M&T Bank Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2019. Comparisons are with the corresponding 2018 periods unless otherwise noted. Amounts are U.S. dollars.
Business and financial performance
M&T is a regional bank holding company providing commercial and consumer banking, mortgage banking, trust and wealth services. In the third quarter, GAAP net income was $480 million, or $3.47 per diluted share, down from $526 million, or $3.53, a year earlier. For the first nine months, net income was $1.44 billion and diluted EPS was $10.16, versus $1.37 billion and $9.00 in 2018.
- Revenue and margins: Third-quarter net interest income was $1.030 billion, approximately flat year over year; taxable-equivalent net interest margin declined to 3.78% from 3.88%. Average earning assets rose 3% to $108.6 billion, but higher deposit costs and lower loan yields compressed the margin. Other income increased to $528 million from $459 million, led by mortgage banking, trust income and trading gains. For nine months, net interest income was $3.12 billion and other income was $1.54 billion.
- Credit costs and expenses: Provision for credit losses was $45 million in Q3, up from $16 million; net charge-offs were $36 million, or an annualized 0.16% of average loans, versus $16 million and 0.07%. Other expense rose to $878 million from $776 million. The efficiency ratio increased to 55.9% from 51.4%.
- Balance sheet and funding: Total assets were $125.5 billion at quarter-end, versus $120.1 billion at December 31, 2018. Loans and leases, net of unearned discount, were $89.8 billion, versus $88.5 billion; deposits were $95.1 billion, versus $90.2 billion. Short- and long-term borrowings totaled $12.5 billion, compared with $12.8 billion at year-end. Cash and interest-bearing bank deposits totaled approximately $14.3 billion.
- Cash flow: For the first nine months, operating activities provided $1.23 billion; investing activities used $4.00 billion; and financing activities provided $2.99 billion. Cash, cash equivalents and restricted cash increased $214 million to $1.82 billion.
- Capital: Shareholders’ equity was $15.8 billion. Consolidated regulatory capital ratios were 9.81% CET1, 11.04% Tier 1, 13.30% total capital and 9.71% Tier 1 leverage. Tangible common equity to tangible assets was 8.20%.
Material changes and notable items
- Quarterly earnings fell year over year as higher provision and operating expenses more than offset stronger fee income. Nine-month earnings increased, supported by higher net interest income and noninterest income.
- Nonaccrual loans rose to $1.01 billion, or 1.12% of loans, from $871 million, or 1.00%, a year earlier. Management attributed much of the quarterly increase to a $119 million commercial loan to a wholesale distributor. Criticized commercial and commercial real estate loans were $2.6 billion, down from $2.8 billion at June 30, 2019.
- Mortgage banking revenues benefited from increased servicing and origination activity. A $14 million third-quarter valuation allowance was recorded on residential mortgage servicing rights, reflecting lower interest rates and expected prepayments.
- The company recorded a $48 million second-quarter charge related to the planned sale of an asset-manager investment; the sale closed effective September 30. First-quarter results included a $50 million ESOP-related legal reserve expense and $37 million of income from Bayview Lending Group.
- During Q3, M&T issued $400 million of Series G preferred stock and redeemed $381.5 million of Series A and C preferred stock. It repurchased approximately 1.93 million common shares for $300 million during the quarter.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said its available liquidity sources are adequate for anticipated normal-course needs. The 2019 capital plan allows approximately $1.9 billion of capital distributions over the four quarters beginning July 1, 2019, subject to regulatory limits and Board declarations; a new common-stock repurchase authorization permits up to $1.635 billion.
- The Federal Reserve reduced short-term rates twice during Q3 and again by 0.25% on October 30, 2019. Management identifies rate and spread changes as key risks to net interest income. Its modeled first-year net interest income changes at September 30 were +$74 million for a 200-basis-point increase, +$49 million for a 100-basis-point increase, and −$104 million for a 100-basis-point decrease; management cautions that model assumptions make actual results uncertain.
- The expected-credit-loss standard taking effect January 1, 2020 was projected to increase the allowance by 5%–15%, mainly due to residential mortgage and consumer loans. The estimate depends on economic conditions and portfolio composition at adoption.
- Wilmington Trust reached a settlement in principle with the Department of Labor on certain ESOP matters; the company did not expect a material incremental financial impact. Other ESOP private lawsuits remain pending. Reasonably possible aggregate litigation losses beyond recorded liabilities were estimated at $0–$50 million; outcomes could still materially affect a particular future period.
- Management cited regional economic and real-estate conditions, commercial real-estate valuation uncertainty, competition, regulatory changes, funding access, and litigation among key risks. Approximately 53% of loans were to customers in New York and Pennsylvania. In October 2019, regulators finalized a rule that would remove M&T’s LCR requirement when effective; internal liquidity stress-testing requirements remain.
Most important facts for investors to verify
- Whether deposit pricing and subsequent rate cuts continue to pressure net interest margin and earnings.
- Whether nonaccrual loans, past-due loans and credit-loss provisions stabilize, including performance of the wholesale-distributor exposure.
- The realized impact of the January 2020 expected-credit-loss standard versus the estimated 5%–15% allowance increase.
- Execution of capital distributions and buybacks, and final resolution and financial effects of ESOP and other legal matters.