M&T BANK CORP quarterly report, Q3 FY2009

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M&T Bank Corporation — Q3 2009 Form 10-Q

Reporting period: Three and nine months ended September 30, 2009; balance-sheet comparisons are to December 31, 2008. Amounts are U.S. dollars. Unless noted, financial statement amounts below are in millions.

Business context and results

M&T is a regional banking company. Results include Provident Bankshares from its May 23 acquisition and Bradford Bank from its August 28 FDIC-assisted transaction. Provident expanded M&T’s Mid-Atlantic presence; Bradford included an FDIC loss-share arrangement covering most losses on acquired loans.

  • Third-quarter revenue: Net interest income of $547.7 million plus other income of $278.2 million totaled $825.9 million, up from $602.0 million a year earlier. Other income included a $29 million pretax Bradford acquisition gain and $47 million of net securities impairment losses.
  • Third-quarter earnings: Net income was $127.7 million, versus $91.2 million in Q3 2008; income available to common shareholders was $113.9 million and diluted EPS was $0.97, versus $0.82. Management’s non-GAAP net operating income was $128.8 million and operating diluted EPS was $0.98; this measure excludes intangible amortization and merger-related gains and expenses.
  • Nine-month results: Revenue was $2.279 billion, versus $2.151 billion in 2008. Net income was $243.1 million versus $453.6 million, and diluted EPS was $1.84 versus $4.09. Non-GAAP operating income was $304.6 million versus $486.8 million; operating diluted EPS was $2.37 versus $4.39.
  • Net interest and margins: Third-quarter taxable-equivalent net interest income was $553.5 million, up 12% year over year; net interest margin was 3.61%, versus 3.39%. The nine-month margin was 3.41%, versus 3.38%. Lower deposit and borrowing costs and the Provident acquisition supported the quarterly increase.
  • Credit costs and asset quality: Q3 provision for credit losses was $154 million, versus $101 million; nine-month provision was $459 million, versus $261 million. Q3 net charge-offs were $141 million, or 1.07% annualized of average loans, versus $94 million and 0.77%. Nonaccrual loans rose to $1.23 billion (2.35% of loans) from $688 million (1.41%) a year earlier. The allowance was $867.9 million, or 1.66% of loans; management said it was adequate.
  • Operating costs and returns: Q3 other expense was $500.1 million, up 15% year over year; it included $14 million of merger-related costs and $17 million of intangible amortization. The reported efficiency ratio was 57.2%; management’s adjusted ratio excluding specified merger, amortization and securities items was 55.2%. Annualized return on assets was 0.73% and return on average common equity was 6.72%.

Financial position, liquidity and capital

  • At September 30, total assets were $69.0 billion, loans and leases before allowance were $52.6 billion, deposits were $46.9 billion, total liabilities were $61.4 billion and stockholders’ equity was $7.6 billion. Since year-end 2008, assets grew from $65.8 billion, loans from $49.4 billion and deposits from $42.6 billion; acquisitions contributed materially to growth.
  • Cash and cash equivalents were $1.374 billion, down from $1.568 billion at year-end. For the first nine months, operating activities provided $1.076 billion, investing activities provided $2.680 billion and financing activities used $3.950 billion; cash declined by $194 million.
  • Short-term borrowings were $2.927 billion and long-term borrowings $10.354 billion at quarter-end. Long-term borrowings decreased from $12.075 billion at year-end, while federal funds purchased and repurchase agreements increased. Management said available liquidity sources were adequate for normal-course needs, while noting funding could be affected by a ratings deterioration or market disruption.
  • Consolidated regulatory capital ratios were 8.42% Tier 1, 12.15% total capital and 8.28% Tier 1 leverage. Common dividends remained $0.70 per share quarterly. The reported common equity count increased in part due to shares issued for Provident.

Material changes and unusual items

  • Provident added approximately $6.3 billion of assets, including $4.0 billion of loans, and $5.9 billion of liabilities, including $5.1 billion of deposits. M&T recorded $332 million of goodwill and $63 million of core deposit intangible. Acquired loans were recorded at fair value without carrying over Provident’s prior allowance.
  • The Bradford transaction added approximately $469 million of assets and $440 million of liabilities. M&T recorded a $29 million pretax ($18 million after-tax) gain and entered an FDIC loss-share arrangement.
  • Merger-related expenses were $82.9 million for the first nine months, with $14.0 million in Q3; additional expenses were expected. The unpaid balance at September 30 was $26 million.
  • Q3 after-tax results also reflected $29 million of securities impairment charges and a $10 million tax benefit from reversing previously accrued uncertain tax positions. Taken together with the Bradford gain and merger costs, management estimated these highlighted items reduced Q3 net income by about $9 million, or $0.08 per diluted share.
  • Privately issued mortgage-backed securities remained a significant valuation and credit exposure. M&T recorded $104 million of net OTTI losses for the nine months and used internal cash-flow modeling and independent pricing indications for certain Level 3 securities. It reported $694 million of gross unrealized losses across investment securities at September 30.

Outlook, risks and contingencies

The filing provides no specific earnings or revenue guidance. Management described continued uncertainty from recessionary conditions, unemployment, declining property values, credit-market disruption and potential further borrower deterioration. It cautioned that additional changes in repayment performance or fair values could affect impairment conclusions, credit provisions and results. Provident integration, expected cost savings and synergies, and acquired-loan cash-flow estimates also remain relevant uncertainties.

  • Management identified credit risk in commercial and commercial real estate lending, residential builders and developers, Alt-A mortgages and consumer portfolios; nonaccrual loans and nonperforming assets increased year over year.
  • Interest-rate sensitivity modeling estimated first-year net interest income increases of $22.5 million for a 100-basis-point rise and decreases of $36.9 million for a 100-basis-point fall. Management cautioned that model assumptions are uncertain and actual results may differ materially.
  • Off-balance-sheet commitments included $16.4 billion of commitments to extend credit, $3.8 billion of standby letters of credit and $1.5 billion of financial guarantees and indemnification contracts. Contract amounts are not necessarily expected funding needs.
  • Management did not expect pending litigation to materially affect financial position, but could not determine whether it might materially affect results in a future period. No material changes to the 2008 Form 10-K risk factors were reported.
  • Disclosure controls were deemed effective as of September 30, 2009; no material change in internal control over financial reporting was identified during the quarter.

Investor verification priorities

  • Track nonaccrual loans, charge-offs, delinquencies and allowance coverage, separating acquired loans from M&T’s legacy portfolio.
  • Review Level 3 mortgage-security valuation assumptions, remaining impairment exposure and possible future OTTI charges.
  • Verify FDIC loss-share coverage and acquired-loan performance, including changes in expected cash flows and Provident integration costs or synergies.
  • Monitor deposit mix, brokered and offshore funding, borrowing maturities, liquidity capacity and regulatory capital.
  • Assess the sustainability of earnings excluding Bradford’s one-time gain, tax-position reversals, securities impairments and merger-related items; compare GAAP and management-defined non-GAAP measures.