M&T Bank Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unless noted otherwise, dollar amounts below are in U.S. dollars. Comparative income-statement periods are the corresponding 2014 periods; balance-sheet comparisons are to December 31, 2014.
Business context and reporting period
M&T is a regional banking company with commercial, real estate, consumer, mortgage-banking, trust and retail operations. Its proposed acquisition of Hudson City Bancorp remained pending at quarter-end; the company expected completion on or about November 1, 2015, subject to customary closing conditions. Federal Reserve and New York State approvals had been received.
Key financial metrics
| Metric | Q3 2015 / September 30, 2015 | Comparison |
|---|---|---|
| Total assets | $97.8 billion | $96.7 billion at December 31, 2014 |
| Loans and leases, net of unearned discount | $68.5 billion | $66.7 billion at December 31, 2014 |
| Total deposits | $72.9 billion | $73.6 billion at December 31, 2014 |
| Long-term borrowings | $10.2 billion | $9.0 billion at December 31, 2014 |
| Shareholders’ equity | $12.9 billion | $12.3 billion at December 31, 2014 |
| Net interest income (GAAP) | $692.8 million | $669.1 million in Q3 2014 |
| Net income | $280.4 million | $275.3 million in Q3 2014 |
| Diluted earnings per common share | $1.93 | $1.91 in Q3 2014 |
| Net interest margin, taxable-equivalent | 3.14% | 3.23% in Q3 2014; 3.17% in Q2 2015 |
| Allowance for credit losses | $933.8 million; 1.36% of loans | $919.6 million; 1.40% at December 31, 2014 |
For the first nine months, net income was $808.7 million versus $788.7 million in 2014, and diluted EPS was $5.56 versus $5.50. Taxable-equivalent net interest income was $2.05 billion, up 2% year over year; the margin was 3.16%, down from 3.38%.
Q3 other income was $439.7 million and other expense was $653.8 million. The efficiency ratio, as defined by the company, was 57.1%, compared with 58.4% a year earlier. Q3 return on average assets was 1.13%, and return on average common equity was 8.93%.
For the nine months, operating cash flow was $1.25 billion, investing cash flow was negative $1.59 billion, and financing cash flow was positive $222 million. Cash and cash equivalents declined $124 million to $1.25 billion. The filing reports bank regulatory capital ratios at September 30 of 10.08% CET1, 11.94% Tier 1, 14.70% total capital and 10.31% Tier 1 leverage for M&T consolidated.
Material changes versus comparable periods
- Q3 net income rose about 2% year over year, supported by higher net interest income and lower expenses; diluted EPS increased from $1.91 to $1.93.
- Higher average earning assets supported net interest income, but lower asset yields compressed the taxable-equivalent margin. Average loans and leases grew 5% year over year, led by commercial real estate and automobile lending.
- Q3 provision for credit losses increased to $44 million from $29 million a year earlier. Net charge-offs were $40 million, versus $28 million; the annualized net charge-off rate rose to 0.24% from 0.17%.
- Nonaccrual loans declined to $787 million, or 1.15% of loans, from $848 million, or 1.29%, a year earlier. Criticized commercial and commercial real estate loans increased to $2.3 billion from $2.0 billion a year earlier.
- Total deposits were down modestly from year-end, while loans, securities and long-term borrowings increased. The company said increased securities holdings and related borrowings were partly intended to prepare for upcoming liquidity rules.
- Q3 trust income and mortgage banking revenues declined year over year. Nine-month other income benefited from the $45 million pretax gain on the April sale of the trade-processing business; the second-quarter $40 million charitable contribution was also a notable item.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management expected to meet the Liquidity Coverage Ratio requirements as they phased in beginning January 2016. The Hudson City transaction was expected to close around November 1, 2015, subject to closing conditions. Management said liquidity sources were adequate for anticipated normal-course funding needs.
- Interest-rate and liquidity exposure: Management cited continued low-rate pressure on loan and securities yields and warned that changes in rates, spreads, balance-sheet mix and prepayments could affect net interest income. Its modeled first-year net interest income change was +$159 million under a gradual +100-basis-point scenario and −$85 million under a −100-basis-point scenario; management cautioned that actual results could differ materially.
- Credit and regional risks: Management highlighted commercial real estate valuation subjectivity, residential real estate performance, consumer credit, and economic conditions in upstate New York and central Pennsylvania. About 60% of loans were to customers in New York State and Pennsylvania.
- Regulatory and compliance matters: M&T and M&T Bank remained subject to a Federal Reserve written agreement concerning BSA/AML compliance; management reported significant progress but said outstanding issues remained. The company was also preparing for the LCR and implementing the Volcker Rule.
- Investigations and litigation: Government agencies were investigating FHA-insured loan originations and loans sold to Fannie Mae and Freddie Mac; settlement discussions continued. Potential remedies could include treble damages, fines, penalties or changes in business practices. Separately, Wilmington Trust faced a continuing DOJ investigation and securities litigation. The filing states aggregate reasonably possible losses beyond recorded liabilities for legal matters were estimated at $0–$40 million, excluding amounts not currently estimable.
- Acquisition: Hudson City had $35.1 billion of assets and $30.3 billion of liabilities at September 30. The estimated purchase price was approximately $5.3 billion. Integration, transaction execution and expected benefits remain items to assess.
- Unusual/accounting items: M&T sold its retirement-services trade-processing business in April, recording a $45 million pretax gain and $23 million after-tax gain. A retrospective accounting change for affordable-housing investments moved related amortization from operating expense to income tax expense; management said the effect on financial position and results was not significant.
Most important facts for investors to verify
- Whether Hudson City closed as expected, the final consideration and financing, and post-close integration costs, deposit retention and loan performance.
- Whether the higher Q3 provision and commercial charge-offs signal sustained credit deterioration, particularly in criticized commercial loans and the company’s key geographies.
- Whether net interest margin stabilizes as rates, asset yields, deposit costs and LCR-related securities funding evolve.
- The status and financial exposure of the FHA/Fannie Mae/Freddie Mac investigations, Wilmington Trust matters and BSA/AML agreement.
- Actual liquidity and capital outcomes as new regulatory requirements phase in, and whether reported earnings remain supported by recurring operations rather than transaction gains.