DBRS Comments on M&T Bank Corp.’s 2Q13 Results – Senior at A (low), Stable Trend

DBRS, Inc. (DBRS) has today commented on the 2Q13 results of M&T Bank Corporation (M&T or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low), with a Stable trend. M&T reported net income available to common shareholders of $328.6 million for 2Q13, up from $255.1 million for 1Q13, and $214.7 million for 2Q12. On a quarter-over-quarter (QoQ) basis, higher earnings reflected several non-recurring items, a stable net interest margin (NIM) and a modest increase in loans. Earnings for the recent quarter equated to 1.68% of average total assets, up from 1.36% for 1Q13.

Importantly, M&T’s business fundamentals remain sound, driven by its resilient earnings capacity, improved capital, solid liquidity profile, and sound asset quality. Nonetheless, DBRS notes that the Company’s recent written agreement with the Federal Reserve regarding strengthening its Bank Secrecy Act and anti-money laundering (BSA/AML) procedures, systems and processes remains a concern, especially given its historically conservative management profile. DBRS notes that the agreement was a formalization of the previously announced Federal Reserve concerns. As such, the Company has made it a priority to strengthen its BSA/AML compliance program. DBRS notes that this issue will delay the closing of the Hudson City Bancorp, Inc. acquisition until the Company demonstrates its efficacy to the satisfaction of the Federal Reserve. DBRS expects that M&T will satisfy the Federal Reserve’s concerns in a timely manner. Nonetheless, DBRS notes that if additional regulatory concerns outside of those currently identified occur, ratings could be negatively pressured.

During 2Q13, the Company reported several non-recurrent items, which overall benefited its earnings, capital and liquidity. Specifically, M&T sold most of its available for sale (AFS), private label collateralized mortgage obligation securities (CMOs), which resulted in a $28 million loss (after-tax). Additionally, the Company sold its holdings of Visa and MasterCard shares for a $62 million gain (after-tax). Finally, M&T reversed an accrual for a contingent compensation obligation assumed in its Wilmington Trust acquisition. This resulted in a $15 million (after-tax) reduction of expenses.

During 2Q13, net interest income increased $21.5 million, or 3.3%, sequentially, driven by a 2.2% increase in average earning assets and a stable NIM of 3.71%. Benefiting spread income in 2Q13, the Company recognized an additional $13 million of interest income, driven by an improvement in estimated cash flows expected to be collected on acquired loans. Modest average loan growth was sustained at 0.2% QoQ, reflecting higher levels of commercial & industrial and commercial real estate loans. Higher average earning assets also reflected an increase in average interest bearing deposits at banks, partially offset by a decline in average securities, reflecting the sale of most of the Company’s AFS private label CMOs.

Non-interest income for 2Q13 increased $75.8 million, or 17.5%, QoQ, mostly driven by the previously mentioned non-recurrent items. That said most recurrent core fee income components improved during 2Q13, including a 2.6% increase in trust income, a 0.7% increase in deposit service charges and a 9.8% increase in brokerage services income. Nonetheless, mortgage banking income continued to decline, albeit at a moderate 2.0%, QoQ. Positively, the Company did not report other-than-temporary-impairment (OTTI) charges in 2Q13, as compared to a $9.8 million charge during 1Q13. DBRS anticipates that any future OTTI charges will be manageable, especially given the recent sale of the Company’s AFS CMOs.

M&T’s expense base remains well managed. Reflecting QoQ declines across most operating expense line items, and the favorable resolution of the Wilmington Trust related compensation contingency, M&T’s non-interest expenses decreased by $37.0 million, or 5.8%, in 2Q13. Positively, lower expenses resulted in a decrease in the Company’s 2Q13 calculated efficiency ratio to 50.9% (53.2%, excluding the reversal of the Wilmington Trust accrual) from 55.9% for 1Q13.

Despite the difficult operating environment, M&T’s asset quality remains sound. Net charge-offs increased moderately, and equated to a still modest 0.35% of average loans for 2Q13, up from 0.23% during 1Q13. The increase reflected a $30.0 million charge-off on a loan to a wholesaler and re-manufacturer of auto parts. Meanwhile, nonaccrual loans declined and equated to a manageable 1.46% of total loans at June 30, 2013, down from 1.60%, at March 31, 2013. Finally, DBRS notes that M&T’s allowance for credit losses remains adequate at 1.41% of total loans.

The Company’s solid funding profile is underpinned by a low cost core deposit base. During 2Q13, average non-interest bearing deposits increased by 10.9%, and average interest bearing deposits increased by 4.5%. Rounding out its liquidity profile, M&T has a moderately sized securities portfolio and ample access to the FHLB and the Federal Reserve, should additional funding be necessary.

The Company has historically operated with a moderately sized capital position. During 2Q13 M&T’s capital ratios benefited from improved earnings and the before-mentioned non-recurrent items. Specifically, the Company’s estimated Tier 1 common ratio increased 62 basis points to 8.55% and its tangible common equity ratio increased 34 basis points to 7.85%. Finally, M&T estimated its Basel III Tier I common ratio to be 8.1%, as of June 30, 2013.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]