M&T Bank Corp. has become the only Buffalo-based business to make the Fortune 500 list, but it's arrival on the prestigious ranking was a bit rocky.
M&T on Tuesday said profits for the first quarter fell 13 percent, the day after it made the elite national ranking for the first time. The bank, which was at No. 519 last year, came in at No. 496, with $4.36 billion in 2006 revenues.
The Fortune 500 list, produced by Fortune magazine, ranks the largest U.S. corporations based on revenues.
The Buffalo Niagara region has not had a company on the Fortune 500 list for 13 years. In 1994, Amherst-based Mark IV Industries appeared on the list for its fifth and final time. Sal H. Alfiero built the firm into a global automotive and manufacturing powerhouse, with 16,000 employees, before selling it in 2000 to the British firm BC Partners for $2.1 billion.
Other companies from upstate New York on the Fortune 500 list this year include Eastman Kodak in Rochester at No. 182; Corning in Corning at No. 439; and Constellation Brands in Fairport at No. 480.
The nearest Buffalo-area company on the Fortune 1000 list this year is Williamsville-based National Fuel Gas at No. 785.
M&T CEO Robert G. Wilmers touted the bank's new status at its annual shareholders' meeting Tuesday, as he defended the bank's business model as still sound despite the earnings snafu that had been telegraphed in late March.
"These earnings results are a reminder that banking has not become a risk-free business," he told employees and shareholders. "A quarter like that just past is sobering -- but does not at all shake our underlying belief in our business model."
Except for periods with big merger or accounting expenses, the earnings report marked the first time since Wilmers took over in 1983 that M&T's profits fell from both the prior quarter and a year earlier.
But while that was an "atypical" disappointment, it was not a disaster, Wilmers noted. He noted that the bank still reported "substantial" profits.
Indeed, in a conference call with Wall Street analysts, Chief Financial Officer Rene Jones said the events of the first quarter won't change the bank's outlook in most areas, even while falling "well short" of internal expectations.
He said the bank has not had a decline in full-year earnings per share since 1989, and "we see no reason this will change in 2007."
M&T reported earnings of $176 million, or $1.57 per share, down from $203 million or $1.77 per share in the first quarter of 2006. That beat Wall Street analysts' consensus expectations of $1.56, as measured by Thomson First Call.
The report was consistent with the company's March 30 warning that mortgage-related woes, a narrower profit margin on lending, and stock compensation costs would combine to reduce earnings per share to between $1.50 and $1.60. Prior to the warning, analysts had been expecting $1.86 per share.
"It was pretty much in line with what they had preannounced," said Joseph Fenech, analyst at Sandler O'Neill & Partners LP. "It was a disappointing quarter overall, but we've known that for a few weeks now."
Net operating earnings, not including accounting factors, fell 11 percent to $187 million, or $1.67 per share, from $211 million, or $1.84 per share.
"This past quarter was no one's idea of a day at the beach," Wilmers said. Still, "to our employees and our shareholders, I say, be reassured. A $176 million quarterly profit is hardly the worst news one could get."
Investors agreed, sending the stock price up $1.55, or 1.4 percent, to $109.12 on Tuesday.
Still, Fenech questioned the bank's long-term growth prospects. "I wouldn't sell the stock here. I'd still rather be with these guys than most other guys out there," Fenech said. "But I'm not rushing into it."
M&T, one of the nation's top 20 banks, had warned that its profits would be sharply lower, as the national crisis in so-called subprime lending -- for borrowers with bad credit -- indirectly impacted the rest of the mortgage industry. About 10 cents per share of M&T's 17-cent drop in operating earnings stemmed from its struggle to sell some loans to investors and its need to reduce the value of those loans on its books.
In particular, the bank cut the value of $883 million in so-called "Alternative-A" loans by $12 million after it was unable to sell them to investors on the secondary market for a price M&T would accept. And it recorded another $6 million for the possibility that it would have to repurchase Alt-A loans it had previously sold if borrowers made late payments in the first 90 days after a sale.
Alt-A loans are not subprime, but allow homeowners with good credit to provide less proof of income, with underwriters relying instead on the value of the property or on the borrowers' past loan repayment history. However, that makes them "nonconventional."
Only 2.6 percent of Alt-A loans industrywide are now delinquent, but as losses on subprime loans soared -- 14.3 percent of such loans are at least 60 days late in payment, up from 8.4 percent a year ago -- investors on the capital markets lumped "Alt-A" into the same risk level. That means fewer investors are bidding for loans at auction, and they're paying less, so M&T aborted its sale.
"We believe that this decision is in our long-run interest but it is a major contributing factor to reducing the net income we have reported for the first quarter," Wilmers said.
Wilmers said he doesn't regret getting into Alt-A lending. M&T now has $1.3 billion in Alt-A loans on its books, including another $400 million originated last year. Jones stressed the loans are high-quality, with average credit scores of 704.
But the bank is making changes. It will now sell mortgages loan by loan rather than holding them for sale in blocks. It will also focus on the high end of the Alt-A market. And it won't make loans for more than 85 percent of a home's value without insurance.
Besides the mortgages, about 6 cents of the 17-cent difference in operating earnings came from the net interest margin -- which measures the difference between what the bank earns on loans and what it pays on deposits. That narrowed because of competition for consumer savings deposits, lower business checking deposits, and $5 million less in prepayment fees.
Finally, although overall loan losses held steady at $17 million, bad loans nearly doubled to $273 million from $143 million a year ago. About $40 million of the increase came from loans to auto dealers struggling from dismal car sales, while another $40 million came from a residential heating equipment maker and from a commercial real estate project whose principal died unexpectedly.
Still, Wilmers noted, that increase only brought problem loans to normal levels from unusual lows, although the bank still set aside $27 million for loan losses, up from $18 million a year ago.
An additional 3-cent decline in per-share profits came from the bank's February investment in BayView Lending Group, a national provider of small-dollar commercial real estate loans. That investment is expected to start adding to earnings in the second half of the year.
Despite the problems, though, Wilmers was quick to stress the bank's diversity and resiliency. Mortgage banking accounted for 6 percent of 2006 profits.
"This is a company with a wide range of business lines which we believe, over time, will balance each other," Wilmers said.