We have reiterated our Neutral recommendation on M&T Bank Corporation (MTB) after a thorough review of its second quarter 2011 earnings results in the light of the current economic environment and the completion of the acquisition of Wilmington Trust Corporation.
Second Quarter 2011 Results
M&T Bank Corp.’s 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 earned 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 the downside.
On a GAAP basis, M&T Bank reported a 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.
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
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, modest loan growth, pressure on net interest margin and regulatory issues remain headwinds to the stock, a sound capital position, with a growing core deposit will uphold the bank in the long run.Hence, we reiterate our Neutral recommendation on the stock.
Additionally, M&T shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. However, one of its closest peers, KeyCorp (KEY) has a Zacks #2 Rank, which translates into a short-term Buy’ recommendation.
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