M&T Bank Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Amounts are U.S. dollars. Unless otherwise noted, financial statement amounts are in millions.
Business context and financial performance
M&T is a regional bank holding company with commercial, real estate, consumer, mortgage, trust and retail banking businesses. The quarter was materially affected by the COVID-19 pandemic, the related economic contraction and the adoption of the current expected credit loss (CECL) accounting standard on January 1, 2020.
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net interest income | $976.8 | $1,050.1 | Down 7%; taxable-equivalent NII was $981.9 |
| Net interest margin | 3.65% | 4.04% | Down 39 basis points; nearly unchanged from 3.64% in Q4 2019 |
| Provision for credit losses | $250.0 | $22.0 | Sharp increase reflecting CECL and deteriorating COVID-19 economic forecasts |
| Other income | $529.4 | $500.8 | Up 6%, led by mortgage banking and trust income |
| Other expense | $906.4 | $894.3 | Up 1%; salaries and technology costs increased |
| Net income | $268.8 | $482.7 | Down 44% |
| Diluted earnings per common share | $1.93 | $3.35 | Down 42% |
| Efficiency ratio | 58.9% | 57.6% | Higher ratio indicates weaker expense efficiency |
Balance sheet, funding and capital
- Total assets were $124.6 billion, up from $119.9 billion at year-end 2019. Loans and leases, net of unearned discount, were $94.1 billion, up $3.2 billion; total deposits were $100.2 billion, up $5.4 billion.
- Allowance for credit losses was $1.38 billion, or 1.47% of loans, versus $1.05 billion at year-end. The allowance increased $132 million at CECL adoption through a retained-earnings adjustment and rose further during the quarter.
- Nonaccrual loans were $1.06 billion, or 1.13% of loans, compared with $963 million, or 1.06%, at year-end. The filing notes that CECL adoption reclassified approximately $171 million of acquired loans to nonaccrual status.
- Short- and long-term borrowings totaled approximately $6.38 billion at March 31, versus $7.05 billion at year-end. Shareholders’ equity was $15.8 billion, or 12.70% of assets.
- Regulatory capital ratios at March 31 were 9.19% CET1, 10.35% Tier 1, 12.54% total capital and 9.59% Tier 1 leverage on a consolidated basis. M&T elected regulatory transition relief for CECL’s capital effects.
- Cash and due from banks were $1.30 billion; interest-bearing deposits at banks were $8.90 billion. Cash, cash equivalents and restricted cash decreased $138 million during the quarter. Operating cash flow was negative $394 million, investing cash flow negative $3.85 billion, and financing cash flow positive $4.11 billion, principally reflecting deposit growth.
Material changes and notable items
- Average loans grew 4% year over year to $91.7 billion, while average deposits rose 7% to $96.2 billion. Late-quarter commercial line draws were approximately $2 billion.
- Mortgage banking revenue increased to $127.9 million from $95.3 million; trust income rose to $148.8 million from $132.8 million. Unrealized losses on marketable equity securities were $20.8 million, compared with gains of $11.8 million in Q1 2019.
- Net charge-offs were $49 million, or 0.22% of average loans on an annualized basis, versus $22 million, or 0.10%, a year earlier.
- Comprehensive income was $685.3 million, including $416.5 million of other comprehensive income, notably gains on cash-flow hedges and investment securities.
- M&T repurchased $374 million of common stock in Q1, then suspended repurchases in response to pandemic uncertainty. The quarterly common dividend was $1.10 per share.
Outlook, risks and contingencies
- Management said COVID-19’s future financial impact was uncertain and not estimable, but could be material. It anticipated higher average loans from customer draws and Paycheck Protection Program (PPP) lending, while warning that low rates and PPP’s 1% loan yield could pressure net interest margin.
- Management warned of possible further increases in credit provisions and charge-offs, and lower trust, deposit-fee, card and capital-markets revenues. Residential mortgage applications were expected to remain strong; some discretionary expenses could decline. No specific earnings or revenue guidance was provided.
- At April 30, 2020, M&T reported approvals for COVID-related modifications/forbearance covering 6,324 commercial customers with $14.1 billion in balances; 81,587 residential customers with $15.2 billion in balances, including loans serviced for others; and 17,834 consumer customers with $555 million. It also reported 32,440 PPP approvals totaling $7.0 billion. These are post-quarter figures.
- The CECL estimate used a two-year forecast that included projected unemployment of 9.3%, an annualized GDP contraction as steep as 26.1%, and a 15.6% average decline in commercial real estate prices in forecast year one. The filing stresses that forecasts are uncertain and changes could materially affect reserves.
- Wilmington Trust executed an $88 million Department of Labor settlement on ESOP matters on April 28, 2020; the amount was within the March 31 litigation reserve. Beyond recorded liabilities, reasonably possible aggregate litigation losses were estimated at $0–$50 million.
- Key risks include borrower defaults and collateral declines, prolonged recession, low interest rates, liquidity and capital needs, operational and cybersecurity risks from remote work, and litigation or regulatory scrutiny, including relating to government relief programs. Management said available liquidity was adequate for anticipated needs.
Important facts for investors to verify
- How subsequent economic conditions, loan modifications and borrower performance affect the allowance, provisions and charge-offs.
- Whether deposit growth and commercial line draws persist, and their effect on funding costs, liquidity and net interest margin.
- Actual PPP lending economics, servicing income and any credit, compliance or litigation exposure associated with relief programs.
- Trends in nonaccrual loans, criticized commercial exposures, mortgage servicing asset valuations and trust-related revenues.
- Future capital ratios, regulatory constraints, dividend capacity and the duration of the share-repurchase suspension.
- Developments in the ESOP settlement and other litigation, including any losses beyond recorded reserves.