M&T Bank Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and performance
M&T is a regional banking company whose operations include business, commercial, real estate, residential mortgage and retail banking. It reported lower year-over-year earnings, with pressure from reduced mortgage activity, a narrower net interest margin and higher operating costs. Credit costs improved compared with Q1 2013.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net interest income | $656.4 million | $656.1 million |
| Other income | $420.1 million | $432.9 million |
| Net income | $229.0 million | $274.1 million |
| Diluted earnings per common share | $1.61 | $1.98 |
| Provision for credit losses | $32.0 million | $38.0 million |
| Net charge-offs | $31.9 million | $36.7 million |
| Net interest margin, taxable-equivalent | 3.52% | 3.71% |
| Efficiency ratio | 63.95% | 55.88% |
| Operating cash flow | $561.1 million | $698.4 million |
Net income declined about 16% year over year. Total assets were $88.5 billion, loans and leases net of unearned discount were $64.1 billion, deposits were $68.7 billion, and shareholders’ equity was $11.9 billion at quarter-end. The allowance for credit losses was $916.8 million, or 1.43% of loans and leases. Nonaccrual loans were $890.9 million, 1.39% of loans.
Quarter-end cash and cash equivalents were $1.76 billion. Investing activities used $3.44 billion, primarily reflecting purchases of available-for-sale securities and increased deposits at banks; financing activities provided $2.97 billion, including deposit growth, long-term borrowing proceeds and preferred-stock issuance. Long-term borrowings were $6.25 billion, up from $5.11 billion at year-end 2013.
Regulatory capital ratios at March 31 were 12.22% Tier 1 capital and 15.30% total capital on a consolidated basis. Management estimated fully phased-in Common Equity Tier 1 at approximately 9.22% under the new capital rules. Tangible common equity to tangible assets was 8.34%. The quarterly common dividend remained $0.70 per share.
Material changes versus comparable periods
- Net interest income was nearly flat year over year, but average earning assets increased 5% to $76.3 billion while the net interest margin fell 19 basis points to 3.52%. Lower loan balances and growth in lower-yielding bank deposits and securities contributed to the margin pressure.
- Other income declined $12.8 million year over year, led by a $13.1 million reduction in mortgage banking revenue amid lower refinancing and loan-origination activity.
- Other expense increased $66.7 million to $702.3 million. Management attributed higher costs versus Q1 2013 principally to professional services and salaries for BSA/AML compliance, capital planning, stress testing, risk management and other operational initiatives. The efficiency ratio rose from 55.88% to 63.95%.
- Credit provision fell by $6.0 million; annualized net charge-offs improved to 0.20% of average loans from 0.23%. Nonaccrual loans were lower than a year earlier but slightly higher than year-end 2013.
- Available-for-sale securities rose to $6.19 billion from $4.53 billion at year-end, and total investment securities rose to $10.36 billion from $8.80 billion. Loans were broadly stable versus year-end.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management said available liquidity was adequate for anticipated ordinary-course needs and expected to take further steps as needed to comply with final liquidity regulations.
- Hudson City acquisition: The proposed acquisition was valued at approximately $5.2 billion and remained subject to regulatory approvals and other conditions. The parties extended the termination date to December 31, 2014; completion was not assured. M&T stated the timing was affected by its work to address regulatory concerns.
- BSA/AML compliance: M&T and its bank subsidiary were operating under a written agreement with the Federal Reserve Bank of New York requiring an enhanced compliance program and other improvements. The initiative involved outside consultants and increased expenses.
- Capital and regulation: M&T issued $350 million of Series E preferred stock and redeemed $350 million of 8.5% trust-preferred-related debt in Q1. Trust preferred securities begin phasing out of Tier 1 capital in 2015 and are excluded from Tier 1 beginning in 2016. The Federal Reserve did not object to M&T’s 2014 capital plan, which permits the stated dividend and up to $50 million of subordinated debt repurchases, subject to board approval and applicable terms.
- Interest-rate risk: Management’s modeled first-year net interest income increased by about $125 million under a gradual +100 basis-point scenario and declined by about $69.7 million under a −100 basis-point scenario. These estimates depend on assumptions and actual results may differ.
- Legal matters: Pending litigation and investigations include SEC and DOJ matters concerning Wilmington Trust activities before its acquisition and a securities class action proceeding to discovery. The filing estimates reasonably possible aggregate losses beyond recorded liabilities at $0–$50 million, but says outcomes could affect a particular period’s results.
- Other items: No merger-related expenses or securities impairment charges were recorded in Q1 2014; Q1 2013 included $4.7 million of merger expenses and $9.8 million of net OTTI losses. Management’s non-GAAP net operating income was $235.2 million, versus $285.1 million in Q1 2013. The filing notes this measure excludes specified items and is not GAAP.
Important facts for investors to verify
- Progress and regulatory status of the BSA/AML remediation program and whether it affects the Hudson City merger timetable or other regulatory approvals.
- Drivers and durability of the lower net interest margin, including loan growth, asset yields, deposit mix and securities purchases.
- Whether compliance, risk-management and other operating expenses moderate, and how the efficiency ratio develops.
- Credit quality trends by loan category, particularly nonaccrual, past-due and home-equity exposures, and the adequacy of the allowance.
- Liquidity and capital impacts of increased securities holdings, new borrowings, preferred issuance and the phase-out of trust preferred capital.
- Developments in Wilmington Trust investigations and litigation, and any change in estimated exposure beyond recorded liabilities.