M&T Bank Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial amounts are in millions unless otherwise stated. Comparisons are with Q3 or the first nine months of 2016, except balance-sheet comparisons, which are with December 31, 2016.
Business context and results
M&T is a bank holding company with business lines including commercial, real estate, residential mortgage, retail and business banking, as well as trust services. Q3 net income was $355.9 million, or $2.21 diluted earnings per common share, versus $350.0 million and $2.10 a year earlier. For the first nine months, net income was $1.086 billion, or $6.69 diluted per share, versus $984.5 million and $5.80.
Key financial metrics
| Metric | Q3 2017 / Sept. 30, 2017 | Comparable period / date |
|---|---|---|
| Net interest income | $957.1 million | $858.3 million in Q3 2016 |
| Other income | $459.4 million | $491.4 million in Q3 2016 |
| Total revenue, net interest income plus other income | $1.417 billion | $1.350 billion in Q3 2016 |
| Provision for credit losses | $30 million | $47 million in Q3 2016 |
| Other expense | $806.0 million | $752.4 million in Q3 2016 |
| Net interest margin, taxable-equivalent | 3.53% | 3.05% in Q3 2016; 3.45% in Q2 2017 |
| Return on average assets / common equity | 1.18% / 8.89% | 1.12% / 8.68% in Q3 2016 |
| Efficiency ratio | 56.0% | 55.9% in Q3 2016; 52.7% in Q2 2017 |
| Total assets | $120.4 billion | $123.4 billion at Dec. 31, 2016 |
| Loans, net of unearned discount | $87.9 billion | $90.9 billion at Dec. 31, 2016 |
| Total deposits | $93.5 billion | $95.5 billion at Dec. 31, 2016 |
| Long-term borrowings | $8.58 billion | $9.49 billion at Dec. 31, 2016 |
| Allowance for credit losses | $1.013 billion; 1.15% of loans | $989 million; 1.09% at Dec. 31, 2016 |
| Nonaccrual loans | $869 million; 0.99% of loans | $920 million; 1.01% at Dec. 31, 2016 |
Cash flow: For the first nine months, operating activities provided $2.066 billion and investing activities provided $2.179 billion; financing activities used $4.198 billion. Cash and cash equivalents increased $47.7 million to $1.368 billion. Investing cash flow benefited from a net decrease in loans, while financing outflows included deposit decreases, debt repayments, share repurchases and dividends.
Liquidity and capital: Management said available liquidity was adequate for expected ordinary-course needs and reported compliance with the Liquidity Coverage Ratio rules. Consolidated regulatory capital ratios were 10.98% CET1, 12.25% Tier 1, 14.87% total capital and 10.35% Tier 1 leverage. Tangible common equity to tangible assets was 9.02%, versus 8.55% a year earlier.
Material changes versus comparable periods
- Q3 net interest income rose about 12% year over year as the taxable-equivalent net interest margin expanded, primarily reflecting higher market rates. The margin also increased 8 basis points from Q2 2017.
- Q3 other income declined year over year, principally because Q3 2016 included a $28 million securities gain. Trust income and deposit service charges increased, while mortgage banking and trading/foreign exchange gains were lower.
- Q3 expenses rose $53.6 million year over year. The company cited higher legal-related and professional-services costs, including a $50 million increase in its legal reserve. Nine-month noninterest operating expenses increased 5% year over year.
- Average commercial real estate and consumer loans grew year over year, while residential real estate loans declined amid continued runoff of loans acquired with Hudson City. Total loans at quarter-end were lower than at year-end 2016.
- Nonaccrual loans were below year-end 2016 but above the year-earlier level; management attributed the year-over-year increase in part to previously performing Hudson City residential mortgages becoming more than 90 days delinquent.
- For the first nine months, net charge-offs were $112.7 million, up from $107.9 million a year earlier; the annualized rate was 0.17% versus 0.16%.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management said higher rates had supported margin expansion, but warned that future interest rates, spreads and balance-sheet mix could adversely affect net interest income and margin.
- Interest-rate modeling estimated first-year net interest income increases of $134 million under a gradual +200-basis-point scenario and $97 million under +100 basis points; a -100-basis-point scenario showed a $181 million decrease. Management cautioned that assumptions are uncertain and actual results may differ significantly.
- On October 9, 2017, Wilmington Trust agreed to pay $60 million to resolve government claims concerning alleged pre-acquisition conduct; $16 million had previously been paid to the SEC, leaving a $44 million payment. Wilmington Trust did not admit liability, and charges were dismissed by court order October 12. M&T increased its legal reserve by $50 million as of quarter-end; the matter reduced Q3 net income by $48 million, or $0.31 per diluted share. The $44 million payment was not tax-deductible.
- Other pending or threatened litigation had an estimated reasonably possible aggregate loss range of $0–$50 million beyond recorded liabilities; the excess exposure was not currently estimable. Management said outcomes could affect results in a particular future period.
- The Federal Reserve terminated its 2013 written agreement concerning M&T’s BSA/AML compliance program on July 25, 2017. Management stated disclosure controls were effective as of September 30, 2017; no material changes in internal control were identified.
- The Federal Reserve did not object to M&T’s 2017 capital plan, which authorized up to $900 million in share repurchases over the four quarters beginning July 1, 2017 and contemplated a quarterly dividend increase of up to $0.05 to $0.80 in Q2 2018. M&T repurchased $225 million of shares in Q3 and $982 million in the first nine months. The stated dividend increase is a plan, not a guaranteed payment.
- Management highlighted regional economic conditions, residential and commercial property valuations, loan concentrations and the subjectivity of commercial real estate valuations as credit risks. It also noted that approximately 55% of loans were to customers in New York State and Pennsylvania.
- Adoption of the new share-based compensation tax guidance reduced Q1 tax expense by $18 million, or $0.12 per diluted share; Q2 and Q3 effects were not significant. No merger-related expenses were recorded in 2017; Q3 2016 included a $17 million after-tax securities gain.
Important facts for investors to verify
- Review the legal settlement’s final accounting and any subsequent developments in the related securities litigation.
- Assess whether net interest margin gains persist as deposit costs reprice and rates or asset mix change.
- Track loan growth and runoff, particularly Hudson City residential mortgages, commercial real estate exposures and consumer credit performance.
- Monitor reserve adequacy, nonaccrual trends and charge-offs against the reported allowance and credit outlook.
- Confirm execution of the repurchase and dividend plans, and review capital and liquidity ratios alongside regulatory requirements.