M&T Bank Corporation — Q2 2017 Form 10-Q
Business context and period. M&T is a regional banking and financial services company reporting for the three and six months ended June 30, 2017. Its businesses include commercial, real estate, residential mortgage, retail and business banking, and trust services. Comparisons below are with Q2 or first-half 2016 unless otherwise noted; balance-sheet comparisons are with December 31, 2016.
Financial performance and condition
| Metric | Q2 / June 30, 2017 | Comparison / context |
|---|---|---|
| Net income | $381 million; diluted EPS $2.35 | Net income rose 13% and diluted EPS rose from $1.98 in Q2 2016. First-half net income was $730 million, versus $635 million. |
| Net interest income and margin | GAAP net interest income $938 million; taxable-equivalent net interest income $947 million; net interest margin 3.45% | Taxable-equivalent income increased 9% year over year; margin was 3.13% in Q2 2016 and 3.34% in Q1 2017. Higher rates and loan growth contributed. |
| Other income and expenses | Other income $461 million; other expense $751 million | Other income was up from $448 million. Expenses were nearly flat year over year; efficiency ratio improved to 52.7% from 55.1%. No merger-related expenses were recorded in 2017. |
| Credit costs and quality | Provision $52 million; net charge-offs $45 million, or 0.20% annualized | Q2 2016 provision was $32 million and charge-offs $24 million. Nonaccrual loans were $872 million (0.98% of loans), down from $927 million at Q1 end but up from $849 million a year earlier. Allowance was $1.01 billion, 1.13% of loans, and 116% of nonaccrual loans. |
| Assets, loans and deposits | Total assets $120.9 billion; loans net of allowance $88.1 billion; deposits $93.5 billion | Assets declined 2.1% and deposits 2.0% from year-end; gross loans and leases were $89.3 billion, down from $91.1 billion. Commercial real estate and commercial lending grew on average year over year, while residential real estate balances declined, largely from repayments on Hudson City-acquired loans. |
| Capital and returns | Shareholders’ equity $16.3 billion; CET1 10.81% consolidated; total capital 14.25%; Tier 1 leverage 10.22% | Quarterly return on average assets was 1.27% and return on average common equity 9.67%. Tangible common equity to tangible assets was 8.95%. |
| Liquidity, funding and debt | Cash and cash equivalents $1.35 billion; interest-bearing deposits at banks $5.02 billion; long-term borrowings $7.65 billion | Issued $900 million of senior notes due 2022 and redeemed $750 million of senior notes. A $1.5 billion Federal Home Loan Bank borrowing outstanding at June 30 matured July 3, 2017. Management said liquidity sources were adequate for normal-course needs and the company complied with LCR requirements. |
| Cash flow, first half | Operating +$1.62 billion; investing +$1.66 billion; financing −$3.26 billion; cash increased $25 million | Financing outflows included deposit decreases, debt repayments, $757 million of treasury-stock purchases, and dividends. Cash-flow movements reflect bank balance-sheet activity and are not directly comparable to industrial-company cash generation. |
Material changes and management commentary
- First-half diluted EPS increased to $4.47 from $3.71. Higher net interest income, a wider margin and growth in trust and credit-related fees supported results. The Q1 adoption of share-based compensation guidance reduced first-half tax expense by $18 million, or $0.12 per diluted share; the Q2 effect was not significant.
- Average loans grew year over year, led by commercial real estate, commercial and consumer lending, but residential real estate continued to run off. Average core deposits were $92.0 billion, slightly higher year over year but below Q1, partly reflecting trust-deposit changes and maturities of higher-rate acquired time deposits.
- Net charge-offs rose year over year; Q2 commercial charge-offs included an $8 million charge-off tied to an asset-management, trading and advisory-services provider. Management described its allowance assessment as cautious and identified regional economic softness, real estate values and valuation uncertainty as considerations.
- The Federal Reserve did not object to the 2017 capital plan. It contemplated up to $900 million of common-share repurchases over four quarters beginning July 1, 2017, a possible dividend increase of up to $0.05 per share to $0.80 in Q2 2018, and $500 million of subordinated capital notes in Q3 2017. The board authorized the repurchase program in July; these actions remain subject to applicable limits and dividend declaration.
- On July 25, 2017, the Federal Reserve Bank of New York terminated its 2013 written agreement concerning BSA/AML compliance. This occurred after the quarter-end.
- No specific earnings or revenue guidance is provided. Management noted that rate changes, spreads, credit performance and balance-sheet mix could affect results. Its interest-rate model estimated first-year net interest income increases of $83 million for a gradual +100-basis-point scenario and $113 million for +200 basis points, and a decrease of $159 million for −100 basis points; management cautioned that assumptions are uncertain and actual results may differ.
Risks, contingencies and unusual items
- Legal matters: Wilmington Trust Corporation, acquired by M&T in 2011, faces a DOJ indictment relating to pre-acquisition conduct; trial was scheduled for October 2017. A securities class action trial was scheduled for June 2018. The company stated that reasonably possible aggregate litigation losses beyond recorded liabilities were $0–$50 million, while excess exposure in particular matters could not be estimated. It cannot rule out a material effect on results in a future period.
- Credit and regional exposure: Management cited residential and commercial real estate valuations, loan delinquencies, consumer credit losses, and slower employment and population growth in parts of upstate New York and central Pennsylvania. Approximately 55% of loans and leases were to customers in New York and Pennsylvania.
- Interest-rate and liquidity risk: Asset and liability repricing differs, and the company uses swaps to manage exposure. Funding availability could be impaired by deterioration in financial condition or ratings or disruption in markets. The modeled rate sensitivities depend on uncertain assumptions.
- Accounting outlook: M&T expected the new credit-loss standard, effective in 2020, to increase its allowance because it will consider expected losses over the life of loans; the amount was still under assessment. M&T expected adoption of the new lease standard to increase reported assets and liabilities, without a material income-statement impact.
- Unrealized securities losses: The company reported $146 million of gross unrealized losses on securities and concluded the declines were temporary; it said it neither intended nor expected to be required to sell impaired securities at a loss. Adverse changes in underlying credit performance could alter that assessment.
Most important facts for investors to verify
- Whether higher net interest margins persist as rates, deposit pricing and loan/deposit mix change.
- Whether charge-offs, nonaccrual loans and the allowance evolve as expected, particularly in consumer and Hudson City-related residential portfolios.
- Execution and regulatory limits on the announced repurchases, proposed dividend increase and subordinated-note issuance.
- Developments and potential financial or regulatory consequences in the Wilmington Trust DOJ and securities litigation matters.
- The eventual quantified effect and implementation of the expected credit-loss accounting standard.