DBRS: M&T’s Improved QoQ Results Reflect Higher Mortgage Banking Inc. & Earn. Assets; Lower Exp.

Summary:
• 2Q14 earnings to common shareholders of $260.7 million, up 23%, linked-quarter.
• 2Q14 earnings linked-quarter reflected a 4.6% increase in revenues and a 3.0% decline in expenses.
• DBRS rates M&T Bank Corporation Issuer & Senior debt at A (low) with a Stable trend.

M&T Bank Corporation (M&T or the Company) reported solid results for 2Q14, with a 23% quarter-on-quarter (QoQ) increase in earnings to common shareholders to $260.7 million, driven by higher mortgage banking income, an increase in average earnings assets, and lower expenses. Higher average earnings assets were attributable to sustained loan growth, as well as securities purchases as M&T prepares for the implementation of the liquidity coverage ratio. DBRS views M&T’s sound asset quality and solid funding and capital profiles as supportive of its rating level.

Revenues improved solidly QoQ, reflecting an 8.6% increase in non-interest income and a 1.9% increase in spread income. Higher fee income reflected an increase in mortgage banking revenues, spurred by improved origination activity and the sale of re-performing government guaranteed loans. Positively, during the quarter, residential mortgage applications and closings were up, and the pipeline improved 18% linked-quarter. Improved fee income also reflected higher trust income, primarily driven by net new business and seasonal tax preparation fees. Meanwhile, higher levels of customer activity drove higher deposit service charges in the quarter.

Sustained loan growth and continued purchases of securities led to a higher spread income, despite a 12 bp narrowing of net interest margin (NIM) to 3.40%. Loan growth was driven by higher levels of commercial & industrial (C&I) loans and consumer exposures. On a geographic basis, the Company reported strong C&I growth in greater New York, Pennsylvania and the mid-Atlantic region. Consumer loan growth included solid increases in indirect auto and recreational finance loans. Meanwhile, M&T continued to acquire high quality liquid assets in preparation for the liquidity coverage ratio.

Non-interest expense decreased by 3.0%, linked quarter, mostly reflecting seasonally higher 1Q14 salaries and benefits, partially offset by an increase in the Company’s litigation reserves related to an SEC civil investigation of Wilmington Trust’s financial reporting activities, which occurred prior to M&T acquiring the company. Overall, M&T’s expense base remains elevated versus historical levels, due to costs associated with strengthening its BSA/AML compliance and overall risk management platform. Management expects that elevated expense levels will improve heading into 2015.

M&T’s asset quality remains sound, reflecting a modest level of net charge-offs and a manageable level of non-accrual loans.

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 walk-away 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.

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