M&T BANK CORP annual report, FY2012

M&T Bank Corporation — 2012 Form 10-K Summary

Business context and reporting period

M&T Bank Corporation reported for the fiscal year ended December 31, 2012. The New York-based financial holding company provides retail and commercial banking, mortgage banking, trust and wealth-management services, primarily across New York and the Mid-Atlantic. Its consolidated assets were $83.0 billion at year-end; M&T Bank represented 99% of consolidated assets.

Financial performance and position

Earnings: Net income was $1.03 billion, up 20% from $859 million in 2011. Diluted EPS was $7.54, up 19%. Fourth-quarter net income was $296 million and diluted EPS was $2.16.
Revenue and margin: Taxable-equivalent net interest income increased 9% to $2.62 billion, reflecting 12% growth in average loans; net interest margin was 3.73%, unchanged year over year. Other income increased 5% to $1.67 billion. Mortgage banking revenue rose to $349 million from $166 million, and trust income to $472 million from $332 million. Total other income included $48 million of net investment-securities losses.
Costs and profitability: Other expense rose 1% to $2.51 billion. The efficiency ratio improved to 56.2% from 60.4%. Return on average assets was 1.29%, versus 1.16%; return on average common equity was 10.96%, versus 9.67%.
Credit: Provision for credit losses declined 24% to $204 million; net charge-offs fell to $186 million, or 0.30% of average loans, from $265 million, or 0.47%. Nonaccrual loans were $1.01 billion (1.52% of loans), down from $1.10 billion (1.83%). The allowance was $926 million, or 1.39% of loans, versus $908 million, or 1.51%.
Cash flow: Net cash from operating activities was $500 million, down from $1.77 billion in 2011. Investing activities used $4.06 billion, primarily reflecting $5.67 billion of net loan growth; financing activities provided $4.10 billion, including $6.23 billion of net deposit growth.
Balance sheet and funding: Assets increased 7% to $83.0 billion; loans, net of unearned discount, grew to $66.6 billion from $60.1 billion. Deposits rose to $65.6 billion from $59.4 billion, including growth in noninterest-bearing and savings deposits. Short-term borrowings were $1.07 billion; long-term borrowings declined to $4.61 billion from $6.69 billion. Shareholders’ equity increased to $10.2 billion from $9.3 billion.
Capital and shareholder returns: At year-end, consolidated Tier 1 and total capital ratios were 10.22% and 13.39%; the leverage ratio was 10.07%. Common dividends remained $2.80 per share for the year. M&T reported no common-stock repurchases under its announced program.

Material changes versus 2011

Higher net interest income, lower credit costs, and stronger mortgage banking and trust revenues drove earnings growth. The full-year contribution from the May 2011 Wilmington Trust acquisition also affected year-over-year comparisons.
Loan growth was led by commercial, commercial real estate and residential mortgage lending. The residential mortgage portfolio grew as M&T retained more originated loans for much of the year; from September, it shifted most new commitments toward loans for sale.
Mortgage banking results benefited from refinancing activity, wider margins and HARP 2.0. Deposit service-charge income remained under pressure from regulatory changes, including debit interchange fee limits.
Investment-securities results swung from $73 million of net gains in 2011 to $48 million of net losses in 2012. The 2011 comparison included $150 million of securities-sale gains, a $55 million CDO-litigation settlement and a $65 million Wilmington Trust acquisition gain.

Outlook, commentary, risks and unusual items

Management described the recovery as slow and uneven, with elevated unemployment and depressed real-estate values. It identified continued economic weakness, credit performance, low interest rates, competition and regulatory change as risks; the filing provides no specific earnings guidance.
M&T had agreed to acquire Hudson City Bancorp for estimated consideration of $4.2 billion. Completion was expected by mid-2013, subject to regulatory and shareholder approvals. Hudson City reported $40.6 billion of assets and $23.5 billion of deposits; M&T expected to repay about $12 billion of its long-term borrowings by liquidating a similar-sized securities portfolio.
The U.S. Treasury sold its remaining Series A and Series C preferred shares in 2012, ending M&T’s participation in TARP. The preferred shares remained outstanding; their reset dividend rate was modified to 6.375%, and M&T agreed not to redeem them before November 15, 2018, subject to stated exceptions.
Regulatory uncertainty includes implementation of Dodd-Frank, enhanced standards for large bank holding companies, and proposed Basel III capital and liquidity rules. Management said the effects were not yet fully determinable and could increase costs or constrain business and distributions.
Privately issued mortgage-backed securities remained a valuation and credit risk: the company recognized $48 million of 2012 impairment losses and reported substantial unrealized losses. Management judged remaining declines temporary, but noted adverse collateral performance could change that assessment.
Legal proceedings were not expected by management to materially affect consolidated financial position. Beyond recorded liabilities, reasonably possible aggregate losses were estimated at $0–$40 million; the filing says outcomes could still materially affect a future period’s results.
Management and the auditor concluded internal control over financial reporting was effective at December 31, 2012. The independent auditor issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

Whether Hudson City’s acquisition received required approvals, closed on expected terms, and delivered anticipated benefits and integration costs.
Whether credit improvement continues, especially in residential mortgages, home equity, commercial real estate and acquired loan portfolios; assess allowance adequacy against loan growth and regional property conditions.
How mortgage banking revenue, held-for-sale balances and servicing-related exposures perform as refinancing conditions and interest rates change.
Whether the company’s privately issued securities valuations, impairment assumptions and reported unrealized losses change materially.
How final capital, liquidity and other regulatory rules affect lending, capital ratios, dividends and shareholder returns.
Review the full cash-flow statement and liquidity disclosures, including reliance on core deposits, short-term funding and available secured borrowing capacity.