DBRS Comments on M&T Bank Corp.’s 3Q13 Results – Senior at A (low), Stable Trend

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $275.4 million for 3Q13, down from $328.6 million for 2Q13, and $273.9 million for 3Q12. On a net operating basis, net income was $301 million compared to $361 million in 2Q13.

Highlights of the quarter include loan (excluding the impact of the securitizations) and core deposit growth, a strengthened capital position, and improving asset quality. Nonetheless, declines in mortgage banking and higher expenses related to investments in risk management, capital planning and stress testing, regulatory compliance, technology and operating structure negatively impacted results, as M&T remains highly focused on addressing its regulatory concerns.

To strengthen capital and liquidity, the Company converted approximately $1.0 billion of FHA loans into Ginnie Mae securities and securitized and sold approximately $1.4 billion of indirect auto loans. DBRS notes that MTB had after-tax gains of $34 million from these loan securitization transactions, while 2Q13 revenues benefited from similar securitization transactions and gains on the sale of investment securities totaling an aggregate $38 million.

Excluding the impact of the securitizations, average loans grew an annualized 1% with commercial and industrial loan growing 2% annualized, or 5% annualized excluding the seasonal decline in floor plan loans. M&T also saw modest growth in commercial real estate and consumer loans, but average residential real estate loans declined by an annualized 5%. Of the Company’s regions, loan growth was strongest in Upstate and Western New York and softest in the mid-Atlantic region.

Despite average earning asset growth, taxable-equivalent net interest income declined by $5 million to $679 million reflecting continued net interest margin pressure. Specifically, the margin compressed another 10 bps to 3.61% driven primarily by lower prepayment fees. M&T noted that the core margin should remain under modest pressure in 4Q13.

Noninterest income declined by $32 million sequentially to $477 million. While securitization gains increased $49 million to $56 million, mortgage banking and securities gains declined significantly. Indeed, mortgage banking revenues decreased by $26.5 million to $64.7 million, and the Company reported no securities gains following $56.5 million of gains in 2Q13. Mortgage banking was negatively impacted by lower originations, as well as tighter gain on sale margins. 4Q13 results will include the full impact of a subservicing contract entered into during 3Q13, which management expects to more than offset potential further declines in mortgage banking.

Noninterest expense jumped 10% to $659 million, but 2Q13 results did include a reversal of a $26 million accrual for a contingent compensation obligation assumed in the Wilmington Trust acquisition that expired. Nonetheless, operating expenses would have increased $34 million reflecting the aforementioned investments, as well as new hires to increase the Company’s loan servicing capacity following the addition of a subservicing portfolio. Management noted that expenses should remain elevated the next several quarters; as M&T continues to make necessary investments to strengthen its infrastructure. On an operating basis, the Company’s efficiency ratio was 56% compared to 50.9% in 2Q13, or 53.2% excluding the reversal.

Asset quality remains sound and continued to improve during the quarter with declines in non-accrual loans and net charge-offs (NCOs). The provision for credit losses improved $9 million sequentially to $48 million, once again matching NCOs. As an annualized percentage of average loans outstanding; NCOs were a low 0.29% in 3Q13, an improvement from 0.35% in 2Q13. Overall, the allowance for credit losses remains sufficient at 1.44% of outstanding loans, especially given current loss rates.

Positively, the Company continues to build capital. Reflecting balance sheet management and retained earnings, M&T has increased its Tier 1 common ratio to 9.07% from 7.46% a year ago. Moreover, M&T’s tangible common equity to tangible assets ratio improved to a solid 8.11% from 7.85% sequentially. Lastly, the Company estimated that its ratio of Common Equity Tier1 to risk-weighted assets under Basel III was approximately 8.75%.

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

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