M&T Bank Corp. — Q1 2021 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2021. M&T Bank Corporation is a bank holding company with commercial, retail, mortgage, trust and related businesses. Comparisons below are primarily with Q1 2020; balance-sheet comparisons are with December 31, 2020.
Key financial results and condition
| Metric | Q1 2021 | Comparable / reference |
|---|---|---|
| Total assets | $150.5 billion | $142.6 billion at Dec. 31, 2020 |
| Loans and leases, before allowance | $99.3 billion | $98.5 billion at Dec. 31, 2020 |
| Total deposits | $128.5 billion | $119.8 billion at Dec. 31, 2020 |
| Net interest income (GAAP) | $981 million | $977 million in Q1 2020 |
| Other income | $506 million | $529 million in Q1 2020 |
| Net income | $447 million | $269 million in Q1 2020; $471 million in Q4 2020 |
| Diluted EPS | $3.33 | $1.93 in Q1 2020; $3.52 in Q4 2020 |
| Net interest margin, taxable-equivalent | 2.97% | 3.65% in Q1 2020; 3.00% in Q4 2020 |
| Efficiency ratio | 60.3% | 58.9% in Q1 2020; 54.6% in Q4 2020 |
Net income was $447 million, up 66% year over year, while total revenue (GAAP net interest income plus other income) was approximately $1.49 billion, down from $1.51 billion. The earnings improvement principally reflected a $25 million provision recapture in Q1 2021 versus a $250 million provision in Q1 2020—not stronger core revenue. The effective tax rate was 24.5%.
Average loans and leases increased 8% year over year to $99.4 billion, including PPP lending. Average core deposits rose 32% to $120.2 billion. The lower-rate environment compressed net interest margin by 68 basis points year over year, although sharply lower funding costs largely offset lower asset yields. Return on average assets was 1.22%; return on average common equity was 11.57%.
Allowance for credit losses was $1.64 billion, or 1.65% of loans, versus $1.74 billion (1.76%) at year-end 2020. Q1 net charge-offs were $75 million, equal to an annualized 0.31% of average loans. Nonaccrual loans were $1.96 billion, or 1.97% of loans, versus $1.89 billion (1.92%) at year-end. Accruing loans 90 days or more past due totaled $1.08 billion; most were government-guaranteed residential mortgages.
Cash flows from operations were $995 million, compared with cash used of $394 million in Q1 2020. Investing activities used $8.93 billion, principally reflecting a $7.74 billion increase in interest-bearing bank deposits and a $989 million net increase in loans; financing activities provided $7.64 billion, mainly from deposit growth. Cash and cash equivalents ended the quarter at $1.26 billion; interest-bearing deposits at banks were an additional $31.4 billion. These cash-flow movements reflect bank balance-sheet funding activity and should not be read as operating cash generation alone.
Long-term borrowings were $3.50 billion, down from $4.38 billion at year-end; total liabilities were $134.0 billion. Consolidated regulatory capital ratios were 10.42% CET1, 11.61% Tier 1, 13.81% total capital and 8.49% Tier 1 leverage. Shareholders’ equity totaled $16.45 billion.
Material changes versus comparable periods
- Provision for credit losses shifted by $275 million year over year, from expense of $250 million to a $25 million recapture, as economic forecasts improved. This was the main driver of higher reported earnings.
- Net interest margin fell from 3.65% to 2.97% year over year. Net interest income was nearly flat because average earning assets grew 24% and deposit and borrowing costs declined.
- Other income declined about 4%, including lower trading gains, deposit service charges and no Bayview Lending Group distribution (a $23 million distribution was recorded in Q1 2020). Mortgage banking and trust income increased.
- Other expense increased to $919 million from $906 million. Q1 2021 included approximately $10 million of merger-related costs; salaries and employee benefits were also higher.
- Nonaccrual loans and criticized commercial and commercial real estate loans remained elevated versus a year earlier. Criticized loans were $8.4 billion, versus $2.4 billion at March 2020 and $7.2 billion at year-end 2020.
Outlook, risks and unusual items
- People’s United acquisition: M&T agreed to acquire People’s United in an all-stock transaction valued at approximately $7.7 billion at M&T’s March 31 share price. People’s United shareholders are to receive 0.118 M&T share per share; closing was expected in Q4 2021, subject to shareholder and regulatory approvals and other conditions. M&T reported $10 million pre-tax merger expenses in Q1. No earnings guidance is provided in the supplied filing text.
- COVID-19 and credit: Management expects the pandemic to continue to negatively affect M&T after quarter-end. At March 31, $4.63 billion of loans had COVID-related modifications, substantially all scheduled to expire during 2021; this includes $2.4 billion of government-guaranteed residential loans with payment deferrals. PPP loans outstanding were $6.2 billion, following $2.5 billion of Q1 originations. Management cited uncertainty around the pace of recovery, stimulus effectiveness, commercial real estate—particularly hospitality and office—and borrower forbearance needs.
- Economic assumptions: The allowance forecast assumed unemployment declining from 6.2% to 4.2% by Q1 2023 and GDP growth of 6.3% in 2021, with commercial real estate prices flat and residential prices not fluctuating significantly. More adverse economic outcomes could increase expected credit losses and the allowance.
- Interest-rate risk: Management reported modeled first-year net interest income increases of $198 million for a 100-basis-point rise and $355 million for a 200-basis-point rise, and a $74 million decrease for a 100-basis-point decline. These are model estimates dependent on assumptions, not forecasts or guarantees.
- Liquidity and capital actions: Management stated available liquidity was adequate for ordinary-course needs. A new $800 million repurchase authorization was approved, but M&T said it did not expect repurchases while the People’s United acquisition was pending.
- Merger and litigation contingencies: The filing describes merger-related litigation and risks of delay, regulatory conditions, integration costs, employee or customer disruption, and failure to achieve expected benefits. Under specified termination circumstances, M&T may owe a $280 million termination fee. Separately, reasonably possible legal losses beyond recorded liabilities were estimated at $0–$25 million; outcomes could still materially affect a particular reporting period.
Most important facts for investors to verify
- Whether credit quality improves: track criticized loans, nonaccruals, charge-offs, modifications as they expire, and the allowance as a share of loans.
- Whether earnings can hold up as provision benefits fade, given margin compression, expense growth and the Q1 increase in the efficiency ratio.
- Progress, approvals, final terms, costs and integration assumptions for the People’s United acquisition, including any litigation developments.
- Deposit and liquidity trends, interest-rate sensitivity, and capital ratios after dividends and any future capital actions.
- The assumptions behind management’s economic forecasts and whether actual credit performance and conditions support the reported allowance.