DBRS Comments on the Q4 Earnings of M&T Bank Corporation – Senior at A (low), Trend Remains Negative

DBRS has today commented on the Q4 2009 earnings of M&T Bank Corporation (M&T or the Company).

In light of the downturn in the economy and high unemployment, M&T reported net income available to common shareholders of $123 million for Q4 2009, up from $114 million for the prior quarter, demonstrating the resiliency of the Company’s credit fundamentals. The Company’s earnings, on a linked quarter basis, were driven by a 2% increase in net interest income, a 6% decrease in provisions for loan loss reserves and a 4% decline in non-interest expenses. Partially offsetting was a 4% decrease in non-interest income. The modest increase in net interest income was driven by a 10 basis points (bps) widening of net interest margin (NIM) to 3.71%, partially offset by a slight decrease (-0.7%) in total average earning assets. M&T’s higher NIM, which has widened since Q1 2009, benefited from lower funding costs. Excluding one-time items, non-interest income reflected moderately higher mortgage banking revenues and slightly lower service charges on deposits and trust income. DBRS notes that on a linked-quarter basis, M&T reported a $12.7 million decrease in other-than-temporary-impairment (OTTI) losses to $34.3 million (before tax) and a $277,000 decrease in loss related to the Company’s equity in earnings of Bayview Lending Group LLC to $10.6 million (before tax). Lower non-interest expenses, excluding one-time items, reflected lower salary and benefits, and equipment/occupancy expenses. Earnings included several non-recurring items, including $3.8 million and $8.5 million in merger related expenses (after tax) during Q4 2009 and Q3 2009, respectively, a Q3 2009 $18 million (after tax) gain related to the FDIC facilitated Bradford Bank acquisition (closed in August 2009) and relatively modest securities related gains/losses.

Despite the macroeconomic headwinds, M&T’s asset quality remains sound and credit deterioration manageable. At December 31, 2009, non-accrual loans (NALs) increased to $1.33 billion or 2.56% of total loans, up from $1.23 billion or 2.35%, at September 30, 2009. The increase in NALs reflected one large CRE loan in the Manhattan market. M&T considers the loss content of this exposure to be limited, as the current property value is in excess of the loan value. The Company’s net charge-offs (NCOs) were $135 million (1.03% of average loans) in Q4 2009, down from $141 million (1.07% of average loans) in Q3 2009. The Company’s provision for loan loss reserves exceeded NCOs by $10 million. The allowance for credit losses at December 31, 2009 was $878 million, which amounted to 1.83% of total M&T legacy loans. This ratio excludes loans obtained in the Provident and Bradford Bank acquisitions, which were marked to fair value at acquisition.

DBRS notes that M&T’s liquidity remains sufficient and is underpinned by a well positioned core deposit base that represents 82% of net loans (at September 30, 2009). A securities portfolio, which represents 11% of total assets, access to the Federal Home Loan Bank and the Federal Reserve round out its liquidity profile. DBRS comments that M&T has roughly $2.0 billion (as of 9/30/09: amortized cost) of private label, hybrid ARM MBS, which remain under pressure, due to the downturn in the economy and a housing market that has yet to stabilize. Indeed, the bulk of the Company’s successive quarterly OTTI charges during 2009 were mostly related to the deeply subordinated tranche of this portfolio, which currently totals around $100 million.

Positively, M&T’s tangible common equity ratio increased to 5.13% at December 31, 2009, from 4.89% at September 30, 2009. The increase reflected a lower level of accumulated other comprehensive loss, earnings retention and a slightly smaller balance sheet. DBRS expects that M&T will continue to 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.