---|---|---|
| Net interest income | $656 million GAAP; $663 million taxable-equivalent | $620 million GAAP in Q1 2012 |
| Other income | $433 million | $377 million in Q1 2012 |
| Net interest margin | 3.71% | 3.69% in Q1 2012; 3.74% in Q4 2012 |
| Provision for credit losses | $38 million | $49 million in Q1 2012 |
| Net charge-offs | $37 million; 0.23% annualized of average loans | $48 million; 0.32% in Q1 2012 |
| Other expense | $636 million | $640 million in Q1 2012 |
| Efficiency ratio | 55.9% | 61.1% in Q1 2012 |
| Cash from operations | $698 million | $539 million in Q1 2012 |
| Cash and cash equivalents at period end | $1.826 billion | $1.986 billion at year-end 2012 |
| Total assets | $82.812 billion | $83.009 billion at year-end 2012 |
| Loans, net of unearned discount | $65.924 billion | $66.571 billion at year-end 2012 |
| Total deposits | $65.090 billion | $65.611 billion at year-end 2012 |
| Long-term borrowings | $5.395 billion | $4.608 billion at year-end 2012 |
| Shareholders’ equity | $10.423 billion | $10.203 billion at year-end 2012 |
Net cash used in investing activities was $372 million and net cash used in financing activities was $487 million. The allowance for credit losses was $927 million, or 1.41% of loans. Nonaccrual loans were $1.053 billion, 1.60% of loans, compared with $1.065 billion, or 1.75%, a year earlier. Regulatory capital ratios at March 31 were 10.62% Tier 1 and 13.81% total capital for M&T consolidated; M&T Bank’s corresponding ratios were 9.17% and 12.12%.
Material changes and drivers
- Year over year, GAAP net income rose about 33%. Higher net interest income and fee income, including mortgage banking, and a lower credit-loss provision contributed; expenses were slightly lower.
- Mortgage banking revenue increased to $93 million from $56 million in Q1 2012, mainly reflecting higher residential loan origination-for-sale volume and wider margins. It was down from $117 million in Q4 2012 as volume and margins softened.
- Average loans grew 9% year over year, led by commercial and residential real estate lending; average investment securities declined 23%, primarily due to mortgage-security maturities and paydowns. Average core deposits increased 10% year over year.
- Compared with year-end, loans, deposits and total assets declined modestly. Short-term borrowings fell, while long-term borrowings increased, including $800 million of senior notes issued in March.
- Nonperforming assets were $1.148 billion, down from $1.206 billion in Q1 2012 but up from $1.117 billion at year-end 2012. Credit quality measures improved year over year, though nonaccrual loans increased from year-end.
Outlook, risks and unusual items
- Hudson City acquisition: The approximately $4.4 billion proposed acquisition remained subject to regulatory approval. M&T reported Federal Reserve concerns about its Bank Secrecy Act and anti-money-laundering compliance procedures, systems and processes, and launched a remediation initiative with outside consultants. The merger termination date was extended to January 31, 2014; completion was not assured. M&T stated it had not been advised of wrongdoing, illegal activity or identified money-laundering incidents. If completed, M&T expected to repay about $12 billion of Hudson City long-term borrowings and sell securities. Additional merger expenses were expected during 2013.
- Credit and securities exposure: Management cited continued risks from unemployment, weak regional growth, depressed real estate values and delinquencies, particularly in residential real estate, Alt-A and builder/developer lending. Q1 included $9.8 million of net OTTI losses recognized in earnings on privately issued mortgage-backed securities. Those securities involve Level 3 valuations and assumptions about defaults, loss severity and collateral performance.
- Interest rates and funding: Management noted that the low-rate environment pressures asset yields and that future changes in rates, spreads, prepayments and deposit behavior could affect net interest income. Its modeled first-year net interest income sensitivity was +$113 million for a gradual +100-basis-point scenario and −$67 million for −100 basis points; actual outcomes may differ materially. Management said available liquidity was adequate for anticipated normal-course needs.
- Capital and regulation: Dodd-Frank rules were expected to phase out trust preferred securities from Tier 1 capital, but implementation rules were not finalized; M&T included $1.2 billion of trust preferred securities in Tier 1 capital at quarter-end. The company had exited TARP in 2012. No specific earnings or revenue guidance was provided.
- Contingencies: Management did not expect litigation to be material to consolidated financial position, but estimated reasonably possible aggregate losses beyond recorded liabilities at $0–$40 million; outcomes could affect a particular period’s results. Commitments included $2.1 billion of maximum credit risk related to recourse on certain sold loans and $2.1 billion of variable-rate demand bonds backed by M&T Bank letters of credit.
Important facts for investors to verify
- Progress and regulatory acceptance of the BSA/AML remediation, and any resulting impact on Hudson City merger timing, conditions or completion.
- Whether the improvement in credit costs and year-over-year asset-quality measures continues, particularly in nonaccrual, Alt-A, home-equity and builder/developer exposures.
- Mortgage banking revenue sustainability as origination volumes and margins change, along with loan repurchase exposure.
- Performance and valuation assumptions for privately issued mortgage-backed and trust-preferred securities, including potential further impairment charges.
- Capital ratios and the effect of trust-preferred phase-out rules, as well as funding costs and liquidity after debt issuance and any future acquisition-related borrowing actions.