M&T Bank Corp. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; filed November 5, 2014. Dollar figures below are in U.S. dollars. Unless stated otherwise, financial statement amounts are in millions.
Business context and reporting period
M&T is a regional bank providing commercial, retail, real estate, mortgage, trust and related services. The quarter’s results reflect continued balance-sheet growth, investment in liquidity to prepare for regulatory requirements, and elevated spending on compliance and risk initiatives. Its proposed acquisition of Hudson City Bancorp remained pending regulatory approval.
Financial performance and position
- Q3 revenue and earnings: Net interest income was $669.1 million (taxable-equivalent: $674.9 million); other income was $451.1 million. Net income was $275.3 million, down from $294.5 million in Q3 2013. Diluted EPS was $1.91 versus $2.11; the common dividend remained $0.70 per share.
- Nine-month results: Net interest income was $1.995 billion and other income was $1.328 billion. Net income was $788.7 million versus $917.1 million; diluted EPS was $5.50 versus $6.64.
- Margins and returns: Q3 net interest margin was 3.23%, down from 3.61% a year earlier and 3.40% in Q2 2014. Q3 return on average assets was 1.17% and return on average common equity was 9.18%, compared with 1.39% and 11.06% in Q3 2013. The efficiency ratio was 59.7%, versus 56.0%.
- Credit: Q3 provision for credit losses was $29 million, down from $48 million; net charge-offs were $28 million, or 0.17% of average loans, versus $48 million and 0.29%. Nonaccrual loans were $847.8 million, 1.29% of loans, compared with $915.9 million and 1.44% a year earlier. The allowance was $918.6 million, or 1.40% of loans.
- Balance sheet and funding: At September 30, total assets were $97.2 billion, up from $85.2 billion at year-end 2013; loans, net of allowance, were $64.7 billion versus $63.2 billion, and deposits were $74.3 billion versus $67.1 billion. Cash and cash equivalents were $1.524 billion and interest-bearing bank deposits were $7.676 billion. Long-term borrowings rose to $9.061 billion from $5.109 billion.
- Cash flows, first nine months: Operating activities provided $774.5 million; investing activities used $12.129 billion, including substantial purchases of available-for-sale securities and increases in interest-bearing bank deposits; financing activities provided $11.206 billion, principally from deposit growth and borrowings. Cash and cash equivalents declined $149.3 million to $1.524 billion.
- Capital: Shareholders’ equity was $12.33 billion. Reported Tier 1 and total capital ratios were 12.45% and 15.40% for M&T consolidated, respectively. Management estimated fully phased-in CET1 at approximately 9.50%. The tangible common equity-to-tangible assets ratio was 8.05%.
Material changes versus comparable periods
- Q3 net income and diluted EPS declined year over year, despite lower credit-loss provisions, as margin compression, higher expenses and the absence of prior-year securitization gains weighed on results.
- Taxable-equivalent Q3 net interest income was $675 million, slightly below the prior-year quarter. Average earning assets increased 11% to $82.8 billion, but the margin contracted 38 basis points year over year, reflecting lower asset yields and growth in lower-yielding securities and bank deposits.
- Q3 other income was $451 million versus $477 million in Q3 2013. The prior-year quarter included $56 million of securitization gains; excluding those gains, prior-year other income was $421 million. Mortgage banking revenue increased to $93.5 million from $64.7 million, largely due to loan servicing activity.
- Nine-month net income fell 14%. The 2013 comparison included $83 million after tax of noteworthy gains and items: Q3 loan-securitization gains and Q2 securities-sale gains and an expired compensation accrual. No similar significant items were recorded in the first nine months of 2014.
- Other expense rose 9% to $2.063 billion for the first nine months. Management attributed the increase primarily to professional services and staffing for BSA/AML compliance, capital planning, stress testing, risk management and other operational initiatives.
- Asset growth included a substantial increase in investment securities, particularly agency mortgage-backed securities, and bank deposits. Total deposits and long-term borrowings also increased materially from year-end.
Outlook, management commentary, risks and contingencies
- Outlook: The filing provides no specific earnings or revenue guidance. Management said liquidity sources were adequate for normal-course funding needs and described actions to prepare for the Liquidity Coverage Ratio, with compliance beginning in 2016 and phased in through 2017.
- Hudson City transaction: The proposed acquisition was valued at approximately $5.4 billion. It remained subject to regulatory and other closing conditions, and the parties extended the termination date to December 31, 2014. Completion by that date was not assured.
- Regulatory compliance: M&T and its bank subsidiary were operating under a written agreement with the Federal Reserve Bank of New York requiring a revised BSA/AML compliance program and other improvements. Management reported progress, but the timing and regulatory satisfaction remained uncertain.
- Interest-rate risk: Management identified low rates and spread pressure as risks to net interest income. Its modeled first-year sensitivity showed net interest income increasing $256.6 million under a 200-basis-point rise and decreasing $128.7 million under a 200-basis-point decline; actual results may differ materially because the model relies on assumptions.
- Capital and regulation: Trust-preferred securities were scheduled to be phased out of Tier 1 capital beginning in 2015 and excluded by 2016. M&T issued $350 million of Series E preferred stock and redeemed $350 million of trust-preferred-related debt in 2014. The company also noted possible Volcker Rule-related divestitures of certain investments.
- Legal matters: Wilmington Trust paid $18.5 million to settle SEC claims concerning pre-acquisition financial reporting; it did not admit the allegations, and the settlement did not affect Q3 expense. A DOJ investigation and securities litigation involving pre-acquisition Wilmington Trust matters continued. For pending and threatened matters in aggregate, reasonably possible losses beyond recorded liabilities were estimated at $0–$40 million; outcomes could still materially affect a particular period’s results.
- Other risks: Management highlighted real estate valuations, economic conditions in upstate New York and central Pennsylvania, loan performance, regulatory change, funding availability and litigation. Approximately 60% of loans were to customers in New York and Pennsylvania.
Most important facts for investors to verify
- Whether margin compression and the shift toward lower-yielding liquidity assets continue, and how that affects net interest income.
- Progress and costs of the BSA/AML remediation, and any resulting regulatory restrictions or delay to the Hudson City acquisition.
- Credit trends, including criticized construction loans, nonaccrual commercial loans, home-equity exposure and allowance adequacy.
- Funding and capital effects of increased long-term borrowings, preferred stock, trust-preferred phase-out and LCR compliance.
- Developments in Wilmington Trust investigations and litigation, including exposure beyond recorded reserves.
- Underlying performance excluding 2013’s securitization and securities-sale items; the company’s “net operating” measures are non-GAAP.