M&T Bank Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Comparisons of results are with the three months ended March 31, 2018 unless noted.
Business context and key financial metrics
M&T is a regional bank with commercial, real estate, consumer, mortgage, trust and retail banking businesses. Dollar amounts below are in U.S. dollars.
| Metric | Q1 2019 | Comparable / reference |
|---|---|---|
| Total revenue (net interest income plus other income; GAAP basis) | $1.551 billion | $1.434 billion in Q1 2018 |
| Net interest income | $1.050 billion | $975.5 million in Q1 2018 |
| Other income | $500.8 million | $458.7 million in Q1 2018 |
| Net income | $482.7 million | $352.6 million in Q1 2018 |
| Diluted EPS | $3.35 | $2.23 in Q1 2018 |
| Provision for credit losses | $22.0 million | $43.0 million in Q1 2018 |
| Net cash from operating activities | $413.3 million | $484.2 million in Q1 2018 |
| Total assets | $120.0 billion | $120.1 billion at Dec. 31, 2018 |
| Loans and leases, net | $87.6 billion | $87.4 billion at Dec. 31, 2018 |
| Total deposits | $90.5 billion | $90.2 billion at Dec. 31, 2018 |
| Short- and long-term borrowings | $12.1 billion combined | $12.8 billion combined at Dec. 31, 2018 |
- Margins and returns: Taxable-equivalent net interest margin was 4.04%, versus 3.71% in Q1 2018 and 3.92% in Q4 2018. Return on average assets was 1.68%; return on average common equity was 13.14%.
- Expenses: Other expense was $894.3 million, down from $933.3 million in Q1 2018 but up from $802.2 million in Q4 2018. The efficiency ratio was 57.6%, compared with 64.0% in Q1 2018 and 51.7% in Q4 2018.
- Liquidity and funding: Cash and due from banks was $1.27 billion and interest-bearing deposits at banks were $7.60 billion at quarter-end. M&T reported compliance with liquidity coverage requirements and management considered normal-course liquidity sources adequate.
- Capital: Consolidated CET1 was 10.03%, Tier 1 capital 11.28%, total capital 13.56%, and Tier 1 leverage 9.97%. Shareholders’ equity was $15.6 billion.
Material changes versus the prior comparable period
- Net income rose about 37%; diluted EPS increased to $3.35 from $2.23. Average diluted shares fell to 137.9 million from 148.9 million, reflecting share repurchases as well as earnings growth.
- Net interest income increased about 8% on a taxable-equivalent basis, primarily as the margin widened. Average earning assets declined $1.1 billion year over year; average loans grew modestly, with commercial and consumer growth offset by lower residential real estate balances.
- Interest expense increased to $176.2 million from $106.6 million, reflecting higher funding costs. The average rate paid on interest-bearing liabilities rose to 1.04% from 0.64%.
- Credit costs eased: provision was $22 million versus $43 million, and net charge-offs were $22.1 million versus $40.5 million. The allowance was $1.02 billion, or 1.15% of loans and leases, broadly unchanged from year-end.
- Nonaccrual loans were $881.6 million, or 0.99% of loans, and nonperforming assets were $962.9 million, or 1.09% of loans plus foreclosed assets. Criticized commercial and commercial real estate loans increased to $3.0 billion from $2.3 billion a year earlier and $2.7 billion at year-end.
- Operating cash flow declined to $413.3 million from $484.2 million. Cash, cash equivalents and restricted cash decreased $338.2 million during the quarter; financing cash use included $365.6 million of treasury-stock purchases and $157.0 million of dividends.
Management commentary, outlook, risks and unusual items
- Notable earnings items: M&T recorded a $50 million increase in legal reserves, reducing Q1 net income by $37 million after tax, or about $0.27 per diluted share. It also recognized $37 million of income from Bayview Lending Group (BLG), adding $28 million after tax, or about $0.20 per diluted share. In Q1 2018, a $135 million legal reserve increase reduced net income by $102 million, while BLG income of $23 million added $17 million after tax. These items materially affect year-over-year comparability.
- Management attributed margin improvement mainly to higher market rates, while noting that future rate and spread changes, funding mix, and asset composition could affect net interest income. Its modeled first-year net interest income impact at March 31, 2019 was negative $74.3 million for a 100-basis-point decline, positive $5.4 million for a 100-basis-point rise, and negative $17.9 million for a 200-basis-point rise; the filing cautions that model assumptions make outcomes uncertain.
- The company reported no specific earnings guidance. Management said it expected available liquidity to meet anticipated normal-course needs. It expected adoption of the new credit-loss standard, scheduled for January 1, 2020, to increase the allowance, particularly for consumer and residential real estate loans; the amount remained undetermined.
- Legal matters: Wilmington Trust, N.A. faces Department of Labor investigations and three DOL lawsuits, plus four private lawsuits, concerning its role as trustee in ESOP transactions. M&T recorded a $50 million legal-reserve increase in Q1. Aggregate reasonably possible losses beyond recorded liabilities were estimated at $0–$100 million; the company said excess exposure in particular matters was not currently estimable. The separate $200 million Wilmington Trust securities-litigation settlement was approved in 2018 and paid in Q3 2018.
- Other risks: Management cited real estate values, economic conditions in its markets, slower employment growth in upstate New York and central Pennsylvania, commercial real estate valuation uncertainty, loan growth, interest rates, competition, regulation, and litigation. About 53% of loans were to customers in New York and Pennsylvania.
- Accounting change: Lease-accounting adoption added approximately $394 million of right-of-use assets and $399 million of lease liabilities at adoption; management said income-statement impact was not material.
- Capital returns: M&T repurchased 2.15 million shares for $366 million during Q1 and reported $436 million of remaining repurchase authorization for Q2 2019. The quarterly common dividend was $1.00 per share.
Important facts for investors to verify
- How much reported earnings growth persists after adjusting for the legal-reserve and BLG items, and for the lower share count?
- Whether the increase in criticized commercial and commercial real estate loans leads to higher nonaccruals, provisions or charge-offs.
- Whether deposit mix and funding costs continue to pressure net interest income and liquidity, particularly given elevated quarter-end overnight borrowings.
- The eventual allowance increase and earnings impact from the expected-credit-loss standard, including management’s evolving implementation assumptions.
- Developments in ESOP-related investigations and lawsuits, and whether legal losses exceed recorded reserves or the disclosed reasonably possible range.
- Execution and economics of the expanded mortgage servicing and sub-servicing portfolios, including related-party exposure to BLG and its affiliates.