USB US Bancorp

M&T Bank Corporation’s (MTB) second quarter 2011 operating earnings of $2.16 per share significantly exceeded the Zacks Consensus Estimate of $1.53.

Earnings also expanded substantially from $1.67 per share in the prior quarter and $1.53 in the year-ago period.

Quarterly results were aided by an increase in net interest income and non-interest income coupled with substantially lower provision for credit losses. However, an increase in expenses was on the downside.

On a GAAP basis, M&T Bank reported net income of $322 million or $2.42 per share, up from $189 million or $1.46 per share in the prior-year quarter.

Sealed Wilmington Trust Deal

On May 16, 2011, M&T Bank Corp. announced the completion of the acquisition of Wilmington Trust Corporation. The deal added 55 branch locations, 225 ATMs and $10.7 billion in assets to the M&T portfolio.

Assets acquired in the transaction totaled approximately $10.8 billion, including $6.4 billion of loans, while liabilities assumed were $10.0 billion, including $8.9 billion of deposits. 

Considerable merger-related expenses will be incurred by M&T in the third and fourth quarters of 2011 as systems conversions are completed and operations are integrated. However, M&T recognized a net after-tax gain of $42 million or 33 cents per share in the reported quarter related to this acquisition.

Behind the Headline Numbers

M&T Bank’s net interest income came in at $593 million, up 3% year over year. The growth stems from a $3.6 billion rise in average earning assets, which was partially offset by a 9 basis point contraction in the net interest margin that deteriorated to 3.75% from 3.84% in the year-earlier quarter.

Contraction in the net interest margin reflected the impact of the Wilmington Trust acquisition.  Moreover, higher earning balances on deposit with the Federal Reserve and higher amounts of agreements to resell securities also contributed to the decline.

Loans and leases, net of unearned discount, were $58.5 billion at the end of the second quarter, up 14.5% from $51.1 billion a year earlier.  Total deposits increased 24.6% to $59.2 billion at June 30, 2011 from $47.5 billion at the end of the prior-year quarter.

M&T Bank’s non-interest income increased 83.2% year over year to $502 million. This reflects net gains from investment securities. Excluding gains and losses from investment securities in all periods and the gain recorded in the recent quarter related to the Wilmington Trust acquisition, noninterest income came in at $353 million, showing an improvement of 19.3% from $296 million reported in the year-earlier quarter.

The year-over-year increase was attributable to appreciably higher trust income, largely due to the Wilmington Trust transaction, letter of credit and other credit-related fees and gains on the sale of previously leased equipment. This was partially offset by lower service charges on consumer deposit accounts.

M&T Bank’s non-interest expense was $577 million, up 21.2% from the year-earlier quarter. Excluding non-operating expenses and other merger-related costs, non-interest operating expenses came in at $525 million, up 13.9% year over year, primarily due to higher expenses related to operations obtained in the Wilmington Trust acquisition. Efficiency ratio deteriorated to 55.6% from 53.1% in the year-earlier quarter.

Credit metrics improved during the quarter, witnessing a 25.9% year-over-year decline in provision for credit losses to $63 million and a 28.0% reduction in net charge-offs to $59 million. Net charge-offs as a percentage of average loans outstanding were 0.43%, down from 0.64% in the year-ago quarter.  Moreover, the ratio of nonperforming assets to total loans plus real estate and other foreclosed assets moved down to 2.42% from 2.50% a year earlier.

M&T Bank’s net operating income expressed as an annualized rate of return on average tangible assets and average tangible common shareholders' equity was 1.69% and 24.40%, respectively, compared with 1.23% and 20.36% in the comparable prior-year period. M&T Bank's tangible common equity to tangible assets ratio was 6.28% as of June 30, 2011, compared with 5.75% as of June 30, 2010.

Repaid TARP Dues

During the reported quarter, M&T purchased from the U.S. Department of the Treasury and subsequently retired $330 million of preferred stock that Wilmington Trust issued pursuant to the Troubled Asset Relief Program (TARP).

Redemptions of $370 million of M&T Series A Preferred Stock issued to the Treasury Department by M&T pursuant to the TARP were also made. Additionally, M&T issued $500 million of fixed rate, perpetual non-cumulative preferred stock to supplement its Tier 1 capital.

Our Take

Similar to M&T Bank, JPMorgan Chase & Co. (JPM) reported a jump in first quarter earnings, which was released last week, owing to lower loan loss provisions. The same happened at Citigroup Inc. (C) and U.S. Bancorp (USB), reflecting that overall credit quality challenges have alleviated somewhat.

Going forward, we believe that the strategic acquisitions should help earnings augmentation at M&T. The repayment of the bailout money, though in part, is essentially a positive step as upon full repayment, M&T can escape restrictions on both financial and executives’ pay package flexibility that the company was subject to upon being a bailout receiver. While the tepid economic recovery and regulatory issues remain headwinds for the stock, a sound capital position, with a growing core deposit will uphold the bank in the long run.

M&T Bank shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

 
CITIGROUP INC (C): Free Stock Analysis Report
 
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US BANCORP (USB): Free Stock Analysis Report
 
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