M&T Bank Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The filing is unaudited. Year-over-year comparisons are affected by the November 2015 Hudson City Bancorp acquisition, whose results are included from its acquisition date.
Financial performance and position
- Q3 revenue: Net interest income plus other income was $1.350 billion, versus $1.133 billion in Q3 2015. Net interest income was $858 million; other income was $491 million.
- Q3 earnings: Net income was $350 million, up from $280 million; diluted EPS was $2.10 versus $1.93. Nine-month net income was $985 million versus $809 million, and diluted EPS was $5.80 versus $5.56.
- Margins and returns: Net interest margin was 3.05%, down from 3.14% a year earlier and 3.13% in Q2 2016. Q3 return on average assets was 1.12%; return on average common equity was 8.68%.
- Costs: Q3 expenses were $752 million versus $654 million a year earlier; the efficiency ratio improved to 55.9% from 57.1%. Higher costs reflected acquired operations, professional services, advertising and FDIC assessments. Nine-month expenses included $36 million of merger-related costs; none occurred in Q3.
- Balance sheet at September 30: Assets were $126.8 billion; net loans and leases were $88.7 billion; deposits were $98.1 billion; and shareholders’ equity was $16.3 billion. Loans and deposits increased from year-end 2015, while long-term borrowings declined to $10.2 billion from $10.7 billion.
- Liquidity and cash flow: Interest-bearing deposits at banks were $10.8 billion. For the first nine months, operating cash flow was $1.07 billion, investing cash outflow was $4.00 billion and financing cash inflow was $2.89 billion; cash and cash equivalents declined $36 million. Management said liquidity was adequate for anticipated normal-course needs and reported compliance with phased-in LCR requirements.
- Capital: Consolidated CET1, Tier 1, total capital and leverage ratios were 10.78%, 12.04%, 14.47% and 9.81%, respectively. The company repurchased $350 million of shares in Q3 and $604 million in the first nine months.
- Credit: The allowance for credit losses was $976 million, or 1.09% of loans. Q3 net charge-offs were $41 million, or 0.19% annualized, versus $40 million and 0.24% a year earlier. Nonaccrual loans were $837 million, or 0.93% of loans; total nonperforming assets were $997 million.
Material changes and notable items
- Hudson City added substantial loans, deposits and operating scale. Management attributed much of the growth in average earning assets and core deposits to the acquisition; it also increased expenses and deposit funding costs.
- Q3 net income included a $28 million pretax ($17 million after-tax) gain from selling substantially all available-for-sale collateralized debt obligations, largely in response to the Volcker Rule.
- Mortgage banking revenue rose to $104 million in Q3 from $84 million a year earlier, supported by stronger commercial loan originations. Nine-month mortgage banking revenue, however, declined to $275 million from $288 million.
- Nonaccrual residential loans included loans acquired with Hudson City that had been performing at acquisition and later became more than 90 days delinquent. Criticized commercial and commercial real estate loans totaled $2.5 billion, up from $2.1 billion at year-end 2015.
- On May 12, 2016, M&T Bank paid $64 million to settle government investigations concerning FHA and agency mortgage-loan underwriting, without admitting liability. The filing said the settlement did not materially affect reported financial condition or results.
Outlook, capital actions and risks
- The filing provides no specific earnings or revenue guidance. Management cited a low-rate environment, higher deposit costs and growth in low-yielding reserve balances as pressures on net interest margin; future results remain sensitive to rates, spreads, credit performance and portfolio mix.
- The Federal Reserve did not object to the revised 2016 capital plan, which permits up to $1.15 billion of common-share repurchases during the four-quarter period beginning July 1, 2016. The board also authorized a repurchase program for up to that amount, subject to regulatory limits. The plan contemplated increasing the quarterly dividend by up to $0.05, to $0.75, in Q1 2017; dividends remain subject to board declaration.
- Management highlighted risks from real estate values and delinquencies, commercial real estate valuation uncertainty, consumer charge-offs, regional economic weakness in upstate New York and central Pennsylvania, interest-rate movements, funding availability, regulation and acquisition integration.
- Other legal matters carry an estimated reasonably possible loss range of $0–$40 million beyond recorded liabilities. Separately, Wilmington Trust Corporation faces a pre-acquisition DOJ indictment; trial was scheduled for October 2, 2017. The filing notes potential criminal, regulatory, financial and reputational consequences.
- On October 28, 2016, after quarter-end, M&T issued $500 million of Series F preferred stock and expected to redeem $500 million of Series D preferred stock in December 2016, subject to the disclosed approvals and terms.
Key facts for investors to verify
- How much of earnings and balance-sheet growth reflects Hudson City, and how acquisition-related costs and benefits are evolving.
- Whether margin pressure from deposit repricing and low-yielding liquidity balances continues, and how interest-rate sensitivity translates into actual results.
- Trends in criticized loans, residential delinquencies tied to Hudson City, consumer charge-offs and the adequacy of the credit-loss allowance.
- Execution and regulatory limits on the $1.15 billion repurchase authorization and the proposed Q1 2017 dividend increase.
- Developments in the Wilmington Trust proceedings and other litigation, and the effects of the post-quarter preferred-stock issuance and planned redemption.