M&T Bank Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
M&T is a regional banking company. Its results include Wilmington Trust from its May 16, 2011 acquisition, making year-over-year comparisons materially affected by the acquired business. The company also acquired certain assets and deposits of K Bank in a 2010 FDIC-assisted transaction.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Change / context |
|---|---|---|---|
| Net interest income | $616.7 million | $569.9 million | Up 8.2% |
| Other income | $368.4 million | $289.9 million | Up 27.1%; includes acquisition-related activity and acquired trust revenues |
| Net income | $183.1 million | $192.0 million | Down 4.6% |
| Diluted earnings per common share | $1.32 | $1.48 | Down 10.8% |
| Provision for credit losses | $58 million | $93 million | Lower year over year |
| Net interest margin, taxable-equivalent | 3.68% | 3.87% | Down 19 basis points |
| Efficiency ratio, excluding specified nonoperating items | 61.8% | 53.4% | Higher ratio reflects increased expenses, primarily associated with Wilmington Trust |
| Return on average assets | 0.94% | 1.12% | Lower year over year |
| Return on average common equity | 7.84% | 9.56% | Lower year over year |
For the first nine months, net income was $711.7 million versus $531.7 million, and diluted EPS was $5.32 versus $4.10. The 2011 period included a $65 million nontaxable acquisition gain and $67 million of merger-related expenses before tax. Management’s non-GAAP net operating income was $210.0 million for Q3 and $716 million year to date; these measures exclude specified acquisition-related items and intangible amortization.
- Balance sheet at September 30: Total assets were $77.9 billion, loans and leases net of unearned discount were $58.4 billion, and deposits were $59.5 billion. At December 31, 2010, these were $68.0 billion, $52.0 billion, and $49.8 billion, respectively; acquisition activity contributed significantly to growth.
- Credit: Allowance for credit losses was $908.5 million, or 1.56% of loans. Q3 net charge-offs were $57 million, or 0.39% annualized of average loans, versus $93 million and 0.73% a year earlier. Nonaccrual loans totaled $1.11 billion, or 1.91% of loans; nonperforming assets were $1.26 billion, or 2.16% of loans and foreclosed assets.
- Cash flow, first nine months: Operating activities provided $1.29 billion; investing activities provided $615 million; financing activities used $1.48 billion. Cash and cash equivalents increased $420 million to $1.35 billion.
- Debt and liquidity: Long-term borrowings were $6.75 billion, down from $7.84 billion at year-end 2010. The filing says management considers available liquidity adequate for anticipated normal-course needs. The consolidated Tier 1, total capital, and Tier 1 leverage ratios were 9.74%, 13.43%, and 9.35%, respectively.
- Shareholder returns: Common dividends remained $0.70 per share each quarter. Common equity was $8.5 billion; tangible common equity to tangible assets was 6.46%.
Material changes and unusual items
- Wilmington Trust added approximately $10.8 billion of assets and $10.0 billion of liabilities at acquisition, including $8.9 billion of deposits. M&T issued 4.69 million common shares, recorded $176 million of core deposit and other intangible assets, and recognized a $65 million nontaxable gain; no goodwill was recorded for the transaction.
- Q3 trust income rose to $113.7 million from $30.5 million, with $85 million attributed to Wilmington Trust. Mortgage banking revenue declined to $38.1 million from $61.1 million, partly because M&T retained more residential mortgage originations in its loan portfolio.
- Q3 other expense rose to $662.0 million from $480.1 million. Merger-related expenses were $26 million in the quarter; the company reported $67 million for the first nine months and expected additional merger-related expenses during the remainder of 2011.
- Q3 included $10 million of pretax other-than-temporary impairment losses on securities. First-nine-month securities results also included $150 million of gains on investment securities, largely from sales during the first half of 2011.
- The company estimated new debit-card interchange fee rules would reduce Q4 2011 service charges on deposit accounts by $15 million to $20 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management expects further integration costs and anticipates operating savings and other synergies from Wilmington Trust, but the filing does not quantify expected savings.
- Management cited weak economic conditions, unemployment, depressed property values, delinquencies, and credit losses as continuing concerns, particularly for residential real estate, homebuilders and developers, Alt-A loans, and commercial real estate. The company noted that collateral valuations and allowance estimates involve substantial judgment.
- Privately issued mortgage-backed securities carried significant unrealized losses and relied partly on internal models because of limited market activity and observable pricing. Management concluded remaining declines were temporary and said it did not intend, nor expect to be required, to sell impaired securities; adverse credit or market developments could change that assessment.
- The Dodd-Frank Act and related rulemaking may affect capital, funding costs, permissible activities, consumer-related revenues, and operations. Trust preferred securities are subject to a phase-out from Tier 1 capital beginning in 2013.
- Management described integration and cost-savings execution as risks. It also warned that a deterioration in financial condition, credit ratings, or market funding availability could impair access to funding. Derivatives with credit-rating triggers could have required up to $34 million of additional collateral at quarter-end.
- Pending and threatened litigation was not expected to be material to consolidated financial position; reasonably possible losses beyond recorded liabilities were estimated at $0–$40 million in aggregate. Management cautioned that litigation outcomes could still materially affect results in a particular future period.
Important facts for investors to verify
- How much of reported growth in loans, deposits, revenue, and expenses is attributable to Wilmington Trust, and how integration costs and anticipated synergies are progressing.
- Whether credit quality continues to improve: track nonaccruals, acquired impaired loans, criticized builder/developer exposures, charge-offs, and allowance coverage.
- Developments in privately issued mortgage-backed securities, including valuation assumptions, impairment charges, and actual collateral performance.
- The realized impact of debit-card interchange rules and other regulatory changes on fee income, FDIC assessments, and capital requirements.
- Capital ratios and funding mix as trust preferred securities phase out of Tier 1 capital, alongside the company’s liquidity and collateral needs.
- Potential litigation exposure, remaining merger-related expenses, and the timing and size of any acquisition-related cost savings.