M&T BANK CORP quarterly report, Q1 FY2017

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M&T Bank Corporation — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. M&T is a regional bank holding company with commercial, real estate, consumer, retail, mortgage-banking and trust businesses.

Financial performance and position

  • Revenue and earnings: GAAP net interest income was $914 million, up 4.9% year over year; other income was $447 million, up 6.2%. Net income rose 16.9% to $349 million. Diluted EPS increased to $2.12 from $1.73; basic EPS was $2.13.
  • Margins and returns: Taxable-equivalent net interest margin was 3.34%, versus 3.18% in Q1 2016 and 3.08% in Q4 2016. Annualized return on average assets was 1.15%, and return on average common equity was 8.89%. The efficiency ratio was 56.93% (management’s non-GAAP calculation).
  • Credit costs: Provision for credit losses was $55 million, compared with $49 million a year earlier. Net charge-offs were $43 million, or 0.19% of average loans, broadly similar to Q1 2016. The allowance was $1.001 billion, 1.12% of loans, versus $989 million, or 1.09%, at year-end.
  • Balance sheet and liquidity: Total assets were $123.2 billion; loans and leases, net, were $88.3 billion, down from $89.9 billion at year-end. Deposits increased to $97.0 billion from $95.5 billion. Cash and due from banks was $1.3 billion and interest-bearing bank deposits were $6.9 billion. Management stated the Company was compliant with LCR requirements and had adequate liquidity for normal-course needs.
  • Debt and capital: Long-term borrowings were $8.1 billion, down from $9.5 billion at year-end. Shareholders’ equity was $16.2 billion. Regulatory capital ratios at March 31 were 10.67% CET1, 11.91% Tier 1, 14.11% total capital and 9.98% Tier 1 leverage for M&T consolidated.
  • Cash flow: Operating activities provided $1.286 billion; investing activities used $826 million and financing activities used $493 million. Cash and cash equivalents ended at $1.287 billion. Operating cash flow included a substantial change in loans originated for sale, so it should not be read as a recurring earnings measure.

Changes versus comparable periods

  • Year over year, average loans grew 3% to $89.8 billion: commercial and commercial real estate balances increased, while residential real estate balances fell 14%, reflecting continued repayments of Hudson City-acquired loans.
  • Average core deposits rose 5% year over year to $94.0 billion, largely from higher trust-customer noninterest-bearing deposits. Average long-term borrowings and interest expense declined.
  • Net interest margin improved with higher market rates and loan balances. Management noted that recent Federal Reserve rate increases supported asset yields, while future rate and spread movements could adversely affect net interest income.
  • Noninterest expense increased to $788 million from $776 million. Q1 2017 had no merger-related costs, compared with $23 million in Q1 2016; higher compensation and FDIC assessments partly offset that benefit.
  • Quarter-end nonaccrual loans were $927 million, or 1.04% of loans, versus $877 million, or 1.00%, a year earlier. Management attributed much of the increase in residential nonaccruals to expected delinquency migration in certain Hudson City-acquired loans.

Outlook, risks and unusual items

  • No earnings guidance: The filing provides no specific earnings or revenue forecast. Management said it may repurchase up to $231 million of common shares in Q2 2017 under its capital plan.
  • Capital returns: M&T repurchased 3.23 million shares for $532 million in Q1 and raised its quarterly common dividend from $0.70 to $0.75 per share.
  • Tax/accounting item: Adoption of share-based compensation guidance reduced Q1 income tax expense by $18 million, or $0.12 per diluted share. Excluding this benefit, the effective tax rate would have been 36.2%, rather than the reported 32.7%.
  • Interest-rate exposure: Management’s modeled first-year net interest income increases were $204 million under a +200-basis-point scenario and $139 million under +100 basis points; a 50-basis-point decline reduced modeled income by $94 million. These estimates rely on uncertain assumptions. Management said exposure to potential earnings volatility had recently increased and it was adding hedging swaps in 2017.
  • Credit and regional risks: Management highlighted residential and commercial property valuations, commercial real estate concentrations, weaker employment growth and stagnant population in upstate New York and central Pennsylvania, and the sustainability of broader economic improvement. About 55% of loans were to customers in New York and Pennsylvania.
  • Legal and regulatory matters: Wilmington Trust Corporation, acquired by M&T, faces a DOJ criminal case concerning pre-acquisition conduct; trial was scheduled for October 2017. Related securities litigation trial was scheduled for June 2018. The Company also remained under a Federal Reserve written agreement relating to BSA/AML compliance and said it was working to resolve outstanding issues. Aggregate reasonably possible litigation losses beyond recorded liabilities were estimated at $0–$40 million, though outcomes could affect a particular period’s results.
  • Other contingencies: Financial guarantees and indemnification contracts totaled $3.5 billion; recourse exposure under the Fannie Mae delegated underwriting and servicing program was approximately $3.0 billion. These contractual amounts do not necessarily represent expected cash outflows.

Most important facts for investors to verify

  1. How much of EPS growth and the lower reported tax rate reflects the one-time $18 million share-based tax benefit, versus recurring operating improvement.
  2. Whether the expansion in net interest margin persists as deposit costs respond to rate increases and management adjusts hedging.
  3. Trends in Hudson City-related residential delinquencies, nonaccrual loans, criticized commercial credits, provisions and charge-offs.
  4. Execution of the announced capital plan, including the remaining authorized buybacks, dividend sustainability and capital ratios.
  5. Developments in the Wilmington Trust DOJ and securities cases and progress toward resolving the BSA/AML written agreement.
  6. Cash-flow movements related to loans originated for sale and the quality and durability of deposit growth.