M&T BANK CORP quarterly report, Q3 FY2023

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M&T Bank Corporation — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023. The filing compares results primarily with the corresponding 2022 periods; balance-sheet changes are generally compared with December 31, 2022. Unless noted, financial amounts below are in U.S. dollars.

Business context and reporting period

M&T is a regional bank with commercial, retail, real estate, mortgage, trust and wealth-management businesses. Results continued to reflect the Federal Reserve’s rate increases, higher yields on earning assets, rising funding costs and customers moving deposits into higher-cost products. The April 2022 People’s United acquisition affects year-over-year comparisons: the first nine months of 2023 include one more quarter of its operations than the 2022 period. M&T sold its CIT trust-related business in April 2023.

Financial performance and key metrics

  • Q3 earnings: Net income was $689.9 million, up 7% from $646.6 million a year earlier and down 20% from $867.0 million in Q2 2023. Diluted EPS was $3.98, versus $3.53 a year earlier and $5.05 in Q2.
  • Nine-month earnings: Net income was $2.259 billion, up 84% from $1.226 billion; diluted EPS was $13.05, up 83% from $7.14.
  • Interest income and margin: Q3 net interest income was $1.775 billion, up 6% year over year but down 1% sequentially. On a taxable-equivalent basis, it was $1.790 billion. Net interest margin was 3.79%, up 11 basis points year over year and down 12 basis points from Q2. Nine-month taxable-equivalent net interest income was $5.434 billion, up 35%, and margin was 3.91%, up 76 basis points.
  • Noninterest income and expenses: Q3 other income was $559.6 million, down 1% year over year and 30% sequentially; the sequential decline largely reflects the $225 million CIT sale gain recognized in Q2. Q3 other expense was $1.278 billion, essentially flat year over year. Nine-month other income was $1.950 billion, up 16%, and expense was $3.929 billion, up 8%.
  • Margins and returns: Q3 return on average assets was 1.33%, return on average common equity was 10.99%, and the efficiency ratio was 53.7%. The filing’s non-GAAP net operating diluted EPS was $4.05 for Q3 and $13.26 for the first nine months; these measures exclude specified acquisition-related items and intangible amortization.
  • Loans and credit: Loans and leases, net of unearned discount, were $132.4 billion at quarter-end, up from $131.6 billion at year-end 2022. The allowance for credit losses was $2.052 billion, or 1.55% of loans, versus $1.925 billion, or 1.46%, at year-end. Q3 provision was $150 million, compared with $115 million a year earlier; nine-month provision was $420 million versus $427 million.
  • Credit quality: Q3 net charge-offs were $96.2 million, an annualized 0.29% of average loans; commercial real estate net charge-offs were $47.3 million. Nonaccrual loans were $2.342 billion, down from $2.436 billion at Q2-end and $2.438 billion at year-end 2022. Criticized commercial and commercial real estate loans totaled $11.1 billion; $8.0 billion were investor-owned commercial real estate loans.
  • Cash flow: For the first nine months, operating cash flow was $3.105 billion, investing cash flow was negative $8.557 billion and financing cash flow was positive $5.701 billion. Cash, cash equivalents and restricted cash ended at $1.769 billion. These cash-flow figures should be viewed alongside the bank’s much larger interest-bearing deposits and other available liquidity.
  • Balance sheet and funding: Total assets were $209.1 billion. Deposits were $164.1 billion, up modestly from $163.5 billion at year-end; within that total, noninterest-bearing deposits fell to $53.8 billion from $65.5 billion, while time deposits rose to $20.0 billion from $10.1 billion. Short-term borrowings were $6.7 billion and long-term borrowings $7.1 billion, compared with $3.6 billion and $4.0 billion, respectively, at year-end.
  • Capital: Shareholders’ equity was $26.2 billion. At September 30, consolidated CET1 was 10.95%, Tier 1 capital 12.27%, total capital 13.99% and Tier 1 leverage 9.43%. Tangible common equity to tangible assets was 7.78%.

Material changes and unusual items

  • Year-over-year earnings growth reflected higher asset yields and the additional quarter of People’s United operations in the 2023 nine-month comparison, partly offset by increased deposit and borrowing costs. The 2022 comparison also included $293 million of nine-month merger-related expenses and a $242 million provision on acquired non-PCD loans.
  • The $225 million pretax gain from the CIT business sale was recorded in Q2 2023, not Q3. CIT contributed $60 million to trust income in the first nine months of 2023 before the sale, compared with $121 million in the prior-year period.
  • Q3 net interest margin declined sequentially as funding costs rose faster than yields on earning assets. Average core deposits were $147.3 billion, down 9% year over year; the filing describes shifts toward interest-bearing accounts and off-balance-sheet alternatives.
  • Q3 commercial real estate provision reflected continued pressure on property values, particularly in office and healthcare. The allowance forecast assumed two-year cumulative commercial real estate price contraction of 8.5%, versus 11.1% in the June forecast. A modeled downside scenario produced $388 million more credit losses than the base scenario; this is a sensitivity illustration, not a forecast.
  • At September 30, the debt securities portfolio had $2.262 billion of gross unrealized losses, including $1.815 billion on held-to-maturity securities. Management stated it expected to recover amortized cost and did not intend, nor expect to be required, to sell impaired securities at a loss. These assessments depend on future conditions.
  • M&T reported available liquidity of $30.0 billion on deposit at the Federal Reserve, $30.1 billion of unused secured borrowing facilities and approximately $16.6 billion of unencumbered investment securities after estimated haircuts. Management said available liquidity was adequate for anticipated ordinary-course needs.

Outlook, risks and contingencies

  • The filing provides no specific earnings or revenue guidance. Management cautions that future net interest income and margin depend on rates, deposit pricing and mix, loan growth, prepayments and other balance-sheet changes. Its modeled first-year NII sensitivities were approximately +$64 million for a gradual +100-basis-point change and negative $100 million for −100 basis points; management emphasizes that actual outcomes may differ materially.
  • Management cited inflation, slowing economic activity, interest-rate and funding pressures, deposit competition, commercial real estate valuations, geopolitical and market volatility, and regional economic conditions as risks. Approximately 37% of loans and leases were to customers in New York State and Pennsylvania.
  • Moody’s reaffirmed M&T Bank’s short-term deposit rating but downgraded M&T and M&T Bank senior and subordinated debt ratings from A3 to Baa1 and M&T Bank long-term deposits from Aa3 to A1 in August 2023.
  • The proposed FDIC special assessment related to the 2023 bank failures was estimated by M&T at $183 million. The proposal could change; the company expected to record the expense in the quarter of enactment. The filing also describes reasonably possible aggregate litigation losses of $0–$25 million beyond recorded liabilities, which management did not consider probable.
  • In October 2023, after quarter-end, M&T issued $750 million of senior notes with a 7.41% fixed rate through October 2028 and a floating rate thereafter, maturing in October 2029. The company also noted a proposed regulatory capital rule for large banks; its impact was still under evaluation.

Most important facts for investors to verify

  • Whether deposit mix and funding costs continue to compress net interest margin, and how uninsured deposits and brokered funding evolve.
  • Whether commercial real estate criticized exposures, charge-offs and the $2.052 billion allowance remain adequate as property values and borrower performance change.
  • The final FDIC assessment amount and timing, and any effect on expenses and earnings.
  • The realized value and duration of securities unrealized losses, particularly the held-to-maturity portfolio, under potential liquidity or interest-rate stress.
  • Capital and liquidity implications of the proposed regulatory capital changes, debt issuance and future shareholder distributions.
  • How reported earnings compare with non-GAAP operating results, including the effects of the CIT sale, People’s United acquisition and other specified adjustments.