M&T Bank Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. M&T is a bank holding company with commercial, real estate, residential mortgage, retail and trust businesses.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $1.029 billion | $957 million | $3.013 billion | $2.810 billion |
| Other income | $459 million | $459 million | $1.375 billion | $1.367 billion |
| Net income | $526 million | $356 million | $1.372 billion | $1.086 billion |
| Diluted earnings per common share | $3.53 | $2.21 | $9.00 | $6.69 |
| Provision for credit losses | $16 million | $30 million | $94 million | $137 million |
Q3 GAAP revenue, calculated as interest income plus other income, was approximately $1.627 billion, versus $1.517 billion a year earlier. Q3 net interest margin was 3.88% on a taxable-equivalent basis, up from 3.53%; the efficiency ratio improved to 51.4% from 56.0%. Q3 return on average assets was 1.80% and return on average common equity was 14.08%.
- Credit quality: Net charge-offs were $16 million in Q3, or 0.07% annualized of average loans, versus $25 million and 0.11% a year earlier. Nonaccrual loans were $871 million, 1.00% of loans, at September 30. The allowance was $1.019 billion, 1.18% of loans.
- Cash flow: For the first nine months, operating cash flow was $1.540 billion, investing cash flow was $1.537 billion, and financing cash flow was negative $3.186 billion. Cash and cash equivalents ended the period at $1.312 billion.
- Balance sheet and funding: Total assets were $116.8 billion, down from $118.6 billion at December 31, 2017. Loans, net of allowance, were $85.7 billion; total deposits were $89.1 billion, down from $92.4 billion. Short-term borrowings were $1.31 billion and long-term borrowings were $9.14 billion, compared with $175 million and $8.14 billion, respectively, at year-end.
- Capital: Shareholders’ equity was $15.4 billion. Consolidated regulatory capital ratios were 10.46% CET1, 11.75% Tier 1, 14.10% total capital and 10.11% Tier 1 leverage. Tangible common equity to tangible assets was 8.53%.
Material changes and management commentary
- Profit increased substantially year over year, supported by higher net interest income and a lower effective tax rate. Q3 effective tax was 24.5%, versus 38.7% in Q3 2017; the 2018 rate reflects the Tax Act’s reduction of the federal corporate rate.
- Higher interest rates widened the net interest margin, while average earning assets declined $2.8 billion year over year. Average loans fell 1%; lower residential mortgage balances, including runoff of Hudson City-acquired loans, were partly offset by growth in commercial real estate and consumer lending.
- Q3 other income was broadly flat. Higher trust and credit-related fees were offset by lower mortgage banking and brokerage revenues and losses on equity securities. Trust income increased to $134 million from $125 million.
- Nine-month other expense rose to $2.486 billion from $2.345 billion, including a $135 million increase to litigation reserves in Q1 2018. Q3 expense was lower year over year in part because Q3 2017 included a $50 million legal reserve increase. Salaries and employee benefits increased, reflecting merit raises and higher incentive compensation.
- Unrealized losses on investment securities reduced other comprehensive income; accumulated other comprehensive loss was $542 million at quarter-end. The company reported $425 million of gross unrealized losses on debt securities but said it expected to recover amortized cost and did not intend, or expect to be required, to sell impaired securities.
Capital actions, outlook and risks
- The Federal Reserve did not object to M&T’s revised 2018 capital plan, which permits up to $1.8 billion in common-share repurchases over the four-quarter period beginning July 1, 2018. M&T repurchased 9.24 million shares for $1.7 billion in the first nine months and raised its quarterly dividend to $1.00 per share in Q3. It repurchased a further 1.11 million shares for $176 million in October.
- No specific earnings or revenue guidance is provided. Management said available liquidity was adequate for anticipated normal-course funding needs and reported compliance with Liquidity Coverage Ratio requirements.
- Interest-rate exposure remains important. The company’s modeled first-year net interest income increased about $46 million under a +100-basis-point scenario and declined about $106 million under a -100-basis-point scenario at September 30; management cautioned that actual results may differ materially because assumptions and market conditions can change.
- Management highlighted uncertainty around economic conditions, interest rates, loan losses, real estate valuations and regional performance. Approximately 53% of loans and leases were to customers in New York and Pennsylvania; management noted slower employment growth in parts of those markets and continued sensitivity to commercial real estate valuations.
- A $200 million settlement of Wilmington Trust securities litigation was paid in Q3 after a $135 million reserve increase in Q1. Final court approval was expected in Q4 2018. Other litigation losses reasonably possible beyond recorded liabilities were estimated at $0–$50 million in aggregate; outcomes could affect results in a future period.
- Adoption of the expected-credit-loss standard was scheduled for January 1, 2020. M&T expected an increase in its allowance, but the amount and financial-statement impact were still being determined. The company expected lease accounting adoption in January 2019 to add $385–$410 million of liabilities.
Important facts for investors to verify
- Whether higher rates continue to expand net interest margin and income, and how deposit costs and deposit outflows evolve.
- Credit trends, particularly nonaccrual and criticized commercial real estate loans, regional exposures, consumer charge-offs and eventual CECL allowance estimates.
- The effect of securities valuation losses on equity and capital, and whether management’s expectation of no impairment or forced sales remains valid.
- Progress and remaining capacity under the repurchase authorization, dividend sustainability, and the impact of capital returns on tangible capital.
- Final court approval of the Wilmington Trust settlement and developments in other legal matters.
- Liquidity and funding mix, including the year-to-date deposit decline, increased short-term borrowings and use of brokered deposits.