DBRS: M&T’s 1Q14 Earnings Improved QoQ, Driven By a 4Q13 Litigation-related Accrual

Summary:
• 1Q14 earnings to common shareholders of $211.7 million, up 4.1% linked-quarter, primarily due to a 5.5% decline in non-interest expense, mostly reflecting the non-recurrence of a 4Q13 litigation-related accrual.
• 1Q14 revenues were pressured, down 3.3%, QoQ, driven by declines in both fee income and spread income.
• DBRS rates M&T Bank Corporation Issuer & Senior debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views M&T Bank Corporation’s (M&T or the Company) 1Q14 earnings as reflective of the sustained challenging operating environment, which includes moderate economic growth and a relatively high level of unemployment. Furthermore, results continue to reflect considerable costs associated with the strengthening of the Company’s operating platform, including investments related to Bank Secrecy Act (BSA)/anti-money laundering (AML) compliance, capital planning and stress testing, risk management and operational and technology initiatives. Overall, DBRS views M&T’s sound asset quality, and solid funding and capital profiles as supportive of its rating level.

Driving improved quarter-on-quarter (QoQ) earnings, non-interest expense decreased by 5.5%, mostly reflecting the non-recurrence of a 4Q13 $40 million litigation-related accrual related to the Company reaching a settlement of a lawsuit. Overall, M&T’s expense base remains elevated versus historical levels, due to costs associated with strengthening the Company’s operating platform.

Lower linked-quarter fee revenues mostly reflected a decrease in customer activity in the first two months of 1Q14, despite improvement in the third month, with a notable decline in deposit service charges, due to a decrease in levels of non-sufficient funds volumes and lower customer debit card activity. Meanwhile, the net interest margin remained pressured, narrowing by 4 bps QoQ to 3.52%, resulting in lower spread income, despite modest average loan growth.

M&T’s asset quality remains sound, reflecting a modest level of net charge-offs and a manageable level of non-accrual loans. Finally, DBRS considers the Company’s loan loss reserves to be adequate. Meanwhile, M&T’s funding and capital profiles also remain sound. Positively, the Company continues to build capital and the Federal Reserve approved its 2014 capital plan that includes the maintenance of its quarterly common stock dividend and the redemption or repurchase of up to $50 million of subordinated debt.

In August 2012, M&T announced its intent to acquire Hudson City. The transaction has been delayed due to concerns with BSA/AML at M&T and the termination date has been extended again to December 31, 2014. DBRS notes that the Company entered into a written agreement with the Federal Reserve Bank of New York on June 17, 2013, to strengthen its BSA/AML systems and processes; an undertaking that management has taken very seriously. Moreover, the Company believes it has made significant progress in addressing many of the concerns stated in the agreement.

DBRS rates M&T Bank Corporation’s Issuer & Senior debt at A (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]