M&T Bank Corporation — Q2 2012 Form 10-Q
Business context and period: Quarterly report for the three and six months ended June 30, 2012. M&T is a regional bank with commercial, consumer, mortgage, and wealth-management businesses. Results include Wilmington Trust, acquired May 16, 2011; comparisons with 2011 are therefore affected by acquisition timing and related integration.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
| Metric | Q2 2012 | Comparable period |
|---|---|---|
| Net interest income | $648.0 million | $586.2 million in Q2 2011 |
| Other income | $391.7 million | $501.7 million in Q2 2011 |
| Net income | $233.4 million | $322.4 million in Q2 2011 |
| Diluted EPS | $1.71 | $2.42 in Q2 2011 |
| Net interest margin | 3.74% | 3.75% in Q2 2011; 3.69% in Q1 2012 |
| Annualized return on assets / common equity | 1.17% / 10.12% | 1.78% / 14.94% in Q2 2011 |
- Six-month results: Net income was $439.8 million versus $528.6 million in the first half of 2011; diluted EPS was $3.20 versus $4.02. Net interest income increased to $1.268 billion from $1.155 billion, while other income declined to $768.4 million from $816.1 million.
- Balance sheet at June 30: Assets were $80.81 billion, loans net of allowance were $61.93 billion, deposits were $62.55 billion, and shareholders’ equity was $9.63 billion. At December 31, 2011, these were $77.92 billion, $59.19 billion, $59.39 billion, and $9.27 billion, respectively.
- Credit and liquidity: Allowance for credit losses was $917 million, or 1.46% of loans. Q2 net charge-offs were $52 million (0.34% annualized of average loans), compared with $59 million (0.43%) a year earlier. Nonaccrual loans were $968 million, or 1.54% of loans; total nonperforming assets were $1.084 billion, or 1.72% of loans plus foreclosed assets.
- Cash flow, first half: Operating cash flow was $644.6 million versus $863.2 million in 2011. Investing activities used $3.056 billion, primarily reflecting $2.806 billion net loan growth; financing activities provided $2.382 billion, including $3.162 billion net deposit growth. Cash and cash equivalents ended at $1.423 billion.
- Debt and capital: Long-term borrowings were $5.688 billion, down from $6.686 billion at year-end; short-term borrowings were $975.6 million. Consolidated Tier 1, total capital, and Tier 1 leverage ratios were 9.92%, 13.29%, and 9.49%. Tangible common equity to tangible assets was 6.65%, and tangible book value per common share was $40.52. The quarterly common dividend remained $0.70 per share.
Material changes versus prior periods
- Q2 net income fell 28% year over year, although net interest income rose about 11%. The comparison was heavily affected by 2011’s $111 million securities-sale gain and $65 million Wilmington Trust acquisition gain; 2012 had net securities losses, including impairment charges.
- Other income declined year over year, partly offset by stronger mortgage banking and trust income. Q2 trust income was $122.3 million versus $75.6 million, substantially reflecting Wilmington Trust. Mortgage banking revenue was $69.5 million versus $42.2 million.
- Q2 provision for credit losses decreased to $60 million from $63 million; first-half provision fell to $109 million from $138 million. Nonaccrual loans and nonperforming assets continued to decline from year-earlier levels.
- Q2 total other expense increased to $627.4 million from $576.9 million. Management attributed much of the increase to acquired Wilmington Trust operations; the efficiency ratio was 56.86%, compared with 55.56% a year earlier.
- Loans and deposits expanded from year-end, while the net interest margin was nearly unchanged year over year. Management cited loan growth and lower deposit costs as offsets to lower asset yields.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance is provided. Management said it did not expect significant additional Wilmington Trust merger-related expenses during the remainder of 2012.
- Management reported improved expected cash flows on acquired loans and transferred $140 million from nonaccretable balance to accretable yield in Q2, adding $14 million to quarterly interest income. Estimates remain subject to future credit performance.
- Key credit risks include residential real estate, Alt-A and homebuilder/developer exposures, commercial real estate valuations, unemployment, and economic weakness in upstate New York and central Pennsylvania. Management cautioned that housing, economic, and credit-market deterioration could increase losses.
- Privately issued mortgage-backed securities had material unrealized losses and Level 3 valuations based partly on internal models and unobservable assumptions. Q2 pre-tax other-than-temporary impairment charges were $16 million. Management said it did not intend, and did not expect to be required, to sell impaired securities; further adverse collateral performance could change impairment estimates.
- Interest-rate sensitivity modeling estimated first-year net interest income increases of $62.9 million for a 100-basis-point rise and decreases of $55.9 million for a 100-basis-point decline. Management emphasized that actual results may differ materially from model estimates.
- Dodd-Frank implementation, lower interchange-fee income, and the scheduled phase-out of trust preferred securities from holding-company Tier 1 capital beginning in 2013 may affect earnings, capital, or funding. On July 2, 2012, after quarter-end, the company redeemed $400 million of subordinated notes due in 2013.
- Management considered available liquidity adequate for normal-course needs. Pending and threatened litigation was not expected to materially affect financial position; reasonably possible losses beyond recorded liabilities were estimated at $0–$40 million, though outcomes could affect a particular future period.
Investor verification priorities
- Reconcile the year-over-year earnings decline to the prior-year securities and acquisition gains, current securities impairments, and recurring operating performance.
- Review credit trends by portfolio, particularly Alt-A, residential builder/developer, commercial real estate, criticized loans, troubled debt restructurings, and acquired-loan cash-flow assumptions.
- Assess the valuation sensitivity and credit performance of privately issued mortgage-backed securities and other Level 3 assets.
- Track deposit composition, funding costs, borrowing maturities, and the capital effect of the trust-preferred phase-out and post-quarter subordinated-note redemption.
- Verify whether mortgage banking repurchase obligations, litigation, regulatory changes, or economic conditions create material charges beyond management’s current estimates.