M&T BANK CORP quarterly report, Q1 FY2015

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M&T Bank Corporation — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014 unless otherwise noted. Amounts below are in U.S. dollars.

Business context and financial results

M&T is a regional bank holding company with commercial and consumer banking, real estate lending, mortgage banking, trust and wealth-management businesses. It reported GAAP net income of $241.6 million, or diluted EPS of $1.65, compared with $229.0 million and $1.61 in Q1 2014.

  • Net interest income was $659.6 million, up 0.5% year over year; the taxable-equivalent figure was $665.4 million. Net interest margin was 3.17%, down from 3.52%.
  • Other income was $440.2 million, up 4.8%, led by mortgage banking revenue of $101.6 million versus $80.0 million.
  • Provision for credit losses increased to $38.0 million from $32.0 million. Other expense declined to $686.4 million from $690.2 million. Income before taxes was $375.4 million and income tax expense was $133.8 million.
  • Annualized return on average assets was 1.02% versus 1.07%; return on average common equity was 7.99% versus 8.22%. The efficiency ratio was 61.5%, improved from 62.8% in Q1 2014.
  • Operating cash flow was $458.4 million, compared with $561.1 million. Investing activities used $1.80 billion, while financing activities provided $1.34 billion. Cash and cash equivalents ended the quarter at $1.37 billion.

Balance sheet, credit and capital

  • Total assets were $98.38 billion, up from $96.69 billion at year-end. Loans and leases, net of unearned discount and allowance, were $66.18 billion, compared with $65.75 billion; deposits were $73.59 billion, essentially unchanged.
  • Investment securities totaled $14.39 billion, up from $12.99 billion. Management said securities purchases, including agency mortgage-backed securities, were partly intended to prepare for upcoming liquidity requirements.
  • Long-term borrowings rose to $10.51 billion from $9.01 billion. In February, the bank issued $1.5 billion of senior notes: $750 million due 2020 at 2.10% and $750 million due 2025 at 2.90%.
  • Shareholders’ equity was $12.53 billion. Reported regulatory capital ratios were 9.78% common equity Tier 1, 11.68% Tier 1, 14.92% total capital and 10.17% Tier 1 leverage for M&T consolidated.
  • The allowance for credit losses was $921.4 million, or 1.37% of loans and leases, versus $919.6 million and 1.38% at year-end. Net charge-offs were $36.2 million, or an annualized 0.22% of average loans, compared with $32.1 million and 0.19% in Q1 2014.
  • Nonaccrual loans were $790.6 million, or 1.18% of loans, down from $890.9 million, or 1.39%, a year earlier. Criticized commercial and commercial real estate loans increased to $2.0 billion from $1.8 billion at year-end.

Material changes and management commentary

  • Net income increased year over year, supported by stronger mortgage banking and other income, while net interest income was nearly flat. Management attributed margin pressure primarily to larger holdings of lower-yielding securities and bank deposits, despite higher average earning assets and loan balances.
  • Average loans and leases increased 4% year over year to $66.6 billion, including growth in commercial real estate and automobile lending. Average core deposits rose 7% to $70.1 billion year over year, but fell 5% from Q4 2014, partly reflecting lower trust-related balances.
  • Salary and benefit expense rose to $389.9 million from $371.3 million, including higher merit, incentive and pension costs. Lower professional-services costs and FDIC assessments partly offset the increase.
  • The company adopted proportional amortization accounting for qualified affordable-housing investments retrospectively. The change did not materially affect financial position or results; Q1 2014 was restated to shift $12 million of costs from operating expense to income tax expense.

Outlook, risks and contingencies

  • Hudson City acquisition: The proposed acquisition was valued at approximately $5.5 billion and remained subject to regulatory approval and other closing conditions. On April 3, 2015, the Federal Reserve indicated it intended to act on the application by September 30, 2015; the parties extended the termination date to October 31, 2015. Completion was not assured.
  • BSA/AML compliance: M&T and its bank subsidiary remained subject to a 2013 written agreement with the Federal Reserve Bank of New York requiring enhanced compliance risk-management measures. The company reported progress on its remediation initiative.
  • Capital plan: The Federal Reserve did not object to the 2015 capital plan. It allowed for a quarterly common dividend of $0.70 per share, subject to board approval, and authorization to repurchase up to $200 million of common shares in the first half of 2016. M&T redeemed $310 million of trust preferred securities on April 15, 2015.
  • Liquidity and interest rates: Management considered liquidity adequate for normal-course needs and was preparing for the modified liquidity coverage ratio requirement effective January 2016, with phase-in. Management warned that low rates and changes in spreads or balance-sheet mix could pressure net interest income. Modelled first-year net interest income increased under +100 and +200 basis-point scenarios and declined under -100 and -200 basis-point scenarios; results depend on assumptions and may differ materially.
  • Legal matters: The company disclosed pending and threatened litigation and regulatory matters. Beyond recorded liabilities, reasonably possible aggregate losses were estimated at $0–$40 million, though the company said outcomes could affect results in a particular period. Separate DOJ and securities-litigation matters involving pre-acquisition Wilmington Trust activities remained ongoing.
  • Other risks: Management highlighted uncertainty in economic conditions, real estate values, regional employment and population trends, regulatory changes, competition, litigation and the outcome of the Hudson City transaction. No material change to the risk factors in the 2014 Form 10-K was reported.

Most important facts for investors to verify

  • Progress and timing of the Hudson City merger, including regulatory approval and BSA/AML remediation.
  • Whether loan growth can offset continued net-interest-margin pressure, and the performance of the growing securities portfolio.
  • Trends in criticized loans, charge-offs, nonaccrual balances and the adequacy of the allowance.
  • Capital and liquidity effects of the 2016 regulatory requirements, debt issuance and trust-preferred redemption.
  • Whether the $0–$40 million range for reasonably possible legal losses changes, and developments in Wilmington Trust matters.
  • How the non-GAAP “net operating” results compare with GAAP results; Q1 2015 net operating income was $245.8 million and diluted net operating EPS was $1.68, versus GAAP net income of $241.6 million and diluted EPS of $1.65.