M&T Bank Corporation — Q1 2018 Form 10-Q
Business context and period. M&T Bank Corporation is a bank holding company. This unaudited filing covers the three months ended March 31, 2018; income and cash flow comparisons are to Q1 2017, while balance-sheet comparisons are to December 31, 2017.
Financial performance and position
- Earnings: Net income was $352.6 million, up from $348.9 million. Diluted EPS was $2.23 versus $2.12; basic EPS was $2.24 versus $2.13. The quarterly common dividend remained $0.75 per share.
- Revenue and margin: GAAP net interest income was $975.5 million, up from $914.3 million; taxable-equivalent net interest income was $980.3 million versus $922.3 million. Net interest margin rose to 3.71% from 3.34%, largely reflecting higher rates, despite lower average earning assets ($107.2 billion versus $112.0 billion). Total other income was $458.7 million versus $446.8 million.
- Costs and profitability: Other expense increased to $933.3 million from $787.9 million, principally reflecting a $135 million increase in litigation reserves. The efficiency ratio was 64.0% versus 56.9%. Return on average assets was 1.22% versus 1.15%; return on average common equity was 9.15% versus 8.89%.
- Taxes and unusual items: Income tax expense was $105.3 million versus $169.3 million, with effective tax rates of 23.0% and 32.7%, respectively; the lower 2018 rate reflects the Tax Act’s federal rate reduction. The litigation reserve reduced Q1 net income by an estimated $102 million after tax, or $0.68 per diluted share. M&T also recorded $9 million of unrealized equity-security losses in income under newly adopted accounting guidance. Q1 2018 share-based compensation tax benefits reduced tax expense by $9 million; the comparable Q1 2017 benefit was $18 million.
- Cash flow: Operating activities provided $484.2 million, down from $1.286 billion. Investing activities used $248.5 million and financing activities used $363.9 million. Cash, cash equivalents and restricted cash ended the quarter at $1.293 billion, down $128.2 million during the quarter.
- Balance sheet and liquidity: Total assets were $118.6 billion, broadly unchanged from year-end. Net loans and leases were $86.7 billion, down from $87.0 billion; deposits were $90.9 billion, down from $92.4 billion. Shareholders’ equity was $15.7 billion versus $16.3 billion. Management stated available liquidity was adequate for normal-course needs, and the company reported compliance with Liquidity Coverage Ratio requirements.
- Funding and capital: Short-term borrowings were $1.63 billion versus $175 million at year-end; long-term borrowings were $8.59 billion versus $8.14 billion. M&T Bank issued $1.0 billion of senior notes in January 2018, maturing in 2021. At March 31, consolidated CET1, Tier 1, total capital and leverage ratios were 10.59%, 11.86%, 14.35% and 10.15%, respectively.
- Credit quality: The allowance for credit losses was $1.020 billion, or 1.16% of loans, versus $1.017 billion at year-end. Q1 provision was $43 million versus $55 million; net charge-offs were $40.5 million versus $42.6 million, or 0.19% of average loans in both periods. Nonaccrual loans were $864.7 million (0.99% of loans), down from $926.7 million (1.04%) a year earlier.
Material changes and management commentary
- Net interest margin improved year over year as market rates rose; management cautioned that further rate, spread and balance-sheet changes could adversely affect net interest income. Its modeled first-year impact at March 31 was an estimated increase of $67.1 million for a 200-basis-point rise and a decrease of $122.5 million for a 100-basis-point decline. Management emphasized that model assumptions are uncertain.
- Average loans were down 2% year over year, including a 13% decline in average residential real estate loans, reflecting repayments of loans acquired with Hudson City. Average consumer loans rose 9%, primarily on automobile and recreational vehicle growth. Average core deposits fell 5%, including runoff of acquired time deposits and lower noninterest-bearing balances.
- Q1 net income included $23 million of income from Bayview Lending Group, compared with a $2 million loss in Q1 2017. Trust income increased to $131.4 million from $120.0 million.
- M&T reported no material changes to its previously disclosed risk factors and provided no specific forward earnings guidance in the supplied filing text. It said the forthcoming credit-loss standard, effective in 2020, is expected to increase the allowance; the amount remains under evaluation.
Contingencies, capital actions and other notable items
- In April 2018, Wilmington Trust and plaintiffs reached an agreement in principle in a securities class action concerning pre-acquisition financial reporting. The anticipated settlement is within the litigation reserve, but requires approvals, a formal agreement and court approval. The company recorded a $135 million reserve increase as of March 31. For other matters, reasonably possible losses beyond recorded liabilities were estimated at $0–$50 million in aggregate; excess exposure in certain matters could not be estimated.
- M&T repurchased 3.78 million shares for $721 million during Q1. It had authorization for up to $475 million of additional repurchases through June 30, 2018. Common equity declined in part due to buybacks and investment-security valuation losses.
- Net unrealized losses on investment securities in accumulated other comprehensive income were $162 million after tax at quarter-end, versus $44 million at year-end. Management said it did not intend, and did not expect to be required, to sell impaired securities at a loss.
Important facts for investors to verify
- Whether the Wilmington Trust settlement receives required party and court approvals, and whether final costs remain within the recorded reserve.
- Whether the higher efficiency ratio and litigation-related expense prove temporary, and how operating costs develop after Q1.
- Whether rising rates continue to support net interest margin without materially pressuring deposit costs, funding, or interest-rate sensitivity.
- How loan growth, deposit runoff, delinquencies and charge-offs evolve, particularly in residential real estate and consumer portfolios.
- The quantified impact of the expected credit-loss accounting standard on the allowance and capital, once management completes its assessment.
- Execution of the remaining share-repurchase authorization and the resulting effects on capital, common equity and per-share metrics.