M&T Bank Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless noted, dollar amounts below are in U.S. dollars.
Business context and financial performance
M&T is a regional bank holding company with commercial and retail banking, mortgage banking, trust and investment services. The filing compares Q3 2013 with Q3 2012 and the first nine months of 2013 with the comparable 2012 period.
- Q3 revenue: Net interest income was $673 million, up 1.6% year over year; other income was $477 million, up 7.1%. Combined, these amounted to approximately $1.15 billion.
- Q3 earnings: Net income was $294 million versus $293 million. Diluted EPS was $2.11 versus $2.17. Return on average assets was 1.39% and return on average common equity was 11.06%.
- Nine-month earnings: Net income increased to $917 million from $733 million; diluted EPS rose to $6.64 from $5.37.
- Margins and expenses: Q3 net interest margin narrowed to 3.61% from 3.77% a year earlier; taxable-equivalent net interest income increased to $679 million from $669 million. Other expense rose 7% to $659 million. The efficiency ratio increased to 56.0% from 53.7%.
- Credit: Q3 provision for credit losses was $48 million, compared with $46 million; net charge-offs were $48 million, or 0.29% annualized of average loans. The allowance was $916 million, 1.44% of loans. Nonperforming assets were $1.005 billion, or 1.58% of loans plus foreclosed assets.
- Balance sheet and liquidity: At September 30, assets were $84.4 billion, loans net of allowance were $62.7 billion, deposits were $66.6 billion, long-term borrowings were $5.1 billion, and shareholders’ equity was $11.0 billion. Nine-month operating cash flow was $504 million; cash and cash equivalents ended at $2.060 billion, up $73 million from the beginning of the period.
- Capital: Current consolidated regulatory ratios were 11.88% Tier 1, 15.07% total capital and 10.74% Tier 1 leverage. Management estimated fully phased-in CET1 of approximately 8.75% under the new capital rules.
Material changes and notable items
- Q3 diluted EPS declined year over year despite slightly higher net income, reflecting higher average diluted shares. Net interest margin also compressed amid lower asset yields.
- Average commercial and commercial real estate lending grew year over year, while residential real estate and consumer loan balances fell. Loans declined during Q3 in part because of securitizations.
- Q3 results included $56 million of pretax gains from securitizations: approximately $35 million from residential mortgage loans and $21 million from automobile loans. The company said securitizations supported regulatory capital, liquidity and risk objectives.
- Q2 included a $46 million pretax loss on sales of approximately $1.0 billion of privately issued mortgage-backed securities, $103 million pretax gains on Visa and MasterCard shares, and a $26 million expense reduction from reversal of an expired Wilmington Trust contingent compensation accrual. These items make sequential comparisons less representative.
- Hudson City Bancorp acquisition consideration was valued at approximately $4.8 billion. Regulatory approval remained outstanding, and the parties extended the termination date to January 31, 2014.
Outlook, risks and contingencies
- No specific earnings guidance is provided in the supplied filing text. Management said available liquidity sources were adequate for anticipated normal-course funding needs and estimated the company could meet the new capital requirements.
- The Federal Reserve Bank of New York identified BSA/AML compliance concerns. M&T and its principal bank entered into a written agreement requiring an enhanced compliance risk-management program and other remediation steps. The work and regulatory review could delay or prevent the Hudson City merger.
- New capital rules take effect beginning in 2015, with phased implementation; trust preferred securities are scheduled to be largely excluded from Tier 1 capital by 2016. The filing also discusses uncertainty around debit-card interchange-fee regulation.
- Management cited low interest rates and margin pressure, credit and collateral risks, regional economic weakness, regulatory changes, and dependence on funding availability as material risk factors. A 100-basis-point rate decline was modeled to reduce first-year net interest income by approximately $65 million; actual results may differ from modeled estimates.
- Pending and threatened litigation had an estimated reasonably possible aggregate loss range of $0–$70 million beyond existing accruals; excess exposure was not estimable. Separate SEC and DOJ investigations concerning pre-acquisition Wilmington Trust reporting and lending matters remained ongoing.
Important facts for investors to verify
- Progress and regulatory status of BSA/AML remediation, and any resulting impact on the Hudson City transaction or its January 31, 2014 termination date.
- Underlying earnings after considering Q3 securitization gains and the unusual Q2 securities gains, securities-sale loss and accrual reversal.
- Whether net interest margin pressure persists, and how loan and deposit mix, interest rates and deposit costs affect earnings.
- Credit trends in criticized, nonaccrual and past-due loans, particularly residential real estate, commercial real estate and consumer exposures; also assess the allowance relative to portfolio risk.
- Capital levels under the fully phased-in rules, treatment of trust preferred securities and the effects of continued securitizations and balance-sheet changes.
- Developments in Wilmington Trust investigations and litigation, and any change to the disclosed possible loss range.