M&T Bank (MTB)
Q4 2011 Earnings Call
January 17, 2012 11:00 am ET
Donald J. MacLeod - Vice President and Assistant Secretary
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Craig Siegenthaler - Crédit Suisse AG, Research Division
Bob Ramsey - FBR Capital Markets & Co., Research Division
Leanne Erika Penala - BofA Merrill Lynch, Research Division
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Adam Chaim - Deutsche Bank AG, Research Division
John G. Pancari - Evercore Partners Inc., Research Division
Marty Mosby - Guggenheim Securities, LLC, Research Division
John D. Fox - Fenimore Asset Management, Inc.
Kenneth M. Usdin - Jefferies & Company, Inc., Research Division
Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division
Michael Turner - Compass Point Research & Trading, LLC, Research Division
Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division
Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you.
I would now like to turn the call over to Don MacLeod, Director of Investor Relations.
Donald J. MacLeod
Thank you, Jackie, and good morning. This is Don MacLeod. I’d like to thank everyone for participating in M&T's Fourth Quarter 2011 Earnings Conference Call both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link.
Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements.
Now I’d like to introduce our Chief Financial Officer, René Jones.
René F. Jones
Thank you, Don, and good morning, everyone. Thank you for joining us on the call today to discuss the fourth quarter as well as our full year 2011 results. Let me begin by reviewing the highlights, after which, Don and I will take your questions.
Turning to the specific numbers. Diluted GAAP earnings per common share were $1.04 for the fourth quarter of 2011 compared with $1.32 earned in the third quarter of 2011. Net income for the recent quarter was $148 million compared with $183 million in the linked quarter. Earnings for the recent quarter were impacted by 4 items I'd like to highlight.
We reported a $79 million pretax other-than-temporary impairment charge on our 20% minority investment in Bayview Lending Group or BLG. This amounts to $49 million on an after-tax basis or $0.39 per common share. This reduces M&T's investment in BLG to an estimated fair value of $115 million. This charge is reflected in other costs of operations in the income statement.
In 2008, M&T Bank Corporation filed a lawsuit against Deutsche Bank Securities, Inc. and several other parties, seeking damages arising from a 2007 investment in collateralized debt obligations. The lawsuit alleged, among other things, that the quality of the investment was not as represented. This matter has now been fully settled, and as part of that settlement, M&T received $55 million. This equates to a $34 million after-tax benefit or $0.27 per common share.
Subsequently, M&T made a $30 million contribution to The M&T Charitable Foundation. As most of you know, we've long articulated the view that healthy communities are the foundation of successful businesses. This belief lies at the heart of M&T's community banking business philosophy. Grants made to not-for-profit agencies by the foundation are focused on improving the quality of life in our communities and increasing economic opportunities where customers and employees -- where our customers and employees live and work.
Lastly, we recorded a $25 million other-than-temporary impairment charge on certain securities in our portfolio of non-agency MBS. This equates to $15 million after tax or $0.12 per common share.
Taken together, these 4 items reduced both GAAP and net operating income by a net $48 million after tax or $0.38 per common share in the fourth quarter.
M&T consistently provides supplemental reporting of its results on a net operating or tangible basis from which we exclude the after-tax effects of amortization of intangible assets as well as expenses and gains associated with mergers and acquisitions. Included in GAAP earnings for the fourth quarter of 2011 were merger-related expenses of $16 million related to the Wilmington Trust acquisition, amounting to $10 million after tax or $0.08 per common share. This compares with $16 million after-tax or $0.13 per common share in the prior quarter. After-tax expense from the amortization of intangible assets was also $10 million or $0.08 per common share in the recent quarter compared with $11 million or $0.08 per common share in the third quarter.
M&T's net operating income for the quarter, which excludes those items, was $168 million compared with $210 million in the linked quarter. Diluted net operating earnings per common share were $1.20 in the recent quarter compared with $1.53 in the linked quarter. In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.
Next, I'd like to cover a few highlights from the balance sheet and the income statement. Taxable-equivalent net interest income was $625 million for the fourth quarter of 2011, up slightly from $623 million in the linked quarter. The net interest margin contracted during the fourth quarter, averaging 3.60%, down 8 basis points from 3.68% in the third quarter. Some forward-basis points of its decline can be attributed to lower prepayment penalties and lower interest on nonperforming loans. The remaining 4 basis points amount to what I’d characterize as core margin compression as $1.5 billion of average loans and investment securities came onto the balance sheet at yields lower than the book overall. The lower yields were partially offset by lower borrowing costs and a higher proportion of non-interest-bearing deposits.
In both the third and fourth quarters, we held large balances of excess liquidity at the Fed: $1.85 billion in the fourth quarter and $1.7 billion in the third quarter with very modest yields. In both quarters, this excess liquidity diluted the net interest margin by some 9 basis points. The deposits that were the source of that excess liquidity, primarily trust related, have now been drawn -- have now been withdrawn or used to fund late fourth quarter loan growth. Funds held at the Fed as of December 31 were just $155 million.