M&T BANK CORP quarterly report, Q1 FY2011

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M&T Bank Corp. — Q1 2011 Form 10-Q

Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are to December 31, 2010. Income and cash-flow comparisons are to the three months ended March 31, 2010. Amounts are U.S. dollars.

Business context and key results

M&T is a regional banking company. It reported GAAP net income of $206.3 million, up 36.6% from $151.0 million a year earlier. Diluted earnings per common share were $1.59, versus $1.15. Return on average assets was 1.23% (0.89% in Q1 2010), and return on average common equity was 10.16% (7.86%).

  • Net interest income was $568.8 million, up 2.2%; provision for credit losses was $75.0 million, down from $105.0 million.
  • Other income was $314.4 million, up from $257.7 million. Total revenue, calculated as net interest income plus other income, was $883.2 million versus $814.0 million.
  • Other expense was $499.6 million, up from $489.4 million. Management’s non-GAAP efficiency ratio, excluding specified securities and merger items and intangible amortization, was 55.8%, compared with 55.9%.
  • Taxable-equivalent net interest margin rose to 3.92% from 3.78%; average earning assets declined to $59.4 billion from $60.3 billion.
  • Operating cash flow was $770.7 million, compared with $653.6 million. Investing activities used $412.6 million and financing activities used $309.5 million. Cash and cash equivalents ended the quarter at $982.3 million, up from $933.8 million at year-end 2010.

Financial position, liquidity and credit

  • Total assets were $67.9 billion, down from $68.0 billion at year-end; loans and leases, net of unearned discount, were $52.1 billion, compared with $52.0 billion. Deposits were $50.5 billion, up from $49.8 billion.
  • Long-term borrowings were $7.3 billion, down from $7.8 billion. Federal funds purchased and securities repurchase agreements were $441 million, versus $867 million; other short-term borrowings were $63 million, versus $81 million.
  • Shareholders’ equity was $8.5 billion, or 12.53% of assets. M&T’s regulatory capital ratios were 9.76% Tier 1, 13.38% total capital and 9.63% Tier 1 leverage.
  • The allowance for credit losses was $903.7 million, or 1.73% of loans. Net charge-offs were $74.2 million, down from $94.5 million; annualized net charge-offs were 0.58% of average loans, versus 0.74%.
  • Nonaccrual loans were $1.21 billion, or 2.32% of loans, down from $1.34 billion and 2.60% a year earlier. Nonperforming assets were $1.43 billion. Accruing loans at least 90 days past due were $264 million, compared with $203 million a year earlier.
  • Credit concerns remain concentrated in residential real estate, including Alt-A mortgages and builder/developer loans, as well as commercial real estate. The company reported $218 million of foreclosed assets. Management considered the allowance adequate but cited weak property values, unemployment and regional economic conditions as continuing risks.

Material changes and unusual items

  • Q1 results included a $39 million pretax gain from selling agency-guaranteed mortgage-backed securities, adding approximately $24 million after tax, or $0.20 per diluted share. The sale was intended to manage balance-sheet size and capital ahead of the Wilmington Trust acquisition.
  • Other-than-temporary impairment charges on investment securities were $16 million pretax, principally related to privately issued mortgage-backed securities. Net investment securities gains were $23 million, compared with net losses of $26 million in Q1 2010.
  • Consumer deposit service charges fell to $109.7 million from $120.3 million; management attributed the decline largely to regulatory changes effective in 2010. Mortgage banking revenue rose to $45.2 million from $41.5 million.
  • Merger-related expenses were $4.3 million pretax ($3 million after tax, or $0.02 per share); there were none in Q1 2010. Management’s non-GAAP net operating income was $216.4 million, or $1.67 diluted per share, excluding specified acquisition-related and intangible-amortization items.

Outlook, transactions and risks

  • Wilmington Trust shareholders approved the proposed stock-for-stock acquisition. The Federal Reserve approved it on April 26, 2011, but New York and Delaware regulatory approvals remained pending when the filing was signed April 29. M&T expected to close after remaining approvals and the applicable waiting period.
  • For Q2 2011, M&T planned to redeem $330 million of Wilmington Trust Treasury preferred stock at closing, repay an additional $370 million of Treasury preferred stock, and issue $500 million of new perpetual preferred stock. It expected post-merger capital ratios to be comparable to September 30, 2010 levels.
  • Management said available liquidity was adequate for anticipated ordinary-course needs. It warned that funding access could be impaired by deterioration in financial condition or credit ratings, or by disruption in short-term funding markets.
  • Interest-rate sensitivity modeling estimated first-year net interest income changes of +$42 million for a 100-basis-point rise and -$46 million for a 100-basis-point decline. Management cautioned that model assumptions are uncertain and actual results may differ materially.
  • The Dodd-Frank Act’s effects remained subject to rulemaking; management said it could adversely affect the company, including through deposit assessment costs, consumer-protection requirements, interchange-fee limits and the phaseout of trust preferred securities from holding-company Tier 1 capital beginning in 2013.
  • Privately issued mortgage-backed securities had substantial unrealized losses and relied in part on internal cash-flow models and limited market pricing. M&T said it did not intend, and did not expect to be required, to sell impaired securities. It warned that adverse collateral performance or valuations could prompt further impairment.
  • Pending and threatened litigation was not expected to be material to financial position, but management could not determine whether it might materially affect results in a future period. The filing reported no material change in previously disclosed risk factors.

Important facts for investors to verify

  • Whether the Wilmington Trust acquisition closed, required remaining approvals, and achieved the planned preferred-stock repayment and issuance without materially weakening capital.
  • Whether credit quality continued to improve, especially nonaccruals, charge-offs and collateral performance in Alt-A, residential construction and commercial real estate portfolios.
  • Whether the allowance remained adequate as loan growth and economic conditions changed.
  • How much earnings growth was recurring versus attributable to the securities sale, and whether impairment charges or mortgage repurchase costs changed.
  • Whether private mortgage-security valuations and assumptions proved reasonable, and the effect of Dodd-Frank implementation and trust-preferred capital phaseout on costs and capital.