DBRS Comments on the Q2 2009 Earnings of M&T Bank Corporation – A (low); Trend Remains Negative

DBRS has today commented on the Q2 2009 earnings of M&T Bank Corporation (M&T or the Company). DBRS notes that M&T’s franchise strengths and credit fundamentals remain unchanged, and its ratings – A (low) for its senior obligations and Negative trend – remain unaffected.

Reflecting the declining economy, M&T reported net income of $51 million for Q2 2009, down from $64 million in the prior quarter, and $160 million in Q2 2008. On a linked quarter basis, earnings reflected operating and merger related expenses related to the Company’s acquisition of Provident Bancshares Corporation (Provident: closed May 23, 2009), and a FDIC special assessment charge. Partially offsetting these expenses were the Company’s higher net interest income, lower provisions and higher fee revenues. Relative to Q2 2008, earnings were pressured by higher provisions, and expenses, somewhat offset by higher net interest income.

Despite the difficult environment, the Company is having success in sustaining its revenues. M&T’s net interest income for Q2 2009 was $507 million, up 12% from $453 million in the prior quarter and up 3% from $492 million in the year-ago period. The growth in net interest income on both a linked and year-over-year quarter basis was primarily attributable to a widening in the net interest margin (NIM) and growth in average earning assets from the Provident acquisition. On a linked quarter basis, NIM widened by 24 basis points (bps) to 3.43%, while on an annual quarter basis, NIM widened by 4 bps. Margin expansion reflected declines in the rates paid on deposits and long-term borrowings.

Non-interest income, excluding securities gains and losses, was also up, increasing in Q2 2009 to $296 million, from $264 million in the prior quarter and $277 million in the year-ago period. On a linked quarter basis, the increase in non-interest income benefited from a decrease in loss related to the Company’s investment in Bayview Lending Group LLC (Bayview), higher service charges on deposit accounts and higher trading account and foreign exchange gains. Compared with Q2 2008, the higher non-interest income in the current quarter is attributable mainly to higher residential mortgage banking revenues (39% higher in Q2 2009 than in the prior year’s quarter) as residential mortgage origination was driven by a lower interest rate environment.

One time items resulted in an increase in expenses. In addition to the Provident merger related expenses of $40 million, Q2 2009’s results included the impact from the special FDIC assessment which amounted to $33 million on a pretax basis and $20 million on an after-tax basis and also reflected the $25 million (pre-tax) or $15 million after-tax of other than temporary impairment charges on certain available-for-sale securities.

Given the continuing recession, asset quality continued to deteriorate during the quarter. At June 30, 2009, non-accrual loans (NALs) increased to $1.1 billion or 2.11% of loans compared with $1 billion or 2.05% of loans at March 31, 2009. The heightened level of NALs reflect deterioration in a sizeable commercial loan, increased amounts of weakness in residential builder and development exposures, and ongoing pressure on residential mortgage loans. Meanwhile, the Company’s net charge-offs were $138 million (1.09% of average loans) in the second quarter, compared with $100 million (.83% of average loans) in Q1 2009. The rise in net charge-offs was mainly attributable to the partial charge-off of a $95 million commercial loan transferred to nonaccrual status in Q1 2009. The provision for credit losses was $147 million for Q2 2009 compared with $158 million in the linked quarter. The provision exceeded charge-offs by $9 million. The allowance for loan losses at June 30, 2009 was $855 million, which amounted to 1.76% of total legacy loans.

DBRS notes that M&T’s liquidity remains sufficient and is underpinned by a moderate sized core deposit base that represents 77% of net loans (at March 31, 2009). A securities portfolio, which represents 12% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve Discount Window round out the Company’s liquidity profile.

M&T’s tangible common equity ratio declined to 4.49% at June 30, 2009 compared with 4.86% at the end of the first quarter. The decline reflects the impact of the Provident merger, as well as higher net unrealized losses in the available-for-sale investment securities portfolio. DBRS expects that M&T will augment its tangible capital over the intermediate term.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.