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M&T profits up despite $135 million legal reserve

Buffalo's largest bank said Monday that its first-quarter profits rose 1 percent because of higher revenues and the sharp drop in the federal tax rate, even after setting aside an additional $135 million to cover expenses for a pre-existing lawsuit.

M&T Bank Corp. reported profits of $353 million, or $2.23 per share, up from $349 million or $2.12 per share in the same period a year ago. Without certain accounting issues, the bank said net operating income rose just under 1 percent to $357 million or $2.26 per share, up from $354 million or $2.15 per share a year ago.

But that includes a $135 million increase in the bank's litigation reserve, which reduced net income by $102 million or 68 cents per share after the effect of taxes. Additionally, the bank is now benefiting from the federal tax reform passed in December, which lowered the corporate tax rate from 35 percent to 21 percent.

Not including the legal reserve, those operating profits actually soared 30 percent to $459 million, or $2.94 per share. That easily beat Wall Street consensus estimates by 18 cents per share.

"M&T is off to a good start in 2018," Darren J. King, executive vice president and chief financial officer, said in a news release.

M&T shares were down 1.08 percent to $181.18 in noontime trading Monday morning. The bank repurchased $721 million of common stock during the quarter, or 3.78 million shares. King said officials felt that was a better use of excess capital than "going and chasing ill-advised deals."

"When we look at the landscape, we haven't found someone who's interested in selling their bank at a price that makes sense for us and our shareholders," King said on a conference call with Wall Street analysts. "There tend to be more sales at the bottom of the cycle, and that's where we tend to be more successful."

King said the additional charge to cover litigation is related to a "change in status" of a "pre-existing" and pending case, but would not provide more specifics.

However, according to the bank's annual report filed with the Securities and Exchange Commission, the bank faces a class-action lawsuit originally filed against Wilmington Trust Corp. by multiple parties in 2010 - prior to M&T's acquisition of the Delaware bank - and later consolidated into a single case.

The lawsuit, which is still winding through federal court, alleges that Wilmington Trust's financial reporting and filings at the time violated securities laws by misstating or misleading investors about the bank's financial condition. A related criminal trial is still pending.

King would not say how much the bank's total legal reserve is now, but said the extra funds - which officials determined based on a quarterly review of potential outcomes - will keep the bank's potential remaining worst-case risk at less than $50 million.

This is the bank's first full quarter under the leadership of Chairman and CEO Rene F. Jones, formerly the bank's vice chairman and previously its chief financial officer. He took over the helm in December following the death of longtime CEO Robert G. Wilmers.

M&T CEO says bank will carry on in Wilmers' tradition

King, who had succeeded Jones as CFO, said the bank was helped by a wider profit margin on lending, better credit and limited growth in regular operating expenses.

Net interest income from taking deposits and making loans rose 6 percent in the quarter to $980 million, as an increase in the profit margin was partially offset by a slight drop in average loans and leases during the quarter. The bank experienced growth in commercial and consumer loans, particularly in upstate New York, New Jersey and the New York City metropolitan area, but that was countered by runoff in the mortgages it acquired from Hudson City Bancorp.

"It seems like there has been more optimism in our customer base because of the tax reform. The only thing that has dampened that is some of the trade and tariff conversation going on," King said. "But overall, the mood is definitely more positive than what we saw in the second half of last year."

He also said demand is strongest for warehouse space, senior healthcare facilities, and multifamily apartments.

"When you think about macro trends, it makes a lot of sense," he said. "As retail gets impacted and business shifts to the Internet, warehouse capacity is in more demand because that's how customers are served. As the population ages, you need more assisted-living and skilled-nursing. And people are coming back into urban centers, particularly millenials and empty nesters."

The bank set aside $43 million to cover loan losses, up from $31 million in the fourth quarter of last year. Its total reserve for losses is now $1.02 billion. Officials wrote off $41 million as uncollectible, down from $43 million a year ago, but an increase from $27 million in the fourth quarter. Bad debts on the books fell.

King said officials aren't seeing any credit pressure on specific industries or geographical areas, but cautioned that the one factor that's consistent with its potential problem loans is that the borrowers are carrying too much debt.

"The credit environment remains very good to excellent," King told the analysts. "Overall credit quality continues to be in line with our expectations, matching the benign trends seen in the last few years."

Fee and other income rose 3 percent to $459 million on higher trust income and a $23 million payment from Bayview Lending Group, a Miami-based small-dollar commercial lender that M&T owns a stake in. That was partially offset by "paper losses" on equity investments that are now included in income.

Expenses rose 19 percent to $927 million, but that includes the litigation reserve. Otherwise, expenses rose 1.6 percent to $792 million, largely from salaries and benefits.

Total assets fell 3.7 percent to $118.6 billion, as loans fell 1.8 percent to $87.7 billion as borrowers continued paying down mortgages that M&T had acquired. Deposits also fell, by 6.3 percent, to $90.9 billion, because of a lower volume of CDs and trust-related funds.

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