M&T Bank Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011 unless noted. Results include Wilmington Trust, acquired May 16, 2011, so year-over-year comparisons reflect acquisition-related growth.
Financial performance and condition
| Metric | Q1 2012 | Comparable period |
|---|---|---|
| Net interest income | $620.4 million GAAP; $627.1 million taxable-equivalent | $568.8 million GAAP in Q1 2011 |
| Other income | $376.7 million | $314.4 million in Q1 2011 |
| Provision for credit losses | $49.0 million | $75.0 million in Q1 2011 |
| Other expense | $639.7 million | $499.6 million in Q1 2011 |
| Net income | $206.5 million | $206.3 million in Q1 2011 |
| Diluted EPS | $1.50 | $1.59 in Q1 2011 |
| Net interest margin | 3.69% taxable-equivalent | 3.92% in Q1 2011; 3.60% in Q4 2011 |
| Efficiency ratio | 61.1% | 55.8% in Q1 2011 |
| Operating cash flow | $539.0 million | $770.7 million in Q1 2011 |
- Average earning assets increased 15% year over year to $68.4 billion; average loans rose 16% to $60.5 billion. Management attributed much of the growth to Wilmington Trust.
- At March 31, assets were $79.2 billion, net loans $60.0 billion, deposits $60.9 billion, long-term borrowings $6.5 billion, total liabilities $69.8 billion, and shareholders’ equity $9.4 billion.
- Deposits increased $1.5 billion from year-end, while loans and leases, before allowance and unearned discount, increased about $0.8 billion. Cash and due from banks was $1.34 billion. Investing cash outflow of $1.68 billion largely reflected loan growth and increased interest-bearing deposits at banks; financing cash inflow was $1.04 billion, mainly from deposit growth.
- Regulatory capital ratios at March 31: consolidated Tier 1 9.85%, total capital 13.43%, and Tier 1 leverage 9.53%. Tangible common equity to tangible assets was 6.51%.
- Credit metrics improved year over year: net charge-offs were $48.3 million, or 0.32% annualized of average loans, versus $74.2 million and 0.58% in Q1 2011. Nonaccrual loans were $1.07 billion, 1.75% of loans, versus 2.08% a year earlier. The allowance was $909 million, 1.49% of loans.
Material changes versus prior periods
- Net income was essentially unchanged from Q1 2011, while diluted EPS fell from $1.59 to $1.50; average diluted shares increased to 125.6 million from 119.9 million.
- Net interest income increased, supported by larger earning assets, but the margin declined 23 basis points year over year. Management cited lower loan yields and the Wilmington Trust mix, partly offset by lower deposit costs.
- Other income rose, notably due to acquired Wilmington Trust trust activities: trust income was $117 million versus $29 million in Q1 2011. Mortgage banking revenue increased to $56 million from $45 million.
- Expenses rose 28% year over year, including higher salaries, FDIC assessments, and costs from Wilmington Trust. Q1 2012 merger-related expenses were $2.7 million, and management expected additional integration expenses during 2012.
- Compared with Q1 2011, Q1 2012 had no material securities-sale gain; Q1 2011 included a $39 million pretax gain on agency mortgage-backed securities. Q1 2012 recognized $11 million of net other-than-temporary impairment losses on securities.
Outlook, commentary, risks and contingencies
- No specific earnings or financial guidance was provided. Management said available liquidity was adequate for anticipated normal-course funding needs.
- Management identified interest-rate and spread changes, loan demand and credit losses, real-estate values, unemployment, and economic conditions in upstate New York and central Pennsylvania as important risks. Its modeled first-year net interest income sensitivity to a gradual 100-basis-point rate increase was positive $65.8 million; a 100-basis-point decrease was negative $66.3 million. Management cautioned that estimates depend on assumptions and actual results may differ.
- Credit concerns remain in residential real estate, builder and developer lending, Alt-A mortgages, and commercial real estate. Management also cited uncertainty in property valuations and borrower repayment capacity. The allowance is based on estimates and could change as conditions evolve.
- The investment portfolio included substantial unrealized losses, particularly on privately issued mortgage-backed securities. Management did not intend, and did not expect to be required, to sell impaired securities; however, adverse changes in underlying credit performance could lead to further impairment. Management estimated that a 10% increase in both default and loss-severity assumptions would have raised Q1 impairment charges by $24 million.
- Dodd-Frank implementation, FDIC assessments, interchange-fee limits, and the phase-out of trust preferred securities from holding-company Tier 1 capital beginning in 2013 may affect costs, revenue, or capital. M&T had $1.2 billion of trust preferred-related junior subordinated debentures outstanding.
- Off-balance-sheet commitments included $6.4 billion of home-equity lines, $3.9 billion of standby letters of credit, and $2.2 billion of financial guarantees and indemnification contracts. M&T’s maximum recourse exposure on Fannie Mae delegated-underwriting loans was approximately $1.9 billion.
- Management did not expect pending or threatened litigation to materially affect consolidated financial position. It disclosed reasonably possible aggregate losses beyond recorded liabilities of $0–$40 million; outcomes could still materially affect results in a particular future period.
Important facts for investors to verify
- How much of loan, deposit, and trust-income growth is organic versus attributable to Wilmington Trust, and whether integration savings offset acquired operating costs.
- Whether margin pressure persists and how sensitive earnings are to rate movements, deposit pricing, and balance-sheet mix.
- Trends in nonaccruals, charge-offs, criticized and restructured loans, and allowance adequacy—especially for Alt-A, home-equity junior liens, and builder/developer exposures.
- Valuation assumptions and potential further losses on privately issued mortgage-backed securities, other impaired securities, and the Bayview Lending Group investment.
- Liquidity and capital effects of deposit funding, commitments and recourse obligations, the May 2012 maturity of $300 million senior notes, and the scheduled trust-preferred capital phase-out.
- Reconcile reported GAAP results with management’s non-GAAP operating measures and taxable-equivalent presentation; the filing reports GAAP net income of $206.5 million and diluted EPS of $1.50.