M&T Bank Corp. — 2010 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
M&T is a regional bank holding company. The quarter’s results reflect ongoing economic weakness and housing-market stress, alongside lower funding costs and higher net interest margins. Prior-year comparisons are affected by the May 2009 Provident acquisition and August 2009 Bradford Bank transaction; Provident’s results were included only from its acquisition date in 2009.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income, GAAP | $569.9 | $547.7 | $1,693.4 | $1,497.0 |
| Provision for credit losses | $93.0 | $154.0 | $283.0 | $459.0 |
| Other income | $289.9 | $278.2 | $821.2 | $782.2 |
| Other expense | $480.1 | $500.1 | $1,445.6 | $1,502.1 |
| Net income | $192.0 | $127.7 | $531.7 | $243.1 |
| Diluted earnings per common share | $1.48 | $0.97 | $4.10 | $1.84 |
| Cash dividends per common share | $0.70 | $0.70 | $2.10 | $2.10 |
- Net interest margin was 3.87% for Q3, up from 3.61% a year earlier and 3.84% in Q2 2010. Taxable-equivalent net interest income was $576 million, up 4% year over year; margin improvement more than offset lower average earning assets.
- Management’s non-GAAP net operating income was $200.2 million, or $1.55 diluted per share, versus $128.8 million and $0.98 in Q3 2009. This measure excludes intangible amortization and merger-related gains or expenses.
- Average loans and leases were $50.8 billion, down 3% year over year, reflecting weak demand. Average core deposits were $43.1 billion, up 5% year over year.
- At September 30, total assets were $68.25 billion, loans and leases net of allowance were $49.90 billion, deposits were $48.65 billion, and stockholders’ equity was $8.23 billion. Long-term borrowings were $8.99 billion, down from $10.24 billion at year-end 2009.
- For the first nine months, operating cash flow was $1.25 billion; investing activities provided $254 million and financing activities used $1.66 billion. Cash and cash equivalents declined $157 million to $1.09 billion.
- Consolidated regulatory capital ratios were 9.45% Tier 1, 13.11% total capital, and 9.18% Tier 1 leverage. Tangible common equity to tangible assets was 5.96%, versus 5.13% at year-end 2009.
Material changes versus comparable periods
- Q3 net income rose about 50% year over year, primarily reflecting lower credit-loss provisions, reduced interest expense, and higher net interest income. Nine-month net income more than doubled, though the 2009 period included Provident and Bradford transaction-related effects and substantially higher securities impairment and credit provisions.
- Net charge-offs fell to $92.9 million in Q3 from $141.5 million a year earlier, but rose from $81.6 million in Q2 2010. The annualized charge-off rate was 0.73%, versus 1.07% in Q3 2009 and 0.64% in Q2 2010.
- Nonaccrual loans were $1.10 billion, or 2.16% of loans, compared with $1.23 billion, or 2.35%, a year earlier. They increased slightly from $1.09 billion, or 2.13%, at Q2 2010. Nonperforming assets totaled $1.29 billion, or 2.53% of loans and foreclosed assets.
- The allowance for credit losses was $894.7 million, or 1.76% of loans, versus $878.0 million, or 1.69%, at year-end 2009. Management judged it adequate, while noting significant uncertainty in borrower repayment and collateral valuations.
- Q3 deposit service charges fell to $117.7 million from $128.5 million a year earlier and in Q2, following new overdraft-consent rules. Mortgage banking revenue increased to $61.1 million from $48.2 million a year earlier, supported by higher residential and commercial origination activity.
- Net securities impairment losses recognized in earnings were $9.5 million in Q3 2010, compared with $47.0 million in Q3 2009. Nine-month recognized net impairment losses were $58.7 million versus $104.0 million.
Outlook, commentary, risks and unusual items
- Near-term outlook: M&T estimated Q4 2010 deposit service-charge revenue could decline 5%–10% from Q3 due to a full quarter of overdraft-rule effects. Retaining certain conforming residential mortgages rather than selling them was expected to reduce Q4 residential mortgage banking revenue by approximately $8 million–$12 million. No overall earnings guidance is provided.
- Credit and economic risks: Management cited high unemployment, weak loan demand, depressed housing values, delinquencies, and valuation uncertainty. Credit concerns include Alt-A mortgages, residential builders and developers, commercial real estate, and certain regions of New York and Pennsylvania. Commercial real estate valuations and future loan losses remain uncertain.
- Investment securities: Privately issued mortgage-backed securities and trust-preferred-related securities carry substantial unrealized losses; significant portions are Level 3 valuations based partly on internal models and unobservable assumptions. Management did not expect to sell impaired securities, but adverse collateral performance or market changes could require further impairment.
- Regulatory change: The Dodd-Frank Act may raise compliance and FDIC assessment costs and affect consumer fees, debit interchange income, derivatives, and capital requirements. Trust preferred securities were then eligible for Tier 1 capital, but a phase-out for large institutions begins in 2013.
- Liquidity: Management considered liquidity adequate for normal-course needs. Funding includes core deposits, wholesale borrowings, brokered deposits, and access to Federal Home Loan Bank and Federal Reserve facilities; availability could deteriorate if the company’s condition or funding markets weaken.
- Unusual and subsequent items: Q3 2009 included a $29 million pre-tax Bradford acquisition gain, merger expenses, $47 million of pre-tax securities impairment, and a $10 million tax benefit from reversal of prior tax accruals. M&T consolidated two mortgage securitization trusts under new accounting rules effective January 1, 2010, adding $424 million of loans and $65 million of borrowings at adoption. After quarter-end, AIB completed the sale of its 26.7 million M&T shares; M&T also agreed to acquire Wilmington Trust in a stock transaction valued at $351 million plus assumption of $330 million of preferred stock, subject to approvals and expected to close by mid-2011.
- Pending and threatened litigation was not expected by management to be material to financial position, though effects on future-period results could not be determined. Disclosure controls were reported effective; no material control changes were identified.
Important facts for investors to verify
- Whether improving charge-offs and nonaccrual trends persist, particularly in commercial real estate, builder/developer, and Alt-A portfolios, and whether the allowance remains adequate.
- Assumptions and valuation sensitivity for Level 3 mortgage-backed securities, impairment exposure, and the potential for additional losses.
- The realized revenue and profitability impact of overdraft rules and the decision to retain residential mortgages rather than sell them.
- Capital and funding implications of Dodd-Frank implementation, including the future treatment of trust preferred securities and FDIC assessments.
- Completion, regulatory approval, and financial integration of the Wilmington Trust transaction, as well as the effect of AIB’s share sale on M&T’s ownership base.
- Comparability of reported earnings with 2009, given acquisition timing, Bradford’s gain, merger costs, securities impairments, and the prior-period tax benefit.