M&T BANK CORP annual report, FY2017

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M&T Bank Corp. 2017 Form 10-K Summary

Business context and reporting period

Annual report for the year ended December 31, 2017, compared primarily with 2016. M&T is a regional bank holding company headquartered in Buffalo, New York, serving consumers, businesses and institutional clients across the Northeast and Mid-Atlantic. Its businesses include commercial and retail banking, commercial real estate lending, residential mortgage banking, and trust and wealth management.

Financial performance and condition

  • Profitability: Net income was $1.408 billion, up 7% from $1.315 billion. Diluted EPS rose to $8.70 from $7.78. Return on average assets was 1.17% (1.06% in 2016); return on average common equity was 8.87% (8.16%). Management’s non-GAAP net operating income was $1.427 billion and diluted operating EPS was $8.82.
  • Revenue and margins: Net interest income was $3.781 billion; on a taxable-equivalent basis it was $3.816 billion, up 9%. Net interest margin increased to 3.47% from 3.11%, primarily reflecting higher loan yields as rates rose. Other income was $1.851 billion, up modestly. The efficiency ratio improved to 55.1% from 56.1%.
  • Credit: Provision for credit losses declined to $168 million from $190 million. Net charge-offs were $140 million, or 0.16% of average loans, versus $157 million and 0.18%. Nonaccrual loans were $883 million, 1.00% of loans, compared with $920 million and 1.01%. The allowance was $1.017 billion, or 1.16% of loans, versus $989 million and 1.09%.
  • Balance sheet and liquidity: Total assets were $118.6 billion, down from $123.4 billion; loans and leases, net of unearned discount, were $88.0 billion versus $90.9 billion. Deposits were $92.4 billion versus $95.5 billion. Shareholders’ equity was $16.3 billion versus $16.5 billion. Core deposits funded 84% of average earning assets. Management stated liquidity was adequate and the Company complied with the Liquidity Coverage Ratio requirement.
  • Debt and capital: Short- and long-term borrowings totaled approximately $8.3 billion, down from $9.7 billion. The consolidated CET1 ratio was 10.99%, Tier 1 ratio 12.26%, and total capital ratio 14.75%. Tangible common equity to tangible assets was 9.10%, compared with 8.92%.
  • Cash flow: Operating activities provided $2.782 billion; investing activities provided $3.395 billion; financing activities used $6.077 billion. Cash and cash equivalents increased $100 million to $1.421 billion. These bank cash-flow totals are affected by changes in loans, deposits and securities.

Material changes versus 2016

  • Profit and EPS increased, driven chiefly by stronger net interest income and a wider net interest margin; average earning assets declined 2% as bank deposits and Hudson City-acquired residential mortgages ran down.
  • Residential real estate loans continued to decline following the 2015 Hudson City acquisition, while commercial real estate and consumer lending grew. Total period-end loans fell about 3%.
  • Provision and net charge-offs fell, while the allowance-to-loans ratio rose to 1.16%.
  • Other expense increased 3% to $3.140 billion. Excluding intangible amortization and merger costs, noninterest operating expense rose to $3.109 billion from $2.969 billion, including higher legal, professional, compensation and charitable expenses.
  • Deposits declined about 3%, particularly time deposits as higher-rate Hudson City balances matured. Long-term borrowings also declined.

Outlook, commentary, risks and unusual items

  • Outlook: The filing provides no specific earnings or revenue guidance. M&T’s 2017 capital plan had Federal Reserve non-objection and contemplated up to $900 million of common-stock repurchases, a possible quarterly dividend increase to $0.80 in the second quarter of 2018, and $500 million of subordinated notes. A further $745 million repurchase authorization was approved in February 2018, in addition to the earlier authorization; distributions remain subject to regulatory and Board approval.
  • Unusual 2017 items: The Tax Act generated $85 million of fourth-quarter tax expense, mainly from remeasuring deferred tax assets; it reduced diluted EPS by $0.56. A new share-based compensation accounting rule reduced tax expense by $22 million. M&T recorded $50 million of additional legal reserves; the Wilmington Trust settlement and related reserve effects reduced 2017 net income by $48 million, or $0.31 per diluted share. The Company also contributed $50 million to its charitable foundation, reducing net income by $30 million after tax. Investment-security gains were $21 million, including an $18 million gain on preferred stock sales.
  • Fourth quarter: Net income was $322 million versus $331 million a year earlier; diluted EPS was $2.01 versus $1.98. The quarter included the Tax Act charge. Taxable-equivalent net interest margin widened to 3.56% from 3.08%; provision for credit losses fell to $31 million from $62 million.
  • Contingencies and risks: Management estimated reasonably possible aggregate legal losses beyond recorded liabilities at $0–$50 million; outcomes could still materially affect results in a particular period. A Wilmington Trust Corporation settlement resolved government claims relating to pre-acquisition conduct for $60 million, including $16 million previously paid to the SEC; the remaining $44 million was nondeductible, and the subsidiary did not admit liability. A securities class action concerning Wilmington Trust remains pending, with no trial date stated. Key risks include regional economic weakness, concentrated real estate exposure, credit deterioration, interest-rate and funding volatility, regulation and capital restrictions, competition, cybersecurity and operational failures, and litigation.
  • Regulatory development: The Federal Reserve terminated the 2013 BSA/AML written agreement in July 2017 after M&T and M&T Bank resolved outstanding issues.

Important facts for investors to verify

  • Review loan-quality trends by portfolio, especially commercial real estate, residential mortgages, consumer loans and the $3.0 billion limited-documentation mortgage portfolio.
  • Assess the sustainability of margin expansion against deposit repricing, continued rate changes and the decline in average earning assets.
  • Check the final and ongoing financial effects of the Tax Act, including deferred-tax adjustments and the lower federal tax rate.
  • Track legal reserves, the Wilmington Trust securities litigation and any outcomes beyond the disclosed $0–$50 million reasonably possible range.
  • Confirm capital ratios, regulatory capital-plan permissions, dividend actions and completion of announced repurchases; verify that buybacks do not obscure underlying share-count and earnings trends.
  • Compare reported GAAP results with management’s non-GAAP operating measures and review the cash-flow statement alongside deposit, loan and securities movements.