DBRS Comments on M&T Bank Corp.’s 3Q12 Results; Ratings Unchanged – Senior at A (low), Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for M&T Bank Corporation (M&T or the Company), including its A (low) Issuer & Senior Debt rating, are unchanged following the release of the Company’s 3Q12 results. The trend on all ratings is Stable. M&T reported net income available to common shareholders of $273.9 million for 3Q12, up from $214.7 million for 2Q12. On a QoQ basis, M&T’s earnings benefited from stabilizing credit costs, a significant increase in mortgage banking revenues and a wider net interest margin (NIM).

M&T continues to reflect positive balance sheet trends. The Company’s loan portfolio has grown for four consecutive quarters, including 2.0% growth during 3Q12. Meanwhile, asset quality remains sound and improved, as nonaccrual loans continue to trend down. Positively, improved credit quality led to a 23% QoQ reduction in provisions for loan loss reserves.

The Company’s earnings generation remains solid. Indeed, during 3Q12, M&T exhibited significant positive operating leverage, as total revenues increased by $68.8 million, or 6.6%, and noninterest expense declined by $11.3 million, or 1.8%. Higher revenues, linked-quarter, were driven by increases in both spread income (up 2.3%) and noninterest income (up 13.8%).

Improved net interest income was attributable to a three basis point widening of NIM to a solid 3.77% and a 0.3% increase in average earning assets. The wider NIM was driven by a lower level of excess liquidity at the Federal Reserve. Higher average earning assets reflected a 2.6%, or $1.6 billion increase in average loans, partially offset by a 6.3% or $460 million decrease in average securities. The 3Q12 loan growth was attributable to higher levels of residential mortgage loans (up 11.7%), commercial & industrial loans (up 2.5%) and commercial real estate loans (up 1.0%). Going forward, residential mortgage loan growth will slow considerably, as the Company has reverted back to selling most of its originations of conforming residential mortgage loans. DBRS notes that M&T’s loan growth continues to benefit from a large competitor’s divestiture in western New York.

Excluding securities gains/losses, including other-than-temporary-impairment (OTTI) charges of $5.7 million in 3Q12 and $16.2 million in 2Q12, M&T’s fee income increased by 10.5% sequentially. Higher fee income was mostly driven by increased levels of mortgage banking income, which increased by a sizable $37.3 million, or 53.6% and deposit service charges, which increased by $3.5 million, or 3.1%. DBRS notes that the OTTI charges for both quarters were related to the Company’s portfolio of private label MBS. DBRS comments that M&T holds approximately $1.5 billion (amortized cost) of these somewhat riskier securities, which may result in additional, albeit manageable, future OTTI charges.

During 3Q12, expenses were well controlled and declined across all reported expense categories. Additionally, lower QoQ noninterest expense reflected the non-recurrence of a 2Q12 $4 million (after-tax) merger cost related to the Wilmington Trust acquisition. DBRS anticipates that future expenses will remain well managed.

Despite the difficult operating environment, M&T’s asset quality continued to improve and remains sound. Specifically, at September 30, 2012, nonaccrual loans represented a manageable 1.44% of net loans, down from 1.54% at June 30, 2012. Meanwhile, 3Q12 net charge-offs declined to a low 0.26% of average loans, from 0.34% for 2Q12. Finally, DBRS notes that M&T’s allowance for credit losses remains adequate at 1.44% of total loans.

The Company’s solid funding profile is underpinned by a low cost core deposit base that mostly funds its loans. Rounding out its liquidity profile, M&T has a moderately sized securities portfolio and ample access to the FHLB and the Federal Reserve, if additional funding is necessary.

Reflecting M&T’s fairly conservative risk profile, the Company has historically operated with a moderately sized capital position. During 3Q12, M&T’s capital profile improved, as its tangible common equity ratio increased to 7.04% at September 30, 2012, up from 6.65% at June 30, 2012 and its estimated Tier 1 common ratio increased to 7.47%, up from 7.15%, respectively. DBRS notes that M&T exited the TARP program during 3Q12.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.