M&T Bank Corporation — Q2 2015 Form 10-Q
Business context and reporting period. M&T Bank Corporation reported the three and six months ended June 30, 2015; balance-sheet comparisons are to December 31, 2014 unless otherwise noted. The bank reported results across business, commercial real estate, mortgage, retail and other segments. Amounts below are rounded; income-statement and cash-flow figures are in millions unless stated.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net interest income, GAAP | $683.1 | $669.1 | $1,342.7 | $1,325.5 |
| Other income | $497.0 | $456.4 | $937.2 | $876.5 |
| Net income | $286.7 | $284.3 | $528.3 | $513.4 |
| Diluted EPS | $1.98 | $1.98 | $3.63 | $3.59 |
| Net interest margin, taxable-equivalent | 3.17% | 3.40% | 3.17% | 3.46% |
| Return on average assets | 1.18% | 1.27% | 1.10% | 1.17% |
| Efficiency ratio | 58.2% | 58.2% | 59.8% | 60.5% |
- Balance sheet and funding: Total assets were $97.1 billion, up from $96.7 billion at year-end 2014. Net loans were $67.2 billion, compared with $65.7 billion; deposits were $72.6 billion, compared with $73.6 billion. Long-term borrowings rose to $10.2 billion from $9.0 billion. In February, the bank issued $1.5 billion of senior notes, with maturities in 2020 and 2025.
- Credit: Q2 provision for credit losses was $30 million, unchanged year over year; first-half provision was $68 million versus $62 million. Q2 net charge-offs were $21 million, or 0.13% annualized of average loans, down from $29 million and 0.18% a year earlier. Nonaccrual loans were $797 million, 1.17% of loans, versus $880 million and 1.36% a year earlier. The allowance was $930 million, 1.36% of loans.
- Liquidity and cash flow: For the first half, operating cash flow was $558 million, investing cash flow was $(555) million, and financing cash flow was $(26) million. Cash and cash equivalents ended at $1.351 billion, compared with $1.917 billion at June 30, 2014. Management stated that liquidity sources were adequate for anticipated normal-course funding needs.
- Capital and shareholder returns: Consolidated regulatory capital ratios were 9.91% CET1, 11.78% Tier 1, 14.55% total capital and 10.22% Tier 1 leverage. Common dividends were $0.70 per share in Q2. The approved 2015 capital plan permitted up to $200 million of common-share repurchases in the first half of 2016; no shares were bought under the announced repurchase program in Q2.
Material changes versus comparable periods
- Q2 net income increased modestly, while diluted EPS was unchanged. First-half net income and diluted EPS rose approximately 3% and 1%, respectively.
- Q2 GAAP net interest income increased about 2%, but the taxable-equivalent net interest margin fell 23 basis points year over year. Management attributed margin pressure to lower earning-asset yields and a changed funding mix; average earning assets rose 10% year over year.
- Loans grew: average Q2 loans and leases increased 5% year over year to $67.7 billion, led by commercial real estate, commercial and auto lending. Average core deposits rose 5% to $71.2 billion, while period-end deposits declined from year-end.
- Other income benefited from a $45 million pretax gain on the sale of the retirement-services trade-processing business. The company also made a $40 million tax-deductible contribution to The M&T Charitable Foundation; together, these items reduced Q2 net income by about $1 million after tax.
- Credit indicators improved year over year overall, but criticized commercial and commercial real estate loans increased to $2.3 billion from $1.8 billion at both June 2014 and year-end 2014. Management said most newly criticized balances were current and the incremental allowance impact was not material.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management highlighted continued low interest rates and possible further pressure on loan and securities yields and net interest margin. Its modeled first-year net interest income sensitivity at June 30 was +$154 million for a gradual +100-basis-point rate scenario, +$285 million for +200 basis points, and $(74) million for -100 basis points; management cautioned that assumptions are uncertain and actual results may differ.
- The Hudson City Bancorp acquisition remained pending regulatory approval. The Federal Reserve indicated it intended to act on the application by September 30, 2015; the termination date was extended to October 31, 2015. M&T stated completion was not assured. The merger agreement’s estimated consideration was approximately $5.5 billion.
- M&T and its bank subsidiary remained subject to a Federal Reserve Bank of New York written agreement requiring improvements to the Bank Secrecy Act/anti-money-laundering compliance program. Management reported progress, but the matter remains relevant to the merger review and regulatory risk.
- Government agencies were investigating FHA-insured and Fannie Mae/Freddie Mac residential loan underwriting. The company disputed the government’s sample methodology, was cooperating, and had begun settlement discussions. Potential remedies could include substantial damages, penalties or business-practice changes.
- Other notable legal matters include ongoing DOJ and securities litigation relating to pre-acquisition Wilmington Trust activities. For pending and threatened litigation generally, reasonably possible losses beyond recorded liabilities were estimated at $0–$40 million in aggregate; the company said outcomes could affect results in a particular future period.
- Effective January 1, 2015, M&T retrospectively adopted proportional amortization accounting for qualified affordable-housing investments. The adoption did not materially affect financial position or results, but reclassified prior-period costs from operating expense to income tax expense. The Q2 trade-processing sale and charitable contribution were unusual items; the filing also reports a $40 million contribution and $45 million pretax sale gain.
- Regulatory matters include phased implementation of new capital rules and the Liquidity Coverage Ratio requirement, with initial LCR compliance beginning January 1, 2016. The company said it was taking steps to comply. Market, credit, liquidity, regulatory, legal and economic risks are discussed; management cited regional economic weakness in upstate New York and central Pennsylvania and uncertainty in the sustainability of broader economic improvement.
Important facts for investors to verify
- Track net interest margin, earning-asset yields and funding costs as rates and the balance-sheet mix change.
- Review criticized loans, nonaccrual trends, consumer and real-estate credit performance, and allowance adequacy alongside loan growth.
- Monitor the Hudson City merger application, compliance-agreement progress and any effect on timing, costs or expected benefits.
- Follow resolution and potential financial exposure from the FHA/Fannie Mae/Freddie Mac investigation and Wilmington Trust matters; the stated $0–$40 million range is for reasonably possible litigation losses beyond existing recorded liabilities.
- Assess whether recurring operating results support reported performance after separating the sale gain, charitable contribution and other non-GAAP adjustments; confirm the definitions and reconciliations of management’s non-GAAP measures.
- Check capital and liquidity ratios against regulatory phase-in requirements and confirm subsequent dividends, repurchases and funding actions.