Executive Summary / Key Takeaways

• M&T Bank Corporation (MTB-PH) demonstrated yield resilience in Q1 2025, with net interest margin expanding despite a challenging rate environment, driven by proactive management of funding costs outpacing asset yield declines.
• Strategic portfolio shifts continued, notably a significant reduction in commercial real estate (CRE) concentration throughout 2024, alongside growth in commercial and industrial (C&I) and consumer lending, aiming to enhance risk profile and diversify assets.
• Credit quality metrics showed improvement with nonaccrual loans declining year-over-year and quarter-over-quarter, although management highlighted ongoing macroeconomic uncertainties and specific industry exposures (CRE office, certain C&I sectors) requiring close monitoring.
• The company maintains a robust liquidity position and strong capital ratios, exceeding regulatory requirements, supported by growth in core deposits and strategic long-term funding initiatives, providing a solid foundation amidst potential regulatory changes.
• While facing competitive pressures from larger, digitally advanced peers, MTB-PH leverages its strong regional network, relationship-based banking model, and proprietary risk management technology as key differentiators.

A Regional Banking Powerhouse Adapts to Shifting Tides

M&T Bank Corporation stands as a prominent regional banking institution, primarily serving communities across the Northeastern and Mid-Atlantic United States. Its business model is built upon a foundation of relationship banking, catering to a diverse clientele ranging from consumers and small businesses to middle-market and large commercial customers, alongside specialized institutional and wealth management services. The company's history is marked by strategic growth, notably through acquisitions like Peoples United Financial, Inc., which significantly expanded its scale, geographic footprint, and asset base, shaping its current competitive stature.

Operating within the dynamic U.S. banking industry, M&T faces intense competition from a broad spectrum of financial players. Larger national banks like JPMorgan Chase (JPM), PNC Financial Services Group (PNC), and U.S. Bank (USB) possess greater scale, broader geographic reach, and often more advanced digital infrastructure. Fintech firms like Capital One Financial (COF) and non-bank entities also challenge traditional banking models, particularly in consumer lending and digital payments.

M&T's strategic response centers on leveraging its deep regional presence and relationship-based approach to foster customer loyalty, particularly within its Commercial and Retail segments. The company differentiates itself through specialized expertise in areas like commercial real estate lending and tailored services for middle-market businesses and high-net-worth individuals. While it may not match the sheer digital scale or speed of some national competitors, M&T aims to compete effectively through service quality, local market knowledge, and prudent risk management.

Underpinning its operational framework is a focus on technology, including what the company describes as proprietary risk management technology. While specific performance metrics for this technology are not detailed, it is inferred to contribute to operational efficiency, particularly in loan processing and risk assessment. This internal technological capability supports the company's ability to manage complex portfolios and credit exposures, providing a competitive advantage in its core lending activities compared to less sophisticated regional players. However, the company acknowledges increasing costs related to outside data processing and software, highlighting the ongoing investment required to keep pace in a rapidly evolving digital landscape, where competitors like JPMorgan and PNC often demonstrate faster digital innovation and lower operating costs per transaction.

Navigating the Rate Environment: Yield Expansion and Portfolio Evolution

The first quarter of 2025 showcased M&T's ability to manage its balance sheet effectively in a fluctuating interest rate environment. Taxable-equivalent net interest income rose to $1.71 billion, a 1% increase from the year-ago quarter, although it saw a 2% sequential decline from Q4 2024, primarily attributed to fewer calendar days in the quarter. More significantly, the net interest margin expanded by 14 basis points year-over-year and 8 basis points quarter-over-quarter, reaching 3.66%. This expansion was driven by a greater decrease in the cost of interest-bearing liabilities (down 56 basis points YoY and 24 basis points QoQ) than the decline in the yield on earning assets (down 22 basis points YoY and 8 basis points QoQ). The reduction in funding costs reflected the impact of the Federal Open Market Committee's (FOMC) rate cuts totaling 100 basis points in late 2024, which lowered deposit and borrowing costs.

Average earning assets totaled $189.1 billion in Q1 2025, down 2% sequentially and year-over-year. This was influenced by shifts in the loan and investment securities portfolios. Average loans and leases were $134.8 billion, a modest 1% increase year-over-year but a 1% decrease sequentially. This trend reflects strategic portfolio adjustments. Average commercial real estate loans decreased significantly by $6.4 billion year-over-year and $1.6 billion sequentially, as the company actively reduced its concentration in this area throughout 2024 due to higher payoffs and increased market competition. Conversely, average commercial and industrial loans grew by $4.2 billion year-over-year and $352 million sequentially, driven by continued growth in loans to the financial and insurance industry. Consumer loans also saw robust growth, increasing by $3.2 billion year-over-year and $318 million sequentially, primarily in recreational finance and automobile lending.

The investment securities portfolio averaged $34.5 billion in Q1 2025, up 21% year-over-year and 2% sequentially. This increase reflects the deployment of liquidity into higher-yielding fixed-rate agency mortgage-backed securities and U.S. Treasury securities, contributing to a rise in the weighted-average yield for the available-for-sale portfolio to 4.42% at quarter-end, up from 3.45% a year prior.

Funding activities saw average total deposits decrease by 2% year-over-year and sequentially, totaling $161.2 billion. Average core deposits remained largely unchanged year-over-year but decreased 2% sequentially due to seasonal commercial customer deposit declines and time deposit maturities. A notable shift occurred within brokered deposits, with brokered time deposits decreasing significantly as they matured, while brokered savings and interest-checking accounts increased, reflecting a deliberate wholesale funding strategy adjustment. Total uninsured deposits were estimated at $76.0 billion at March 31, 2025, representing a key area of liquidity focus.

Credit Quality and Risk Management

Credit quality metrics showed improvement in the first quarter. Nonaccrual loans decreased by $150 million sequentially and $762 million year-over-year, totaling $1.54 billion at March 31, 2025. This reduction was seen across both commercial real estate and commercial and industrial portfolios. The allowance for credit losses stood at $2.20 billion, stable sequentially but up from $2.19 billion a year ago. As a percentage of total loans and leases, the allowance was 1.63%, a slight increase from 1.61% at year-end 2024, reflecting a modest deterioration in macroeconomic forecasts.

Management's assessment of credit risk is influenced by several factors, including potential inflationary pressures, unemployment trends, slower economic growth, geopolitical uncertainties, and the impact of elevated interest rates on commercial borrowers' ability to refinance. The commercial real estate portfolio, particularly the office sector, remains a focus area due to elevated vacancies and lower debt service coverage ratios. Criticized investor-owned commercial real estate loans improved slightly to $5.4 billion (21% of the portfolio) from $6.0 billion (23%) in Q4 2024, with a weighted-average LTV of approximately 66% for criticized loans. The company's commercial real estate loan concentration relative to Tier 1 capital plus allowable ACL decreased significantly to 133% at March 31, 2025, down from 176% a year prior, demonstrating the impact of its strategic reduction efforts.

While nonaccrual loans have decreased, criticized commercial and industrial loans saw a sequential increase, driven by exposures to motor vehicle/recreational finance dealers, services, and retail industries. Management utilizes a detailed loan grading system and conducts targeted reviews to assess risk, incorporating macroeconomic forecasts and qualitative adjustments for model limitations and environmental influences.

Capital Strength and Liquidity Foundation

M&T maintains a strong capital position, with regulatory capital ratios well above minimum requirements and buffer levels. The CET1 capital ratio, a key measure of a bank's financial strength, stood robustly above the required minimum plus buffer. The company's parent company liquidity is also substantial, projected to cover cash outflows for 40 months, including dividends and debt service, without reliance on subsidiary dividends or external financing.

Liquidity management is a critical focus, with the company adhering to enhanced liquidity standards, conducting internal stress tests, and maintaining a liquidity buffer. Available liquidity sources, including deposits at the Federal Reserve Bank of New York, unused secured borrowing facilities, and unencumbered investment securities, totaled $89.1 billion at March 31, 2025, representing approximately 134% of uninsured deposits not collateralized by the company.

Shareholder returns remain a priority, evidenced by the Board's authorization of a new $4.0 billion common share repurchase program in January 2025. The company actively repurchased 3.42 million shares for $662 million in Q1 2025.

Segment Performance Highlights

The Commercial Bank segment saw net income increase by 15% year-over-year to $231 million, primarily driven by a significant decrease in the provision for credit losses, despite a decline in net interest income. Average commercial real estate loans decreased substantially, while commercial and industrial loans grew.

The Retail Bank segment's net income decreased by 22% year-over-year to $347 million. This was largely due to a narrowing net interest margin on deposits and a higher provision for credit losses, partially offset by growth in average loan balances (recreational finance and automobile) and an increase in noninterest income, boosted by a new residential mortgage sub-servicing agreement.

The Institutional Services and Wealth Management segment reported a 5% year-over-year decrease in net income to $121 million. This was mainly attributable to a narrowing net interest margin on deposits and higher noninterest expense, which offset an increase in noninterest income from global capital markets and wealth management activities reflecting improved market performance.

The All Other category, which includes the investment portfolio, borrowings, and unallocated expenses, saw its net loss decrease year-over-year, benefiting from improved net interest income allocation and the absence of the prior year's FDIC special assessment.

Outlook and Key Risks

While the company does not provide explicit forward-looking quantitative guidance figures, management's commentary and the recent performance trends offer insights into the outlook. The focus remains on managing the balance sheet in response to interest rate dynamics, continuing strategic portfolio adjustments (reducing CRE concentration, growing C&I and consumer), and maintaining a strong liquidity and capital position. The potential for future cash distributions from the BLG investment exists but is uncertain in timing and amount.

Interest rate sensitivity modeling suggests varying impacts on projected net interest income depending on the magnitude and direction of rate changes, highlighting the ongoing importance of balance sheet management and hedging strategies. The company is also actively evaluating the potential impact of proposed regulatory capital requirements for large banking organizations.

Key risks to the investment thesis include:

• Macroeconomic Headwinds: Potential impacts of inflation, unemployment, and slower GDP growth on credit quality and loan demand.
• Commercial Real Estate Exposure: Continued pressure on valuations and borrower refinancing ability, particularly in the office sector.
• Competitive Intensity: Challenges from larger, more digitally advanced peers and fintechs, potentially impacting market share and margins, especially if M&T's digital capabilities lag significantly.
• Regulatory Changes: The potential impact of new capital requirements and other regulations on profitability and strategic flexibility.
• Credit Quality Deterioration: A worsening of credit performance in C&I or consumer portfolios beyond current expectations.

Conclusion

M&T Bank's first quarter 2025 results demonstrate a regional bank effectively managing its core business amidst a complex economic and competitive environment. The expansion of the net interest margin reflects skilled balance sheet management, while strategic shifts in the loan portfolio aim to enhance the risk profile. The reduction in CRE concentration is a notable proactive measure. Despite facing challenges from larger, digitally dominant competitors, M&T leverages its established regional presence and relationship-focused model.

The investment thesis for MTB-PH rests on its ability to maintain yield resilience through disciplined funding and asset management, execute its strategic portfolio adjustments successfully, and leverage its risk management capabilities to navigate potential credit quality pressures. Investors should closely monitor trends in net interest margin, the performance of the commercial real estate and C&I portfolios, the impact of ongoing investments in technology and operational efficiency, and the evolving regulatory landscape. While macroeconomic uncertainties and competitive pressures persist, M&T's strong capital and liquidity position provide a solid foundation.