M&T Bank Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 23, 2012. The filing reports full-year results and fourth-quarter trends. M&T is a regional financial holding company offering commercial and retail banking, trust, wealth-management, mortgage and related services. Its May 16, 2011 acquisition of Wilmington Trust materially expanded its assets, deposits and trust business.
Financial results and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets, year-end | $77.9 billion | $68.0 billion |
| Loans and leases, net of unearned discount, year-end | $60.1 billion | $52.0 billion |
| Deposits, year-end | $59.4 billion | $49.8 billion |
| Net interest income, GAAP | $2.390 billion | $2.268 billion |
| Net interest income, taxable-equivalent | $2.416 billion | $2.292 billion |
| Net interest margin | 3.73% | 3.84% |
| Other income | $1.583 billion | $1.108 billion |
| Other expense | $2.478 billion | $1.915 billion |
| Provision for credit losses | $270 million | $368 million |
| Net income | $859 million | $736 million |
| Diluted earnings per common share | $6.35 | $5.69 |
| Efficiency ratio, company-defined | 60.4% | 53.7% |
| Shareholders’ equity, year-end | $9.27 billion | $8.36 billion |
Net income rose 17%; diluted EPS rose 12%. Return on average assets was 1.16% (1.08% in 2010), and return on average common equity was 9.67% (9.30%). M&T’s non-GAAP net operating income was $884 million and diluted operating EPS was $6.55; these exclude specified intangible amortization and merger-related items.
Credit: Net charge-offs were $265 million, or 0.47% of average loans, compared with $346 million, or 0.67%, in 2010. Nonaccrual loans were $1.10 billion, 1.83% of loans, versus $1.14 billion, 2.19%. The allowance was $908 million, 1.51% of loans, compared with $903 million, 1.74%; acquired loans are recorded at fair value without a carried-over allowance.
Cash flow and funding: Operating cash flow was $1.77 billion; investing activities provided $369 million; financing activities used $1.62 billion. Cash and cash equivalents at year-end were $1.45 billion. Core deposits financed 83% of earning assets at year-end. Short- and long-term borrowings totaled $7.47 billion, down from $8.79 billion. M&T reported approximately $9.0 billion of FHLB borrowing capacity and $10.0 billion of Federal Reserve lines, collateral-dependent; neither facility had Federal Reserve borrowings outstanding at year-end.
Capital: Consolidated Tier 1, total capital and leverage ratios were 9.67%, 13.26% and 9.28%, respectively. The company reported compliance with applicable minimum capital requirements. Common dividends were $2.80 per share for the year, unchanged from 2010; dividends and repurchases are subject to regulatory oversight and TARP-related restrictions.
Material changes versus 2010
- Wilmington Trust contributed results from May 16, 2011. The transaction added approximately $10.8 billion of assets and $8.9 billion of deposits at acquisition, and generated a $65 million non-taxable bargain-purchase gain. It contributed $217 million of trust income in 2011.
- Loan growth and lower credit costs supported earnings: net interest income increased, while the provision for credit losses fell by $98 million. The net interest margin nevertheless narrowed 11 basis points to 3.73%.
- Other income increased 43%, including $150 million of realized securities gains, the $55 million CDO-litigation settlement and the $65 million acquisition gain. Excluding identified items, management reported higher underlying noninterest income, mainly from acquired trust operations.
- Expenses increased 29%, reflecting the acquired business, $84 million of merger-related expenses, a $79 million impairment of the BLG investment, a $30 million charitable contribution and higher FDIC assessments. The efficiency ratio worsened to 60.4%; management calculated 58.4% excluding the BLG impairment, litigation settlement and charitable contribution.
- Year-end deposits grew faster than borrowings, and noninterest-bearing and savings deposits increased. Cayman Islands deposits declined to $356 million from $1.61 billion.
Fourth-quarter performance, outlook and risks
Fourth-quarter 2011 net income was $148 million, down 28% from $204 million a year earlier; diluted EPS was $1.04 versus $1.59. The quarter included the $79 million BLG impairment, $30 million charitable contribution and $55 million settlement. The quarterly efficiency ratio rose to 67.4% from 52.5%. Net interest margin was 3.60% versus 3.85% in fourth-quarter 2010.
The filing provides no specific company earnings or revenue guidance. Management described continuing economic uncertainty and anticipated headwinds in 2012, including elevated unemployment, weak housing and commercial real-estate conditions, consumer indebtedness, energy-price volatility and fiscal and sovereign-debt concerns. The Federal Reserve had indicated that exceptionally low federal-funds rates might continue at least through late 2014; this is a cited policy expectation, not M&T earnings guidance.
- Credit and concentration: Real-estate loans represented about 65% of the loan portfolio. Risks include residential builders and developers, Alt-A mortgages, commercial real estate valuations, and local economic weakness in upstate New York and central Pennsylvania. Management’s sensitivity scenarios indicated a possible $70 million increase in the allowance under specified deterioration assumptions.
- Market and investment risk: Privately issued mortgage-backed securities had substantial unrealized losses and Level 3 valuation inputs. Management identified the securities as not other-than-temporarily impaired beyond recognized charges, but adverse collateral performance or valuation assumptions could change that judgment.
- Interest-rate and liquidity risk: Net interest income is exposed to differing repricing of assets and liabilities. The company’s model estimated first-year net interest-income increases of $64 million for a gradual +100-basis-point change and decreases of $62 million for −100 basis points; management cautioned that model assumptions are uncertain and actual results may differ.
- Regulation: Dodd-Frank, CFPB supervision, debit interchange limits, FDIC assessment changes, CCAR and proposed enhanced standards for institutions over $50 billion could raise costs, constrain activities or affect revenue, capital and liquidity. Basel III implementation and trust-preferred capital phase-out were also identified as future considerations.
- Contingencies and unusual items: Management did not expect pending litigation to materially affect consolidated financial position; reasonably possible aggregate losses beyond recorded liabilities were estimated at $0–$40 million, though period-specific results could be affected. Residential mortgage loan repurchase obligations remain an exposure; 2011 charges were $23 million.
PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of December 31, 2011.
Important facts for investors to verify
- How much of 2011’s earnings growth came from Wilmington Trust, securities gains, the acquisition gain and the litigation settlement, versus recurring operations.
- Whether credit quality continues to improve, especially in residential real estate, builder/developer and acquired loan portfolios, and whether the $908 million allowance remains adequate.
- The quality and valuation assumptions of privately issued mortgage-backed securities and the remaining $115 million BLG investment.
- Whether deposit growth, funding mix and capital levels can support loan growth while meeting evolving regulatory and capital requirements.
- The outlook for margins, fee income and operating costs, including the full-year effect of acquisition integration, interchange limits and FDIC assessments.
- Potential cash and earnings effects of legal matters, mortgage repurchases, off-balance-sheet commitments and pension underfunding.