M&T BANK CORP quarterly report, Q3 FY2020

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M&T Bank Corporation — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020. Comparisons below are with the corresponding 2019 period unless stated otherwise. Amounts are in U.S. dollars.

Business context and financial performance

M&T is a bank holding company. Results were shaped by the COVID-19 pandemic, lower interest rates, government relief programs and adoption of the expected-credit-loss accounting standard (CECL) on January 1, 2020.

  • Q3 net income: $372 million, down from $480 million; diluted EPS was $2.75 versus $3.47. Net income improved from $241 million and EPS of $1.74 in Q2 2020.
  • First nine months: Net income was $882 million versus $1.436 billion; diluted EPS was $6.42 versus $10.16.
  • Q3 net interest income: $943 million GAAP, compared with $1.030 billion. Taxable-equivalent net interest income was $947 million. Q3 net interest margin was 2.95%, down 83 basis points year over year and 18 basis points from Q2.
  • Other income: $521 million in Q3 versus $528 million; first-nine-month totals were $1.537 billion and $1.541 billion.
  • Provision and credit costs: Q3 provision for credit losses was $150 million, versus $45 million; the Q2 2020 provision was $325 million. Nine-month provision was $725 million versus $122 million.
  • Expenses and margins: Q3 other expense was $827 million versus $878 million. The efficiency ratio was 56.2% versus 56.0%; nine-month ratio was 57.0% versus 56.5%. Q3 return on average assets was 1.06% and return on average common equity was 9.53%.

Balance sheet, cash flow and capital

  • Assets and lending: Total assets were $138.6 billion at September 30, up from $119.9 billion at December 31, 2019. Loans and leases, net of unearned discount, were $98.4 billion, up from $90.9 billion; the allowance for credit losses was $1.76 billion.
  • Deposits and liquidity: Deposits were $115.2 billion, up from $94.8 billion. Interest-bearing deposits at banks reached $20.2 billion, versus $7.2 billion. Cash and due from banks was $1.49 billion. Deposit growth and elevated bank balances were important contributors to the larger balance sheet.
  • Borrowings: Short- and long-term borrowings totaled approximately $5.50 billion, down from $7.05 billion at year-end 2019. M&T Bank redeemed $750 million of senior notes in January and another $750 million in July.
  • Cash flows, nine months: Operating activities provided $125 million; investing activities used $18.0 billion, principally reflecting increases in loans and interest-bearing bank deposits; financing activities provided $17.9 billion, largely from deposit growth. Cash, cash equivalents and restricted cash ended at $1.49 billion.
  • Equity and regulatory capital: Shareholders’ equity was $16.1 billion. M&T’s reported CET1, Tier 1, total capital and Tier 1 leverage ratios were 9.81%, 11.01%, 13.31% and 8.51%, respectively. Common tangible equity to tangible assets was 7.64%, versus 8.55% at year-end 2019.

Material changes and notable items

  • The lower-rate environment reduced Q3 taxable-equivalent net interest income and margin despite higher average earning assets. Average Q3 loans were $98.2 billion, up 9% year over year, including approximately $6.5 billion of Paycheck Protection Program loans.
  • CECL adoption increased the allowance by $132 million at January 1, 2020 through a retained-earnings adjustment. Subsequent pandemic-related forecasts and credit deterioration drove further provision expense; the September allowance was 1.79% of loans, or 1.91% excluding PPP loans.
  • Nonaccrual loans were $1.24 billion, or 1.26% of loans, versus $963 million at year-end 2019. The year-over-year comparisons are affected by CECL-related changes in the treatment of certain acquired loans.
  • Criticized commercial and commercial real estate loans totaled $6.9 billion, compared with $2.5 billion at year-end 2019. Management attributed the increase principally to pandemic effects and loan re-grading.
  • COVID-related loan modifications outstanding were $9.4 billion at September 30, down from $16.9 billion at June 30. Substantially all were scheduled to expire in Q4 2020. The filing states that qualifying modified loans were not classified as past due or troubled debt restructurings.
  • Q3 mortgage banking revenue rose to $153 million from $137 million, while deposit service charges fell to $91 million from $111 million. Trust income increased to $150 million from $144 million.
  • Common-stock repurchases were $374 million in Q1 2020; none occurred in Q2 or Q3. Management said it did not anticipate repurchases in Q4. The quarterly common dividend was $1.10 per share.
  • Prior-year comparisons included a $48 million asset-manager investment charge in Q2 2019 and a $50 million legal reserve increase in Q1 2019. The filing also reports $23 million of BLG distributed income in the first nine months of 2020, compared with $37 million in 2019.

Outlook, commentary and risks

Management provided no specific earnings or credit-loss guidance. It expected the pandemic to continue to affect results and cautioned that it could have a material impact. Management identified continued pressure on net interest income and margin, potentially elevated credit provisions and charge-offs, reduced fee income, and possible changes in customer demand as key exposures. Its September credit-loss forecast assumed unemployment rising to approximately 10% in Q4 2020 and remaining in the high single digits through 2022, GDP contracting about 5.1% in 2020 and returning to pre-pandemic levels by Q3 2022, and commercial real estate prices declining 17% in 2020.

Management said available liquidity was adequate for anticipated needs. Interest-rate sensitivity modeling estimated first-year net interest income increases of $225 million under a +200 basis-point scenario and $128 million under +100 basis points, and a $38 million decrease under -100 basis points; these are model estimates, not forecasts, and depend on uncertain assumptions.

Key risks include the uncertain duration and effects of COVID-19, borrower repayment capacity and commercial real estate exposure (particularly hospitality and retail), low rates, market and liquidity conditions, cybersecurity and remote-work operational risks, and regulatory or litigation developments. The company reported reasonably possible legal losses beyond recorded liabilities of $0–$25 million; management did not consider them probable, while noting a future reporting-period impact could still be material.

Investor facts to verify

  • Track modification expirations and subsequent borrower performance, especially in commercial real estate and hospitality/retail.
  • Compare the allowance, criticized and nonaccrual loans, charge-offs, and updated economic assumptions in subsequent filings; account for CECL comparability effects.
  • Monitor net interest margin, deposit growth and mix, and whether excess liquidity can be deployed profitably as rates and balances change.
  • Assess PPP loan forgiveness and repayment, and whether mortgage banking gains and elevated originations persist.
  • Review capital ratios, dividend capacity, and the timing of any resumption of share repurchases against regulatory conditions and pandemic risks.