Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009 for M&T Bank Corp. The reporting period is significantly impacted by the acquisition of Provident Bankshares Corporation on May 23, 2009, a stock-for-stock transaction valued at approximately $274 million. The acquisition added $6.3 billion in assets, including $4.0 billion in loans and $5.1 billion in deposits, expanding M&T's presence in the Mid-Atlantic region. The company operates as an accelerated filer and is not a shell company.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Income | $51.2 million | $160.3 million | $115.4 million | $362.5 million |
| Diluted EPS | $0.36 | $1.44 | $0.85 | $3.26 |
| Net Interest Income | $501.6 million | $486.6 million | $949.4 million | $965.5 million |
| Provision for Credit Losses | $147.0 million | $100.0 million | $305.0 million | $160.0 million |
| Net Charge-offs | $137.6 million | $99.2 million | $237.5 million | $145.0 million |
| Total Assets | $69.9 billion | $65.9 billion | N/A | N/A |
| Total Deposits | $46.8 billion | $42.6 billion | N/A | N/A |
| Stockholders' Equity | $7.4 billion | $6.5 billion | N/A | N/A |
| Return on Average Assets | 0.31% | 0.98% | 0.35% | 1.12% |
| Net Interest Margin | 3.43% | 3.39% | 3.31% | 3.38% |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 68% year-over-year in Q2 2009. This decline is primarily attributed to a $147 million provision for credit losses (up from $100 million in Q2 2008), $25 million in other-than-temporary impairment (OTTI) charges on investment securities, and $66 million in merger-related expenses associated with the Provident acquisition.
- Credit Quality Deterioration: Nonaccrual loans rose to $1.11 billion (2.11% of total loans) from $568 million (1.16%) in Q2 2008. Net charge-offs increased significantly, driven by higher delinquencies in residential real estate, commercial real estate (including a $33 million partial charge-off of a single commercial real estate loan), and consumer loans.
- Balance Sheet Expansion: Total assets increased by $4.1 billion to $69.9 billion, largely due to the Provident acquisition. Loans and leases grew to $53.1 billion, while deposits increased to $46.8 billion.
- Investment Securities: The company recognized $25 million in pre-tax OTTI losses in Q2 2009 on privately issued collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs). Gross unrealized losses on available-for-sale securities totaled $906 million at period end.
Guidance, Outlook, and Risks
- Merger Integration: Management expects to incur additional merger-related expenses in the second half of 2009, though these are expected to be substantially less than the $69 million incurred in the first six months. The company anticipates achieving operating cost savings and synergies from the Provident acquisition over time.
- Credit Outlook: Management maintains a cautious outlook regarding credit losses due to the recessionary environment, declining residential real estate values, and rising unemployment. The allowance for credit losses was $855 million (1.62% of total loans) at June 30, 2009. Management believes this level is adequate but notes that further deterioration in economic conditions could require additional provisions.
- Interest Rate Risk: The company utilizes interest rate swap agreements to manage interest rate risk. The net interest margin improved slightly to 3.43% in Q2 2009, driven by declines in funding costs outpacing declines in asset yields. However, future changes in market rates or spreads could adversely impact net interest income.
- Regulatory Capital: As of June 30, 2009, the company's Tier 1 capital ratio was 8.17% and total capital ratio was 11.87%, well above regulatory minimums. The company holds preferred stock issued under the U.S. Treasury Capital Purchase Program.
- Legal Proceedings: The company is subject to various pending legal proceedings, but management does not anticipate that the aggregate ultimate liability will be material to its financial position.
Investor Verification Checklist
- OTTI Charges: Verify the specific composition of the $25 million Q2 2009 OTTI charge and the remaining $906 million in gross unrealized losses on investment securities to assess potential future write-downs.
- Nonaccrual Trends: Monitor the trajectory of nonaccrual loans, particularly the $33 million partial charge-off in the commercial real estate sector and the concentration of Alt-A residential loans.
- Merger Synergies: Track the realization of cost savings and revenue enhancements from the Provident acquisition against the $69 million in merger-related expenses incurred YTD 2009.
- Deposit Insurance Costs: Review the impact of the FDIC special assessment ($33 million in Q2 2009) on future operating expenses and profitability.
- Bayview Lending Group: Assess the performance of the 20% minority investment in Bayview Lending Group LLC, which reported a loss of $207,000 in Q2 2009, and the potential for future impairment charges on the $267 million book value.