M&T Bank Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet comparisons are to December 31, 2011 unless noted. Amounts are in U.S. dollars. The filing is unaudited.
Business context and results
M&T is a regional bank with commercial, real estate, consumer, retail, trust and mortgage-banking businesses. Its August 2012 agreement to acquire Hudson City Bancorp is a major pending transaction. Results also include Wilmington Trust, acquired in May 2011.
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Net interest income | $662.7 million | $616.7 million | Up 7% |
| Total revenue (net interest income plus other income) | $1.108 billion | $985.1 million | Up 13% |
| Provision for credit losses | $46 million | $58 million | Down 21% |
| Other expense | $616.0 million | $662.0 million | Down 7% |
| Net income | $293.5 million | $183.1 million | Up 60% |
| Diluted EPS | $2.17 | $1.32 | Up 64% |
| Net interest margin, taxable-equivalent | 3.77% | 3.68% | Up 9 basis points |
| Return on average assets | 1.45% | 0.94% | Higher |
For the first nine months of 2012, net income was $733.3 million versus $711.7 million; diluted EPS was $5.37 versus $5.32. Net interest income was $1.931 billion versus $1.772 billion, while total other income was $1.214 billion versus $1.184 billion. The 2011 comparison included $150 million of securities-sale gains and a $65 million Wilmington Trust acquisition gain.
Management’s non-GAAP net operating income was $302.1 million, or $2.24 per diluted share, for Q3 2012, compared with $210.0 million and $1.53 in Q3 2011. The filing defines this measure to exclude acquisition-related amortization and merger gains and expenses.
Financial position, cash flow and credit
| Metric | September 30, 2012 | December 31, 2011 |
|---|---|---|
| Total assets | $81.1 billion | $77.9 billion |
| Loans, net of unearned discount, before allowance | $64.1 billion | $60.1 billion |
| Total deposits | $64.0 billion | $59.4 billion |
| Long-term borrowings | $5.0 billion | $6.7 billion |
| Shareholders’ equity | $9.9 billion | $9.3 billion |
| Allowance for credit losses | $921 million | $908 million |
For the first nine months, operating cash flow was $473.8 million, compared with $1.285 billion in 2011; investing cash flow was a use of $2.726 billion, versus a source of $614.7 million; and financing cash flow was a source of $2.423 billion, versus a use of $1.480 billion. Cash and cash equivalents were $1.623 billion at period-end. The cash-flow statement reflects a $3.572 billion net increase in loans and a $4.624 billion increase in deposits.
- Net charge-offs were $41.8 million in Q3, versus $57.1 million a year earlier; the annualized charge-off rate declined to 0.26% from 0.39%.
- Nonaccrual loans were $925 million, or 1.44% of loans, down from $1.114 billion, or 1.91%, a year earlier. Nonperforming assets were $1.037 billion, or 1.62% of loans plus foreclosed assets.
- Accruing loans at least 90 days past due, excluding acquired loans, were $309 million, up from $240 million a year earlier; most were government-guaranteed residential mortgages.
- The allowance was 1.44% of loans, compared with 1.56% a year earlier. Management said it believed the allowance appropriately reflected inherent portfolio losses.
At September 30, consolidated Tier 1 capital, total capital and Tier 1 leverage ratios were 10.21%, 13.55% and 9.82%, respectively. Tangible common equity to tangible assets was 7.04%, compared with 6.40% at year-end 2011. The common dividend remained $0.70 per share quarterly.
Material changes and unusual items
- Q3 earnings benefited from higher net interest income, lower credit-loss provision and stronger mortgage-banking revenue. Mortgage-banking revenue rose to $106.8 million from $38.1 million, reflecting refinancing activity, wider margins and higher loan-sale volumes.
- Average loans grew 9% year over year to $63.5 billion, led by residential real estate and commercial lending. Average core deposits rose 10% to $60.0 billion; noninterest-bearing balances increased while time deposits declined.
- Q3 2012 had no Wilmington Trust merger-related expense; Q3 2011 included $26 million pre-tax. For the first nine months, 2012 included $10 million of merger-related expense, compared with $67 million in 2011.
- Other-than-temporary impairment losses recognized in earnings were $5.7 million in Q3 and $33.3 million year to date, primarily on privately issued mortgage-backed securities. The 2011 nine-month period included $150 million of securities-sale gains.
- In August 2012, the U.S. Treasury sold its M&T Series A and C preferred shares, allowing M&T to exit TARP. The preferred shares remain outstanding; amended terms provide for a 6.375% dividend rate from November 2013, subject to shareholder approval, and restrict redemption before November 2018.
Outlook, risks and contingencies
- Hudson City acquisition: M&T expected completion by mid-2013, subject to regulatory and shareholder approvals. Hudson City reported $41.9 billion of assets and $37.2 billion of liabilities. M&T expected to repay about $13 billion of its long-term borrowings by liquidating a comparably sized securities portfolio. No earnings guidance is provided in the filing.
- Interest rates: Management’s modeled first-year net interest income increased by $98 million under a gradual +100 basis-point scenario and declined by $57 million under a -100 basis-point scenario. These are estimates dependent on assumptions; actual outcomes could differ materially.
- Credit and securities exposure: Management cited weak housing conditions, real-estate valuations, elevated delinquencies, unemployment and regional economic weakness. Privately issued mortgage securities include substantial Level 3 valuations based partly on unobservable inputs. The company warned that adverse collateral performance could prompt additional impairment.
- Funding and regulation: Management considered normal-course liquidity sources adequate, but noted that funding access could be affected by rating deterioration or market disruption. Dodd-Frank phase-in beginning in 2013 will remove trust-preferred securities from holding-company Tier 1 capital over time; M&T had $1.2 billion of such securities.
- Commitments and litigation: Commitments included $20.5 billion of commercial and other credit extensions, $3.9 billion of standby letters of credit and $2.0 billion of financial guarantees and indemnification contracts. Management did not expect litigation liabilities to be material to financial position; reasonably possible losses beyond recorded liabilities were estimated at $0–$40 million, though future-period operating results could be affected.
Most important facts for investors to verify
- Whether the Hudson City transaction received required approvals, closed as expected, and achieved its stated financing and integration assumptions.
- Whether mortgage-banking gains and elevated origination volumes persisted, and how repurchase claims affected revenue; Q3 mortgage-banking revenue included an estimated $10 million reduction for repurchase obligations.
- Whether loan-quality improvement continued, particularly in residential real estate, builder/developer, Alt-A and junior-lien home-equity portfolios, and whether the allowance remained adequate.
- How privately issued mortgage-backed securities and other Level 3 valuations performed, and whether collateral defaults or loss severities required additional impairments.
- How capital ratios and funding costs were affected by trust-preferred phase-out, changing interest rates, and any post-merger repayment of Hudson City borrowings.