M&T Bank Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are in U.S. dollars. The quarter reflects the November 1, 2015 acquisition of Hudson City Bancorp, so year-over-year comparisons include a substantially larger company.
Business context and reporting period
M&T is a regional bank with commercial, real estate, consumer, retail, mortgage banking, trust and wealth-management businesses. The Hudson City acquisition expanded its presence in New Jersey, Connecticut and New York. M&T paid about $2.1 billion in cash and issued 25.95 million shares; the transaction was valued at approximately $5.2 billion and added about $36.7 billion of assets at acquisition. Management cited expected geographic diversification and scale benefits.
Financial performance and condition
- Earnings: Net income was $298.5 million, up 23.6% from $241.6 million in Q1 2015. Diluted EPS was $1.73 versus $1.65; basic EPS was $1.74 versus $1.66. Net income available to common shareholders was $275.7 million. The common dividend remained $0.70 per share.
- Revenue and interest margins: Total revenue on the taxable-equivalent basis was $1.299 billion, compared with $1.106 billion a year earlier. Taxable-equivalent net interest income increased 32% to $878.3 million, mainly reflecting higher average earning assets following the acquisition. Net interest margin was 3.18%, versus 3.17%; net interest spread was 3.01%, versus 2.97%.
- Noninterest income and expenses: Other income was $420.9 million, down from $440.2 million. Other expense rose to $776.1 million from $686.4 million, including $23.2 million of merger costs and $12.3 million of intangible amortization. The efficiency ratio improved to 57.0% from 61.5%.
- Credit: Provision for credit losses was $49 million, up from $38 million. Net charge-offs were $42.2 million, or 0.19% of average loans on an annualized basis, versus $36.2 million and 0.22%. Nonaccrual loans were $876.7 million (1.00% of loans), up from $790.6 million (1.18%) a year earlier. The allowance was $962.8 million, or 1.10% of loans, compared with $921.4 million, or 1.37%, a year earlier.
- Balance sheet: Total assets were $124.6 billion, up from $122.8 billion at year-end; loans, net of unearned discount, were $87.9 billion versus $87.5 billion; deposits were $94.2 billion versus $92.0 billion. Shareholders’ equity was $16.4 billion. Average loans grew 32% year over year and average deposits grew 29%, with acquisition effects significant.
- Debt and liquidity: Long-term borrowings were $10.3 billion and short-term borrowings were $1.8 billion at quarter-end. Cash and due from banks totaled $1.18 billion, while interest-bearing bank deposits were $9.55 billion. Cash flows were $448.2 million from operations, negative $2.02 billion from investing and positive $1.38 billion from financing; cash and cash equivalents declined $189.9 million. Management said available liquidity was adequate for normal-course needs and the company was complying with the phased-in liquidity coverage requirements.
- Capital: Consolidated regulatory ratios were 11.06% CET1, 12.35% Tier 1, 14.84% total capital and 9.96% Tier 1 leverage. M&T repurchased 948,545 shares for $100 million during the quarter. The board authorized up to $154 million of repurchases in Q2 2016, including a $54 million reallocation with Federal Reserve concurrence.
Material changes versus comparable periods
- Year-over-year earnings and interest income increased substantially, driven principally by Hudson City-related growth in loans, deposits and earning assets. The acquisition also increased expenses, including FDIC assessments, personnel costs and integration spending.
- Other income declined year over year, particularly mortgage banking revenue (down about $20 million) and trust income (down about $13 million). The April 2015 sale of the trade-processing business reduced comparative trust revenue.
- Consumer net charge-offs increased to $37.4 million from $19.6 million, including $14 million of charge-offs on loans associated with customers identified as deceased or bankrupt; $11 million of those balances had been current.
- Net income was below Q4 2015’s $271.0 million, while taxable-equivalent net interest income rose from $813.4 million and the net interest margin increased from 3.12%. Q4 included $97.0 million of merger-related expenses, compared with $23.2 million in Q1 2016.
- Nonperforming assets were $1.06 billion, compared with $994.5 million at year-end. Management attributed increased nonaccrual loans in part to acquired Hudson City residential loans migrating to delinquency.
Outlook, commentary, risks and unusual items
- The filing provides no specific numeric earnings or revenue guidance. Management expects additional Hudson City merger-related expenses in 2016 and anticipates acquisition synergies, which are not quantified here.
- Management highlighted interest-rate and spread changes, credit losses, real estate collateral values, liquidity access, regulatory requirements, competition, technology and execution of acquisition integration as factors that could affect results. Rate-sensitivity modeling estimated first-year net interest income increases of $163.7 million under a gradual +100-basis-point scenario and $280.5 million under +200 basis points, and a $115.3 million decrease under a gradual -50-basis-point scenario; management cautioned that assumptions are uncertain and actual results may differ.
- M&T is negotiating with government agencies over an investigation into FHA-insured and agency-sold residential loan underwriting. Potential remedies could include penalties, restitution or business-practice changes. Discussions had not produced a definitive agreement; management expected a potential settlement not to materially affect future consolidated financial condition or results.
- Wilmington Trust Corporation, acquired by M&T in 2011, was indicted in January 2016 over alleged pre-acquisition conduct and intends to defend itself. The filing describes potential criminal or other remedies. Separate securities litigation was stayed pending the criminal trial. For other pending matters, reasonably possible losses beyond recorded liabilities were estimated in aggregate at $0–$40 million, although some excess exposure was not estimable.
- The Federal Reserve written agreement concerning BSA/AML compliance remained unresolved, though M&T reported substantial progress. Management identified no material changes to previously disclosed risk factors. Disclosure controls were reported effective, with no material internal-control changes identified for the quarter.
Important facts for investors to verify
- How Hudson City integration costs, customer retention and expected cost savings develop, and how much further merger spending is expected in 2016.
- Whether credit quality stabilizes: monitor nonaccrual migration in acquired residential loans, criticized commercial credits, consumer charge-offs and allowance coverage.
- How recurring revenue and expenses trend absent acquisition effects, particularly mortgage banking, trust income, FDIC assessments and personnel costs.
- The resolution and financial consequences of the FHA/Fannie Mae/Freddie Mac investigation, Wilmington Trust proceedings and other legal contingencies.
- Capital distributions and liquidity: confirm the planned Q2 repurchases, dividend capacity, regulatory capital levels and compliance with liquidity requirements.
- Interpret GAAP and management-defined “net operating” results separately: Q1 net operating income was $320.1 million and diluted net operating EPS was $1.87, excluding specified merger costs and intangible amortization.