M&T Bank Corporation — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2011; comparative income and cash-flow figures are for 2010. M&T is a regional bank holding company. Results include Wilmington Trust from its May 16, 2011 acquisition, so year-over-year balance-sheet and earnings comparisons are affected by the transaction.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $586 | $567 | $1,155 | $1,124 |
| Other income | $502 | $274 | $816 | $531 |
| Provision for credit losses | $63 | $85 | $138 | $190 |
| Other expense | $577 | $476 | $1,076 | $965 |
| Net income | $322 | $189 | $529 | $340 |
| Diluted EPS | $2.42 | $1.46 | $4.02 | $2.61 |
Q2 return on average assets was 1.78% and return on average common equity was 14.94%, versus 1.11% and 9.67% a year earlier. Management’s non-GAAP net operating income was $289 million, or $2.16 diluted EPS, versus $198 million, or $1.53, in Q2 2010; this measure excludes intangible-asset amortization and merger-related gains and expenses.
- Margin and revenue: Taxable-equivalent net interest income was $593 million, up 3% year over year, while net interest margin narrowed to 3.75% from 3.84% in Q2 2010 and 3.92% in Q1 2011. Average earning assets rose to $63.4 billion, primarily due to the acquisition; lower-yielding cash balances and resale agreements also weighed on margin.
- Credit: Net charge-offs were $59 million in Q2, or 0.43% annualized of average loans, versus $82 million and 0.64% a year earlier. The allowance was $908 million, 1.55% of loans. Nonaccrual loans were $1.26 billion (2.15% of loans), and accruing loans 90 days or more past due were $373 million (0.64%). The latter ratio increased from 0.40% a year earlier.
- Cash flow: For the first half, operating activities provided $863 million and investing activities provided $840 million; financing activities used $1.30 billion. Cash and cash equivalents ended the period at $1.33 billion. Acquisition activity, securities transactions and loan growth affected these flows.
Financial position and capital
At June 30, 2011, total assets were $77.7 billion, loans net of allowance were $57.6 billion, deposits were $59.2 billion and shareholders’ equity was $9.24 billion. At December 31, 2010, these were $68.0 billion, $51.1 billion, $49.8 billion and $8.36 billion, respectively. The increase primarily reflects Wilmington Trust. Short-term borrowings were $567 million and long-term borrowings $7.13 billion at quarter-end. Management said available liquidity sources were adequate for anticipated normal-course funding needs; approximately $939 million was available for dividends from banking subsidiaries to M&T under applicable limits.
Consolidated regulatory capital ratios were 9.52% Tier 1, 13.20% total capital and 9.80% Tier 1 leverage. Tangible common equity to tangible assets was 6.28%. The common dividend remained $0.70 per share for the quarter.
Material changes, unusual items and management commentary
- Wilmington Trust acquisition: M&T issued 4.69 million common shares, valued at approximately $406 million, and acquired about $10.8 billion of assets, including $6.4 billion of loans; assumed liabilities were about $10.0 billion, including $8.9 billion of deposits. The transaction added $176 million of core deposit and other intangible assets, recorded no goodwill and generated a $65 million non-taxable gain. Acquired operations contributed $79 million in revenue and $3 million in net income from acquisition through quarter-end, excluding the merger-related gain and expenses.
- Acquisition-related costs and securities: Merger-related expenses were $37 million in Q2 and $41 million for the first half; further costs were expected in the remainder of 2011. Securities sales generated $111 million of pre-tax gains in Q2, predominantly to manage balance-sheet size and capital ratios following the acquisition. Q2 included $27 million of pre-tax impairment losses on privately issued mortgage-backed securities. The gain and expenses associated with transactions contributed a net $42 million after tax in Q2, according to management.
- Other income and expenses: Trust income rose substantially, reflecting Wilmington Trust. Deposit service charges declined year over year, partly due to regulatory changes. The efficiency ratio, excluding merger costs, intangible amortization and securities and acquisition gains, was 55.6% in Q2 versus 53.1% a year earlier.
- Risks and outlook: Management cited continued economic uncertainty, unemployment, weak housing and real-estate values, and elevated credit risks—particularly residential builders and developers and Alt-A mortgages. It provided no specific earnings or margin guidance. Management expected potential cost savings and business synergies from Wilmington Trust, but these were not reflected in pro forma figures and may not be achieved as expected.
- Regulatory, legal and operational matters: M&T estimated debit-card interchange-fee rules would reduce deposit service-charge income by $15 million to $20 million in Q4 2011. Dodd-Frank’s phaseout of trust preferred securities from holding-company Tier 1 capital begins in 2013. Management did not expect pending or threatened litigation to materially affect financial position; reasonably possible losses beyond recorded liabilities were estimated at $0–$40 million, though a particular period’s results could be affected. Some Wilmington Trust operations remained on pre-acquisition control systems at quarter-end; disclosure controls were deemed effective.
Most important facts for investors to verify
- How much of reported earnings growth is sustainable after separating acquisition effects, the $65 million acquisition gain, securities gains and merger costs.
- Whether Wilmington Trust integration costs, deposit retention, credit performance and anticipated cost savings track management’s expectations.
- Trends in nonaccrual and past-due loans, especially acquired loans, residential construction and Alt-A exposures, and the adequacy of the allowance.
- Exposure to privately issued mortgage-backed securities, including Level 3 valuation assumptions and further impairment risk.
- Effects of margin pressure, changing rates and regulatory changes on net interest income, fee income, capital needs and liquidity.
- Progress toward integrating acquired operations and controls, and any material developments in litigation or other contingencies.