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| MTB > SEC Filings for MTB > Form 10-K on 23-Feb-2009 | All Recent SEC Filings |
23-Feb-2009
Annual Report
Corporate Profile and Significant Developments
M&T Bank Corporation ("M&T") is a bank holding company headquartered in Buffalo,
New York with consolidated assets of $65.8 billion at December 31, 2008. The
consolidated financial information presented herein reflects M&T and all of its
subsidiaries, which are referred to collectively as "the Company." M&T's wholly
owned bank subsidiaries are M&T Bank and M&T Bank, National Association ("M&T
Bank, N.A.").
M&T Bank, with total assets of $64.8 billion at December 31, 2008, is a New
York-chartered commercial bank with 684 banking offices in New York State,
Pennsylvania, Maryland, Delaware, New Jersey, Virginia, West Virginia and the
District of Columbia, and an office in the Cayman Islands. M&T Bank and its
subsidiaries offer a broad range of financial services to a diverse base of
consumers, businesses, professional clients, governmental entities and financial
institutions located in their markets. Lending is largely focused on consumers
residing in New York State, Pennsylvania, Maryland, northern Virginia and
Washington, D.C., and on small and medium size businesses based in those areas,
although residential and commercial real estate loans are originated through
lending offices in six other states. Certain lending activities are also
conducted in other states through various subsidiaries. M&T Bank's subsidiaries
include: M&T Credit Services, LLC, a consumer lending and commercial leasing and
lending company; M&T Real Estate Trust, a commercial mortgage lender; M&T Realty
Capital Corporation, a
multifamily commercial mortgage lender; M&T Securities, Inc., which provides
brokerage, investment advisory and insurance services; MTB Investment Advisors,
Inc., which serves as investment advisor to the MTB Group of Funds, a family of
proprietary mutual funds, and other funds and institutional clients; and M&T
Insurance Agency, Inc., an insurance agency.
M&T Bank, N.A., with total assets of $939 million at December 31, 2008, is a
national bank with an office in Oakfield, New York. M&T Bank, N.A. offers
selected deposit and loan products on a nationwide basis, largely through
telephone, Internet and direct mail marketing techniques.
On December 18, 2008, M&T entered into a definitive agreement to acquire
Provident Bankshares Corporation ("Provident"), a bank holding company
headquartered in Baltimore, Maryland, in a stock-for-stock transaction.
Provident will merge with and into First Empire State Holding Company, a wholly
owned direct subsidiary of M&T formed solely for the purposes of the merger.
Immediately following the acquisition, Provident's wholly owned banking
subsidiary, Provident Bank of Maryland ("Provident Bank") will be merged with
and into M&T Bank. Provident Bank operates 143 branch offices located primarily
in Maryland and Virginia. At December 31, 2008, Provident had $6.6 billion in
assets, including $4.4 billion of loans and leases and $1.4 billion of
investment securities, and $5.9 billion of liabilities, including $4.8 billion
of deposits. The merger requires the approval of various regulatory agencies and
Provident's shareholders and, assuming those approvals are obtained, is expected
to be completed during the second quarter of 2009. Under the terms of the merger
agreement, Provident common shareholders will receive 0.171625 shares of M&T
common stock in exchange for each share of Provident common stock they own.
Provident Series A and Series B preferred stock will be exchanged for series of
M&T preferred stock on substantially the same terms. The acquisition of
Provident will expand the Company's presence in the Mid-Atlantic area, is
expected to give the Company the second-largest deposit share in Maryland, and
will triple the Company's presence in Virginia.
The condition of the residential real estate marketplace and the U.S. economy in
2007 and 2008 has had a significant impact on the financial services industry as
a whole, and specifically on the financial results of the Company. Beginning
with a pronounced downturn in the residential real estate market in early 2007
that was led by problems in the sub-prime mortgage market, the deterioration of
residential real estate values and higher delinquencies and charge-offs of loans
continued throughout 2008. The drop in real estate values negatively impacted
residential real estate builder and developer businesses. With the U.S. economy
in recession in 2008, financial institutions were facing higher credit losses
from distressed real estate values and borrower defaults, resulting in reduced
capital levels. In addition, investment securities backed by residential and
commercial real estate were reflecting substantial unrealized losses due to a
lack of liquidity in the financial markets and anticipated credit losses. Some
financial institutions were forced into liquidation or were merged with stronger
institutions as losses increased and the amounts of available funding and
capital levels lessened. The Federal National Mortgage Association ("Fannie
Mae") and The Federal Home Loan Mortgage Corporation ("Freddie Mac"), two
government-sponsored entities, were placed in conservatorship in September 2008
by the U.S. Government. The Federal Reserve also lowered its federal funds
target rate in the fourth quarter of 2008 three times, from 2.00% at the
beginning of the quarter to a range of 0% - .25% at December 31, 2008.
In the third quarter of 2008, the Federal Reserve, the U.S. Treasury Department
("U.S. Treasury") and the Federal Deposit Insurance Corporation ("FDIC")
initiated measures to stabilize the financial markets and to provide liquidity
for financial institutions. The Emergency Economic Stabilization Act of 2008
("EESA") was signed into law on October 3, 2008 and authorizes the U.S. Treasury
to provide funds to be used to restore liquidity and stability to the
U.S. financial system. Under the authority of EESA, the U.S. Treasury instituted
a voluntary capital purchase program to encourage U.S. financial institutions to
build capital to increase the flow of financing to U.S. businesses and consumers
and to support the U.S. economy. Under the program, the U.S. Treasury has been
purchasing senior preferred shares of financial institutions which will pay
cumulative dividends at a rate of 5% per year for five years and thereafter at a
rate of 9% per year. The terms of the senior preferred shares indicate that the
shares may not be redeemed for three years except with the proceeds of a
"qualifying equity offering" and that after three years, the shares may be
redeemed, in whole or in part, at par value plus accrued and unpaid dividends.
In February 2009, legislation was signed that may result in changes in those
terms. The senior preferred shares are non-voting and qualify as Tier 1 capital
for regulatory reporting purposes. In
connection with purchasing senior preferred shares, the U.S. Treasury also
receives warrants to purchase the common stock of participating financial
institutions having a market price of 15% of the amount of senior preferred
shares on the date of investment with an exercise price equal to the market
price of the participating institution's common stock at the time of approval,
calculated on a 20-trading day trailing average. The warrants have a term of ten
years and are immediately exercisable, in whole or in part. For a period of
three years, the consent of the U.S. Treasury will be required for participating
institutions to increase their common stock dividend or repurchase their common
stock, other than in connection with benefit plans consistent with past
practice. Participation in the capital purchase program also includes certain
restrictions on executive compensation. The minimum subscription amount
available to a participating institution is one percent of total risk-weighted
assets. The maximum suggested subscription amount is three percent of
risk-weighted assets. On December 23, 2008, M&T issued to the U.S. Treasury
$600 million of Series A preferred stock and warrants to purchase
1,218,522 shares of M&T common stock at $73.86 per share. M&T elected to
participate in the capital purchase program at an amount equal to approximately
1% of its risk-weighted assets at the time.
Following a systemic risk determination pursuant to the Federal Deposit
Insurance Act, the FDIC announced a Temporary Liquidity Guarantee Program
("TLGP"), which temporarily guarantees the senior debt of all FDIC-insured
institutions and certain holding companies, as well as deposits in
noninterest-bearing deposit transaction accounts, for those institutions and
holding companies who did not elect to opt out of the TLGP by December 5, 2008.
M&T chose to continue its participation in the TLGP and, thus, did not opt out.
To further increase access to funding for businesses in all sectors of the
economy, the Federal Reserve Board announced a Commercial Paper Funding Facility
("CPFF") program, which provides a broad backstop for the commercial paper
market. Beginning October 27, 2008, the CPFF began funding purchases of
commercial paper of three-month maturity from high-quality issuers.
On November 30, 2007, M&T acquired Partners Trust Financial Group, Inc.
("Partners Trust"), a bank holding company headquartered in Utica, New York.
Partners Trust Bank, the primary banking subsidiary of Partners Trust, was
merged into M&T Bank on that date. Partners Trust Bank operated 33 branch
offices in upstate New York at the date of acquisition. The results of
operations acquired in the Partners Trust transaction have been included in the
Company's financial results since November 30, 2007, but did not have a material
effect on the Company's results of operations in 2007 or in 2008. After
application of the election, allocation and proration procedures contained in
the merger agreement with Partners Trust, M&T paid $282 million in cash and
issued 3,096,861 shares of M&T common stock in exchange for Partners Trust
shares outstanding at the time of acquisition. In addition, based on the merger
agreement, M&T paid $9 million in cash to holders of outstanding and unexercised
stock options granted by Partners Trust. The purchase price was approximately
$559 million based on the cash paid to Partners Trust shareholders, the fair
value of M&T common stock exchanged, and the cash paid to holders of Partners
Trust stock options. The acquisition of Partners Trust expanded the Company's
presence in upstate New York, making M&T Bank the deposit market share leader in
the Utica-Rome and Binghamton markets, while strengthening its lead position in
Syracuse.
Assets acquired from Partners Trust on November 30, 2007 totaled $3.5 billion,
including $2.2 billion of loans and leases (largely residential real estate and
consumer loans), liabilities assumed aggregated $3.0 billion, including
$2.2 billion of deposits (largely savings, money-market and time deposits), and
$277 million was added to stockholders' equity. In connection with the
acquisition, the Company recorded approximately $283 million of goodwill and
$50 million of core deposit intangible. The core deposit intangible is being
amortized over 7 years using an accelerated method.
As a condition of the approval of the Partners Trust acquisition by regulators,
M&T Bank was required to divest three of the acquired branch offices in
Binghamton, New York. The three branches were sold on March 15, 2008, including
loans of $13 million and deposits of $65 million. No gain or loss was recognized
on that transaction.
On December 7, 2007, M&T Bank acquired the Mid-Atlantic retail banking franchise
of First Horizon Bank ("First Horizon"), a subsidiary of First Horizon National
Corporation, in a cash transaction, including $214 million of loans,
$216 million of deposits and $80 million of trust and investment assets under
management. The transaction did not have a significant effect on the Company's
results of operations during 2007 or 2008. In connection with the transaction,
the Company recorded
approximately $15 million of core deposit and other intangible assets that are
being amortized using accelerated methods over a weighted-average life of
7 years.
The Company incurred merger-related expenses associated with the Partners Trust
and First Horizon transactions related to systems conversions and other costs of
integrating and conforming acquired operations with and into the Company of
approximately $15 million ($9 million net of applicable income taxes, or $.08 of
diluted earnings per common share) during 2007 and $4 million ($2 million net of
applicable income taxes, or $.02 of diluted earnings per common share) during
2008. Those expenses consisted largely of professional services and other
temporary help fees associated with the conversion of systems and/or integration
of operations; costs related to branch and office consolidations; incentive
compensation; initial marketing and promotion expenses designed to introduce the
Company to customers of the acquired operations; travel costs; printing, postage
and supplies; and other costs of commencing operations in new offices. In
accordance with generally accepted accounting principles ("GAAP"), included in
the determination of goodwill associated with the Partners Trust acquisition
were charges totaling $14 million, net of applicable income taxes ($18 million
before tax effect), for severance costs for former Partners Trust employees,
termination of Partners Trust contracts for various services and other items. As
of December 31, 2008, there were no significant amounts of unpaid merger-related
expenses or charges included in the determination of goodwill.
On February 5, 2007, M&T invested $300 million to acquire a 20 percent minority
interest in Bayview Lending Group LLC ("BLG"), a privately-held commercial
mortgage lender that specializes in originating, securitizing and servicing
small balance commercial real estate loans. M&T recognizes income from BLG using
the equity method of accounting. M&T's pro-rata portion of the results of
operations of BLG was a loss of $37 million ($23 million after tax effect) in
2008 and income of $9 million ($5 million after tax effect) in 2007, which have
been recorded as a component of "other income" in the consolidated statement of
income. Including expenses associated with M&T's investment in BLG, most notably
interest expense, that investment reduced the Company's net income in 2008 by
$32 million (after tax effect) or $.29 per diluted common share and in 2007 by
$4 million (after tax effect) or $.04 per diluted common share.
On June 30, 2006, M&T Bank completed the acquisition of 21 branch offices in
Buffalo and Rochester, New York from Citibank, N.A., including approximately
$269 million of loans, mostly to consumers, small businesses and middle market
customers, and approximately $1.0 billion of deposits. Expenses associated with
integrating the acquired branches into M&T Bank and introducing the customers
associated with those branches to M&T Bank's products and services aggregated
$3 million, after applicable tax effect, or $.03 of diluted earnings per common
share during the year ended December 31, 2006.
Critical Accounting Estimates
The Company's significant accounting policies conform with GAAP and are
described in note 1 of Notes to Financial Statements. In applying those
accounting policies, management of the Company is required to exercise judgment
in determining many of the methodologies, assumptions and estimates to be
utilized. Certain of the critical accounting estimates are more dependent on
such judgment and in some cases may contribute to volatility in the Company's
reported financial performance should the assumptions and estimates used change
over time due to changes in circumstances. Some of the more significant areas in
which management of the Company applies critical assumptions and estimates
include the following:
• Allowance for credit losses - The allowance for credit losses represents
the amount which, in management's judgment, will be adequate to absorb
credit losses inherent in the loan and lease portfolio as of the balance
sheet date. A provision for credit losses is recorded to adjust the level
of the allowance as deemed necessary by management. In estimating losses
inherent in the loan and lease portfolio, assumptions and judgment are
applied to measure amounts and timing of expected future cash flows,
collateral values and other factors used to determine the borrowers'
abilities to repay obligations. Historical loss trends are also considered,
as are economic conditions, industry trends, portfolio trends and
borrower-specific financial data. Changes in the circumstances considered
when determining management's estimates and assumptions could result in
changes in those estimates and assumptions, which may result in adjustment of the allowance. A detailed discussion of facts and circumstances considered by management in assessing the adequacy of the allowance for credit losses is included herein under the heading "Provision for Credit Losses."
• Valuation methodologies - Management of the Company applies various
valuation methodologies to assets and liabilities which often involve a
significant degree of judgment, particularly when liquid markets do not
exist for the particular items being valued. Quoted market prices are
referred to when estimating fair values for certain assets, such as trading
assets, most investment securities, and residential real estate loans held
for sale and related commitments. However, for those items for which an
observable liquid market does not exist, management utilizes significant
estimates and assumptions to value such items. Examples of these items
include loans, deposits, borrowings, goodwill, core deposit and other
intangible assets, and other assets and liabilities obtained or assumed in
business combinations; capitalized servicing assets; pension and other
postretirement benefit obligations; value ascribed to stock-based
compensation; estimated residual values of property associated with leases;
and certain derivative and other financial instruments. These valuations
require the use of various assumptions, including, among others, discount
rates, rates of return on assets, repayment rates, cash flows, default
rates, costs of servicing and liquidation values. The use of different
assumptions could produce significantly different results, which could have
material positive or negative effects on the Company's results of
operations. In addition to valuation, the Company must assess whether there
are any declines in value below the carrying value of assets that should be
considered other than temporary or otherwise require an adjustment in
carrying value and recognition of a loss in the consolidated statement of
income. Examples include investment securities, other investments, mortgage
servicing rights, goodwill, core deposit and other intangible assets, among
others. Specific assumptions and estimates utilized by management are
discussed in detail herein in management's discussion and analysis of
financial condition and results of operations and in notes 1, 3, 4, 7, 8,
10, 11, 12, 18, 19 and 20 of Notes to Financial Statements.
• Commitments, contingencies and off-balance sheet arrangements - Information
regarding the Company's commitments and contingencies, including guarantees
and contingent liabilities arising from litigation, and their potential
effects on the Company's results of operations is included in note 21 of
Notes to Financial Statements. In addition, the Company is routinely
subject to examinations from various governmental taxing authorities. Such
examinations may result in challenges to the tax return treatment applied
by the Company to specific transactions. Management believes that the
assumptions and judgment used to record tax-related assets or liabilities
have been appropriate. Should tax laws change or the tax authorities
determine that management's assumptions were inappropriate, the result and
adjustments required could have a material effect on the Company's results
of operations. Information regarding the Company's income taxes is
presented in note 13 of Notes to Financial Statements. The recognition or
de-recognition in the Company's consolidated financial statements of assets
and liabilities held by so-called variable interest entities is subject to
the interpretation and application of complex accounting pronouncements or
interpretations that require management to estimate and assess the
probability of financial outcomes in future periods. Information relating
to the Company's involvement in such entities and the accounting treatment
afforded each such involvement is included in note 19 of Notes to Financial
Statements.
Overview
The Company's net income for 2008 was $556 million or $5.01 of diluted earnings
per common share, representing declines of 15% and 16%, respectively, from
$654 million or $5.95 of diluted earnings per common share in 2007. Basic
earnings per common share decreased 17% to $5.04 in 2008 from $6.05 in 2007. Net
income in 2006 aggregated $839 million, while diluted and basic earnings per
common share were $7.37 and $7.55, respectively. The after-tax impact of
acquisition and integration-related expenses (included herein as merger-related
expenses) associated with the 2007 business combination and branch acquisition
transactions were $2 million ($4 million pre-tax) or $.02 of basic and diluted
earnings per
common share in 2008 and $9 million ($15 million pre-tax) or $.08 of basic and
diluted earnings per common share in 2007. Similar costs related to the 2006
branch acquisition transaction were $3 million ($5 million pre-tax) or $.03 of
basic and diluted earnings per common share in 2006. Net income represented a
rate of return on average assets in 2008 of .85%, compared with 1.12% in 2007
and 1.50% in 2006. The return on average common stockholders' equity was 8.64%
in 2008, 10.47% in 2007 and 13.89% in 2006.
The Company's financial results for 2008 were affected by several notable
factors. Largely the result of the state of the U.S. economy and the distressed
residential real estate marketplace, the Company's provision for credit losses
in 2008 was $412 million, significantly higher than $192 million in 2007. Net
charge-offs of loans rose dramatically in 2008, to $383 million from
$114 million in 2007. Net loan charge-offs as a percentage of average loans
outstanding were .78% and .26% in 2008 and 2007, respectively. While charge-offs
were up in all major categories of loans, the most significant contributors to
the sharp rise were loan charge-offs related to residential real estate markets;
charge-offs of loans to builders and developers of residential real estate
jumped from $4 million in 2007 to $100 million in 2008, and residential real
estate loan charge-offs grew to $63 million in 2008 from $19 million in 2007.
Not only did the condition of the residential real estate markets negatively
impact the Company's financial results in 2008 through a higher provision for
credit losses, but significantly higher costs were incurred related to the
workout process for modifying the residential mortgage loans of creditworthy
borrowers and to the foreclosure process for borrowers unable to make payments
on their loans.
During the third quarter, a $153 million (pre-tax) other-than-temporary
impairment charge was recorded related to preferred stock issuances of Fannie
Mae and Freddie Mac. The write-down was taken on preferred stock with a basis of
$162 million following the U.S. Government's placement of Fannie Mae and Freddie
Mac under conservatorship on September 7, 2008. At December 31, 2008 the fair
value of the securities of $2 million (adjusted cost basis of $9 million) was
reflected in the Company's available-for-sale investment securities portfolio.
The Company recognized additional other-than-temporary impairment charges during
2008 totaling $29 million (pre-tax) related to certain collateralized debt
obligations (obtained from Partners Trust) and collateralized mortgage
obligations. In total, other-than-temporary impairment charges on investment
securities aggregated $182 million ($111 million after tax effect) during 2008,
thereby lowering diluted earnings per common share by $1.00.
Also reflected in the Company's 2008 results was $29 million, or $.26 of diluted
earnings per common share, resulting from M&T Bank's status as a member bank of
Visa. During the last quarter of 2007, Visa completed a reorganization in
contemplation of its initial public offering ("IPO") in 2008. As part of that
reorganization M&T Bank and other member banks of Visa received shares of
Class B common stock of Visa. Those banks are also obligated under various
agreements with Visa to share in losses stemming from certain litigation
involving Visa ("Covered Litigation"). As of December 31, 2007, although Visa
was expected to set aside a portion of the proceeds from its IPO in an escrow
account to fund any judgments or settlements that may arise out of the Covered
Litigation, guidance from the Securities and Exchange Commission ("SEC")
indicated that Visa member banks should record a liability for the fair value of
the contingent obligation to Visa. The estimation of the Company's proportionate
share of any potential losses related to the Covered Litigation was extremely
difficult and involved a great deal of judgment. Nevertheless, in the fourth
quarter of 2007 the Company recorded a pre-tax charge of $23 million
($14 million after tax effect, or $.13 per diluted common share) related to the
Covered Litigation. In accordance with GAAP and consistent with the SEC
guidance, the Company did not recognize any value for its common stock ownership
interest in Visa as of the 2007 year-end. During the first quarter of 2008, Visa
completed its IPO and, as part of the transaction, funded an escrow account with
$3 billion from the proceeds of the IPO to cover potential settlements arising
out of the Covered Litigation. As a result, during the first three months of
2008, the Company reversed approximately $15 million of the $23 million accrued
during the fourth quarter of 2007 for the Covered Litigation, adding $9 million
to net income ($.08 per diluted common share). In addition, M&T Bank was
allocated 1,967,028 Class B common shares of Visa based on its proportionate
ownership of Visa. Of those shares, 760,455 were mandatorily redeemed in March
2008 for an after-tax gain of $20 million ($33 million pre-tax), which has been
recorded as "gain on bank investment securities" in the consolidated statement
of income, adding $.18 to diluted earnings per common share. During the fourth
quarter of 2008, Visa
announced that it had settled an additional portion of the Covered Litigation
and it further funded the escrow account to provide for that settlement. That
settlement and subsequent funding of the escrow account did not result in a
material impact to the Company's consolidated financial position or results of
operations.
The Company resolved certain tax issues during the third quarter of 2008 related
to its activities in various jurisdictions during the years 1999-2007. As a
result, the Company paid $40 million to settle those issues, but was able to
reduce previously accrued income tax expense in 2008 by $40 million, thereby
adding $.36 to diluted earnings per common share.
The Company's financial results for 2007 were adversely impacted by several
. . .
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