M&T Bank Corporation — Q2 2019 Form 10-Q
Business context and period. M&T Bank Corporation is a diversified banking and financial services company. This unaudited filing covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018.
Financial performance and position
- Q2 earnings: Net income was $473 million, down 4% from $493 million a year earlier. Diluted EPS was $3.34, up from $3.26, supported in part by fewer average shares outstanding (135.5 million versus 145.0 million).
- First-half earnings: Net income was $956 million versus $846 million in the first half of 2018; diluted EPS was $6.69 versus $5.48.
- Revenue and interest income: Q2 net interest income was $1.041 billion, up 3% year over year; other income was $512 million, up 12%. For the first half, net interest income was $2.092 billion and other income was $1.013 billion.
- Margins and efficiency: Taxable-equivalent net interest margin was 3.91% in Q2, versus 3.83% a year earlier and 4.04% in Q1 2019. The Q2 efficiency ratio was 56.0%, compared with 52.4% a year earlier and 57.6% in Q1.
- Credit costs: Q2 provision for credit losses was $55 million, versus $35 million a year earlier and $22 million in Q1. Net charge-offs were $44 million, or an annualized 0.20% of average loans, versus $35 million and 0.16% a year earlier. First-half provision was $77 million versus $78 million; first-half net charge-offs were $67 million versus $76 million.
- Credit quality: Nonaccrual loans were $865 million (0.96% of loans), down from $894 million at year-end but up from $820 million a year earlier. Criticized commercial and commercial real estate loans were $2.8 billion, down from $3.0 billion at March 31, 2019. The allowance was $1.030 billion, or 1.15% of loans.
- Balance sheet and funding: Total assets were $121.6 billion; loans and leases, net of unearned discount, were $89.9 billion; deposits were $91.7 billion. Deposits increased 1.7% from year-end. Cash and due from banks were $1.272 billion and interest-bearing deposits at banks were $8.792 billion.
- Borrowings and liquidity: Short-term borrowings were $4.611 billion and long-term borrowings $7.656 billion, for $12.267 billion combined, down from $12.843 billion at year-end. Management said available liquidity was adequate for normal-course needs; the Company reported compliance with Liquidity Coverage Ratio requirements.
- Cash flows, first half: Operating activities provided $480 million; investing activities used $581 million; financing activities used $233 million. Cash, cash equivalents and restricted cash decreased $334 million to $1.272 billion.
- Capital: Shareholders’ equity was $15.7 billion. Consolidated regulatory capital ratios were 9.84% CET1, 11.06% Tier 1, 13.33% total capital and 9.80% Tier 1 leverage. Tangible common equity to tangible assets was 8.41%.
Changes, outlook, risks and unusual items
- Loan growth and higher earning-asset yields supported year-over-year net interest income, while deposit and borrowing costs rose. The margin narrowed sequentially as LIBOR declines reduced asset yields and deposit costs increased.
- Q2 operating results included a $48 million pre-tax charge to reduce the value of an asset-manager investment; the after-tax impact was $36 million, or $0.27 per diluted share. M&T agreed in July to sell its non-controlling interest in the manager.
- Q1 2019 included a $50 million pre-tax increase in legal reserves and $37 million of income from Bayview Lending Group (BLG). These items affect comparisons between quarters.
- Mortgage servicing growth lifted servicing revenue, but lower interest rates prompted a $9 million Q2 valuation allowance on residential mortgage servicing rights. Serviced residential mortgage balances reached $102.9 billion.
- Management’s 2019 capital plan, beginning July 1, targets approximately $1.9 billion of net capital distributions over four quarters. In July, the Board authorized repurchases of up to $1.635 billion, subject to regulatory limits; dividends remain subject to Board declaration.
- No specific earnings or revenue guidance is provided in the supplied filing text. M&T expects the new credit-loss standard, scheduled for adoption January 1, 2020, to increase the allowance, particularly for consumer and residential real estate portfolios; the amount and financial-statement impact remained undetermined.
- Key risks include interest-rate and spread changes, credit losses and collateral values, funding availability, competition, regulatory changes and litigation. Interest-rate modeling estimated first-year net interest income changes of +$22 million for a 200-basis-point increase, +$25 million for a 100-basis-point increase, and −$73 million for a 100-basis-point decrease; management cautioned that modeling assumptions are uncertain.
- Wilmington Trust reached a settlement in principle with the Department of Labor in July 2019 on certain ESOP matters; a formal agreement was not yet executed. Aggregate reasonably possible legal losses beyond recorded liabilities were estimated at $0–$50 million, though outcomes could affect results in a particular period.
- Effective January 1, 2019, lease accounting added right-of-use assets and lease liabilities; at June 30, these were $396 million and $422 million, respectively. The adoption did not materially affect income.
Investor facts to verify
- Whether Q2’s higher credit provision and charge-offs persist, and how nonaccrual and criticized loan trends develop.
- The eventual allowance increase and earnings impact from adoption of the expected-credit-loss standard in 2020.
- Execution and regulatory conditions for the $1.635 billion repurchase authorization and the broader $1.9 billion capital-distribution plan.
- The final ESOP settlement terms and any changes to legal reserves or reasonably possible losses.
- Whether deposit pricing, funding mix and interest-rate changes continue to pressure net interest margin.