M&T Bank Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. M&T is a regional bank holding company with commercial, retail, mortgage and trust businesses.
Key financial metrics
| Metric | Q2 2018 | Comparable period |
|---|---|---|
| Total revenue (net interest income plus other income) | $1.466 billion | $1.399 billion in Q2 2017 |
| Net interest income | $1.009 billion | $938 million in Q2 2017 |
| Net income | $493 million | $381 million in Q2 2017 |
| Diluted earnings per common share | $3.26 | $2.35 in Q2 2017 |
| Net interest margin (taxable-equivalent) | 3.83% | 3.45% in Q2 2017 |
| Efficiency ratio | 52.4% | 52.7% in Q2 2017 |
For the first half of 2018, net income was $846 million ($5.48 diluted EPS), compared with $730 million ($4.47 diluted EPS) in the first half of 2017. Net interest income was $1.984 billion versus $1.852 billion; other income was $916 million versus $908 million.
At June 30, total assets were $118.4 billion, net loans and leases $86.8 billion, deposits $89.3 billion, total liabilities $102.8 billion and shareholders’ equity $15.6 billion. The allowance for credit losses was $1.019 billion, or 1.16% of loans. Nonaccrual loans were $820 million (0.93% of loans); total nonperforming assets were $918 million (1.04%). Q2 net charge-offs were $35 million, or 0.16% annualized.
First-half operating cash flow was $521 million, down from $1.623 billion in the prior-year period. Financing activities used $1.236 billion, including $1.196 billion of treasury-stock purchases. Cash and cash equivalents at period end were $1.369 billion; interest-bearing bank deposits were $6.670 billion.
Regulatory capital ratios at June 30 included 10.52% CET1, 14.28% total capital and 10.18% Tier 1 leverage. Management reported compliance with liquidity coverage requirements and said available liquidity was adequate for anticipated normal-course needs.
Material changes versus prior periods
- Q2 net income rose about 29% year over year. Higher net interest income, reflecting wider margins in the rising-rate environment, was the principal earnings tailwind; the taxable-equivalent margin increased to 3.83% from 3.45%.
- Average earning assets fell to $106.2 billion from $110.0 billion a year earlier, including lower average loans and securities. Residential real estate balances continued to decline, partly from repayments of loans acquired with Hudson City; consumer lending grew.
- Interest expense rose to $120 million from $92 million in Q2 2017. Other income was slightly lower, at $457 million versus $461 million; higher trust and mortgage banking income was offset by weaker credit-related fees, brokerage income and other items.
- Q2 other expense increased to $777 million from $751 million. First-half expense rose to $1.710 billion from $1.538 billion, largely reflecting a $135 million litigation reserve recorded in Q1 2018 and higher personnel costs. The first-half efficiency ratio increased to 58.2% from 54.8%.
- The allowance for credit losses was broadly unchanged from year-end 2017; nonaccrual loans and nonperforming assets were lower than at year-end. First-half provision for credit losses declined to $78 million from $107 million.
- Deposits declined to $89.3 billion from $92.4 billion at December 31, 2017, while short-term borrowings increased to $3.24 billion from $175 million. Management attributed quarter-end short-term borrowing levels in part to liquidity management.
- Shareholders’ equity fell to $15.6 billion from $16.3 billion at year-end, with buybacks and accumulated other comprehensive losses contributing. Common shares repurchased in the first half cost $1.196 billion; the Q2 dividend increased to $0.80 per share.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. The Federal Reserve did not object to M&T’s revised 2018 capital plan: up to $1.8 billion of common-share repurchases over the four quarters beginning July 1, 2018, and a potential Q3 dividend increase of up to $0.20 per share, to $1.00, subject to Board declaration and regulatory limits. The Board authorized a new $1.8 billion repurchase program in July.
- The $135 million Q1 litigation reserve anticipated a $200 million settlement of Wilmington Trust securities litigation. The settlement received preliminary court approval in July; a final hearing was scheduled for Q4 2018. The settlement amount was within the recorded reserve. Other reasonably possible litigation losses beyond recorded liabilities were estimated at $0–$50 million in aggregate.
- The 2018 effective tax rate benefited from the federal corporate tax rate reduction from 35% to 21%; Q2’s rate was 24.7%, compared with 36.1% a year earlier.
- Management identified interest rates and spreads, deposit and liquidity conditions, credit losses, collateral values, commercial real estate valuation subjectivity, litigation, regulation and economic conditions in its markets as risks. About 54% of loans were to customers in New York and Pennsylvania; management also noted slower employment growth and stagnant population growth in upstate New York and central Pennsylvania.
- Interest-rate sensitivity modeling estimated first-year net interest income changes of +$56.6 million for a 100-basis-point increase, +$72.9 million for a 200-basis-point increase, and −$122.2 million for a 100-basis-point decrease. Management cautioned that model assumptions are uncertain and actual outcomes may differ.
- The company expects the forthcoming current-expected-credit-loss standard, scheduled for adoption in 2020, to increase its allowance; the amount and financial-statement impact were still being determined. Adoption of fair-value accounting for certain equity securities moved changes into earnings; first-half unrealized losses were $7 million.
Important facts for investors to verify
- Track whether net interest margin gains persist as deposit costs rise and average loans, deposits and securities change.
- Review credit trends, especially commercial real estate, consumer charge-offs, criticized loans and the eventual impact of CECL on reserves.
- Confirm completion and final approval of the $200 million Wilmington Trust settlement and monitor other litigation exposures.
- Assess deposit outflows, reliance on short-term borrowing, liquidity metrics and the effect of capital distributions on equity and capital ratios.
- Monitor execution and regulatory constraints on the announced share-repurchase and potential dividend plans.