M&T Bank Corp. — 2018 Form 10-K Summary
Reporting period and business context. This is M&T Bank Corporation’s annual report for the fiscal year ended December 31, 2018; fourth-quarter results are also reported. The company is a regional financial holding company focused on retail and commercial banking, trust and wealth management, and mortgage services, primarily in the Northeast and Mid-Atlantic. At year-end, it reported $120.1 billion in assets, $90.2 billion in deposits, and $15.5 billion in shareholders’ equity.
Financial performance and position
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Net income | $1.918 billion | $1.408 billion | Up 36% |
| Diluted earnings per common share | $12.74 | $8.70 | Up 46% |
| Net interest income, taxable-equivalent | $4.094 billion | $3.816 billion | Up 7% |
| Net interest margin | 3.83% | 3.47% | Expanded 36 basis points |
| Other income | $1.856 billion | $1.851 billion | Nearly unchanged |
| Provision for credit losses | $132 million | $168 million | Down 21% |
| Efficiency ratio | 54.8% | 55.1% | Improved modestly |
| Return on average assets | 1.64% | 1.17% | Improved |
| Return on average common equity | 12.82% | 8.87% | Improved |
Fourth quarter. Net income was $546 million, versus $322 million in Q4 2017; diluted EPS was $3.76, versus $2.01. Taxable-equivalent net interest income rose 9% to $1.065 billion, and the net interest margin increased to 3.92% from 3.56%. The Q4 efficiency ratio was 51.7%, compared with 54.7% a year earlier.
Revenue, costs and margins. Higher loan yields in a rising-rate environment drove margin expansion. Average earning assets fell 3% to $106.8 billion, partly offsetting the margin benefit. Interest expense increased 36% to $526 million as deposit and borrowing costs rose. Other expense increased 5% to $3.288 billion, including higher compensation, professional-services costs and legal reserves.
Loans and credit quality. Year-end loans and leases, net of unearned discount, were $88.5 billion, up slightly from $88.0 billion. Average loans declined 2%, with residential real estate balances continuing to run off following the Hudson City acquisition; commercial real estate and consumer lending grew. Net charge-offs were $130 million, or 0.15% of average loans, versus $140 million, or 0.16%, in 2017. Nonaccrual loans were $894 million, about 1.01% of loans; criticized commercial and commercial real estate loans increased to $2.7 billion from $2.5 billion.
Cash flow, funding and liquidity. Operating cash flow was $2.090 billion, down from $2.782 billion in 2017. Investing activities used $1.410 billion, while financing activities used $495 million; year-end cash and cash equivalents were $1.605 billion. Deposits declined to $90.2 billion from $92.4 billion. Short-term borrowings increased to $4.398 billion from $175 million, principally reflecting a $4.2 billion FHLB borrowing in December for liquidity purposes; $3.0 billion matured on the first business day of 2019 and $1.2 billion on February 1, 2019. Long-term borrowings were $8.445 billion, versus $8.141 billion.
Capital and shareholder returns. Total shareholders’ equity declined to $15.46 billion from $16.25 billion, chiefly reflecting substantial common-stock repurchases. Regulatory capital ratios at year-end included a 10.13% consolidated CET1 ratio and a 9.88% leverage ratio. M&T repurchased 12.3 million shares for $2.2 billion in 2018 and declared $3.55 per common share in dividends, up from $3.00. The Federal Reserve did not object to the 2018 capital plan, which authorized up to $1.8 billion of repurchases and supported an increase in the quarterly dividend to $1.00 per share.
Material changes versus 2017
- Net income growth reflected higher net interest income, lower credit-loss provision and a substantially lower effective tax rate. The effective tax rate fell to 23.5% from 39.4%, largely due to the federal corporate tax-rate reduction.
- The company recorded a $135 million increase in legal reserves in Q1 2018 for a pre-acquisition Wilmington Trust matter. The related $200 million settlement was paid in Q3 and approved by the court in Q4; the reserve increase reduced net income by $102 million after tax, or $0.71 per diluted share.
- Core deposits at year-end fell to $85.5 billion from $90.4 billion. The company cited maturities of higher-rate time deposits and lower savings and noninterest-bearing balances.
- Net unrealized losses on investment securities in accumulated other comprehensive income increased to $148 million after tax from $44 million, largely reflecting interest-rate movements. Management reported no other-than-temporary impairment charges in 2018.
- Common-stock repurchases rose to $2.2 billion from $1.2 billion in 2017; the average share count fell, contributing to per-share earnings growth.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said liquidity sources were adequate for anticipated normal-course funding needs and reported compliance with applicable liquidity requirements at year-end.
- Management identified sensitivity to interest rates, deposit pricing and competition, regional economic conditions, real estate valuations and credit performance. Real estate represented about 65% of the loan portfolio; approximately 53% of loans and leases were to customers in New York and Pennsylvania.
- The company estimated a $93 million increase in the allowance under a specified credit-deterioration scenario; this is a sensitivity illustration, not a forecast. The allowance was $1.019 billion, or 1.15% of loans and leases, at year-end.
- LIBOR-linked loans, borrowings and derivatives extend beyond the announced end of LIBOR submissions after 2021, creating transition, pricing, legal and operational risks.
- Bank regulators may limit dividends, repurchases, acquisitions or other activities. Regulatory tailoring rules discussed in the filing were proposals, not final requirements; their ultimate effects were uncertain.
- Other material risks include cybersecurity and third-party operational disruptions, litigation and regulatory scrutiny, and possible deposit outflows or higher funding costs. The company disclosed a reasonably possible aggregate loss range of $0–$50 million beyond recorded legal liabilities; outcomes could still materially affect a particular future period.
- Adoption of the current expected credit-loss standard was scheduled for 2020. Management expected it to increase the allowance, but the amount and financial-statement impact had not yet been determined.
Important facts for investors to verify
- Confirm the sustainability of 2018 earnings growth by separating rate-driven net interest margin gains, lower credit costs and the tax-rate change from recurring operating performance.
- Track deposit balances and pricing, the runoff of the December FHLB borrowing, and liquidity measures and funding costs after year-end.
- Review commercial real estate concentrations, criticized-loan trends, nonaccrual loans, charge-offs and the adequacy of the allowance under adverse conditions.
- Assess the final legal costs and any further developments related to Wilmington Trust matters, including the disclosed ESOP investigations and lawsuits.
- Verify capital ratios and regulatory approvals supporting planned repurchases and dividends, and monitor the pending credit-loss accounting transition.