DBRS Comments on M&T Bank Corporation’s 2Q10 Earnings – Senior at A (low): Trend Remains Negative

DBRS has today commented on the 2Q10 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 of A (low) for its senior obligations and Negative trend remain unaffected. M&T reported net income available to common shareholders of $176 million for 2Q10, up from $138 million for the prior quarter, reflecting a 19% decline in provisions for loan loss reserves, a 6% increase in noninterest income, a 2% increase in net interest income and a 3% decline in noninterest expense.

Various factors contributed to the revenue increase. Higher core noninterest income reflected increased service charges on deposits and mortgage banking revenues, somewhat offset by lower trust and brokerage services, trading account and foreign exchange gains and a moderately higher loss related to the Company’s ownership stake in Bayview Lending Group LLC. 2Q10 results also reflected other-than-temporary securities impairment losses of $22 million, down from $27 million for the prior quarter. Net interest income expansion reflected a 6 basis point (bps) widening of net interest margin (NIM), and there was a modest decrease in average earning assets. The wider NIM reflected higher loan yields, generated by a higher average one-month LIBOR rate, prepayment penalties and fees received on pay-downs and payoffs of nonaccrual loans. The decrease in noninterest expense was mostly attributed to lower salaries and employee benefits.

Despite the protracted economic challenges, M&T’s asset quality remains sound and credit erosion manageable. This reflects positively on the Company’s conservative underwriting standards. Specifically, net charge-offs (NCOs) declined to 0.64% of average loans during 2Q10, down from 0.74% during 1Q10, reflecting lower levels of C&I and residential builder construction loan charge-offs, somewhat offset by higher levels of commercial real estate (CRE) charge-offs. Meanwhile, nonperforming assets declined to 2.50% of total loans and OREO at June 30, 2010, down from 2.78% at March 31, 2010. M&T’s loan loss reserves are acceptable, given the current charge-off rate. DBRS notes that the Company’s loan loss allowance represented 2.7 years of 2Q10 net charge-offs.

The Company’s solid funding profile is underpinned by its low cost core deposit base, which represents roughly 86% (as of March 31, 2010) of net loans. Moreover, M&T has ample access to the FHLB and Federal Reserve if this funding is needed. Of some concern, the Company has a relatively large portfolio of somewhat riskier private label MBS, and to a far lesser extent, collateralized debt obligations (CDOs), which could result in future other-than-temporary impairment (OTTI) losses over the intermediate term.

Given the Company’s fairly conservative risk profile, M&T has historically operated with a moderately sized capital position, which was recently stressed by the Provident acquisition. Since the acquisition, the Company has enhanced its capital through earnings. Specifically, M&T’s tangible common equity (TCE) ratio expanded by 126 basis points to 5.75% since the close of the Provident acquisition. DBRS notes that M&T’s regulatory capital position includes $751 million of TARP funds.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, 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.