M&T Bank Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. M&T reported that COVID-19 materially affected the economic outlook, customer activity, credit estimates and operating conditions during the period.
Key financial metrics
Dollar amounts are in millions unless otherwise noted.
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus other income) | $1,444 | $1,554 in Q2 2019 |
| Net interest income | $957 | $1,041 in Q2 2019 |
| Net interest margin, taxable-equivalent | 3.13% | 3.91% in Q2 2019; 3.65% in Q1 2020 |
| Provision for credit losses | $325 | $55 in Q2 2019; $250 in Q1 2020 |
| Net income / diluted EPS | $241 / $1.74 | $473 / $3.34 in Q2 2019 |
| Net income, first half / diluted EPS | $510 / $3.67 | $956 / $6.69 in first half 2019 |
| Other income | $487 | $512 in Q2 2019 |
| Other expense | $807 | $873 in Q2 2019 |
| Efficiency ratio | 55.7% | 56.0% in Q2 2019; 58.9% in Q1 2020 |
| Return on average assets / common equity, annualized | 0.71% / 6.13% | 1.60% / 12.68% in Q2 2019 |
| Loans and leases, net of unearned discount | $97,758 | $90,923 at Dec. 31, 2019 |
| Total deposits | $114,968 | $94,770 at Dec. 31, 2019 |
| Allowance for credit losses | $1,638, or 1.68% of loans | $1,051 at Dec. 31, 2019; 1.16% of loans |
| Nonaccrual loans | $1,157, or 1.18% of loans | $963 at Dec. 31, 2019; $1,062 at Mar. 31, 2020 |
| Total assets / shareholders’ equity | $139,537 / $15,945 | $119,873 / $15,717 at Dec. 31, 2019 |
| Long-term borrowings | $6,321 | $6,986 at Dec. 31, 2019 |
| Cash and due from banks / interest-bearing bank deposits | $1,355 / $20,888 | $1,433 / $7,190 at Dec. 31, 2019 |
Cash flow, capital and shareholder returns
- For the first half of 2020, net cash from operating activities was $131 million, cash used in investing activities was $18,944 million, and cash from financing activities was $18,732 million. Ending cash, cash equivalents and restricted cash was $1,355 million, versus $1,272 million at June 30, 2019.
- At June 30, consolidated regulatory capital ratios were 9.50% CET1, 10.69% Tier 1, 12.98% total capital and 8.56% Tier 1 leverage. M&T Bank’s respective ratios were 10.32%, 10.32%, 12.13% and 8.27%.
- Common equity was $14.7 billion, or $114.54 per share; tangible common equity to tangible assets was 7.48%. These tangible measures are non-GAAP.
- The quarterly common dividend was $1.10 per share. M&T repurchased $374 million of shares in Q1 but none in Q2, and said it did not anticipate repurchases in Q3 given the pandemic and regulatory guidance.
- Management stated that available liquidity was adequate for anticipated funding needs. Approximately $634 million was available for dividends from bank subsidiaries to the holding company under applicable limits.
Material changes and drivers
- Q2 net income fell about 49% year over year. The principal pressure was the sharply higher credit-loss provision amid a worsening COVID-19 outlook. Q2 net charge-offs were $71 million, or 0.29% of average loans, versus $44 million, or 0.20%, a year earlier.
- Adoption of the current expected credit loss standard (CECL) on January 1 increased the allowance by $132 million through a cumulative adjustment to retained earnings. The allowance then rose to $1.638 billion by June 30, reflecting updated forecasts and credit conditions.
- Taxable-equivalent net interest income was $961 million, down from $1.05 billion in Q2 2019. The margin contracted as lower market rates reduced asset yields; growth in average earning assets partly offset the pressure.
- Average loans increased 10% year over year to $97.8 billion, driven in part by Paycheck Protection Program lending. M&T had funded $6.5 billion of PPP loans by June 30. Deposits also grew substantially, including from customers drawing on credit lines and placing proceeds in deposits.
- Other income declined year over year as lower deposit service charges and transaction-related fees, among other items, offset stronger mortgage banking and trust income. Mortgage banking benefited from higher origination volumes and margins; residential mortgage servicing rights recorded $10 million of impairment in Q2.
- Net income was also affected by lower earnings in retail banking and higher provisions across lending segments. The Discretionary Portfolio segment benefited from increased net interest income, including interest-rate swap effects.
Outlook, risks and unusual items
- COVID-19 outlook: Management expected continued adverse effects after June 30 and said the pandemic could materially affect future results. It cited the possibility of further credit losses, pressure on net interest margin, weaker fee income and operational disruption. No specific earnings or margin guidance was provided.
- Credit assumptions: The June 30 forecast assumed unemployment would remain in the high single digits through 2022, GDP would contract nearly 7% in 2020 and return to pre-pandemic levels by Q2 2022, and commercial real estate prices would decline 15% in the first forecast year. Management noted that changing forecasts could materially change reserves.
- Borrower relief and exposures: The filing reported $16.9 billion of COVID-related loan modifications in the loan portfolio; qualifying accommodations generally were not treated as past due or troubled debt restructurings. Criticized commercial and commercial real estate loans rose to $6.2 billion from $2.4 billion at March 31. M&T noted that its customers and loan exposures could remain affected as relief periods end.
- Rate sensitivity: The filing’s model estimated first-year net interest income would increase $68 million under a +100-basis-point parallel rate change and decrease $45 million under a -100-basis-point change at June 30. These estimates depend on assumptions and are not forecasts of actual results.
- Legal matters: Wilmington Trust executed an $88 million Department of Labor settlement in April concerning ESOP matters; substantially all was paid in Q2 and the amount was within the existing litigation reserve. Additional reasonably possible legal losses beyond recorded liabilities were estimated at $0–$25 million in aggregate, although the company said those losses were not considered probable.
- Other unusual comparisons: Q2 2019 included a $48 million charge to reduce the carrying value of an asset-manager investment. Q1 2019 included a $50 million increase in legal reserves and $37 million of income from Bayview Lending Group; M&T received $23 million of Bayview income in Q1 2020, but none in Q2 2020.
- Other stated risks include recession and market volatility, interest-rate and credit risks, cybersecurity and remote-work risks, regulatory and litigation exposure, and possible reduced liquidity or funding access.
Most important facts for investors to verify
- Whether credit quality, criticized loans, nonaccruals and charge-offs worsen as payment deferrals expire, and whether CECL assumptions remain supportable.
- The performance and repayment profile of the $6.5 billion PPP portfolio and the broader modified-loan exposures, including commercial real estate and finance dealers.
- Whether deposit growth is durable and how excess liquidity, loan growth and funding costs affect net interest income and margin.
- Capital and liquidity resilience, including the effect of continued losses, regulatory requirements, dividends and the pause in share repurchases.
- Developments in the ESOP settlement and other litigation, and any material change in estimated exposure beyond recorded reserves.