DBRS Comments on the Q4 2008 Earnings of M&T Bank Corporation – Senior at A (low)

DBRS has today commented on the Q4 2008 earnings of M&T Bank Corporation (M&T or the Company), given the rapidly deteriorating economy and continuing instability in the markets.

M&T reported net income of $102 million, up from $91 million for the prior quarter and $65 million for Q4 2007. The sequential quarterly increase reflects a substantial decrease in other than temporary impairment (OTTI) charges, partially offset by a 50% increase in provisions and a two basis point (bp) narrowing of net interest margin (NIM) to 3.37%. The annual quarterly increase also benefited from significantly lower levels of OTTI related charges, partially offset by a 50% increase in provisions and an eight basis point narrowing of NIM. DBRS notes that M&T’s franchise strengths and credit fundamentals remain unchanged, and its ratings – A (low) for its senior obligations and Negative trend – remain unaffected.

As anticipated, asset quality deteriorated somewhat during the quarter, given the deepening recession. At December 31, 2008, non-performing loans (NPLs) increased to 1.54% of loans versus 1.41% at September 30, 2008 and 0.90% at December 31, 2007. The Company’s Q4 2008 net charge-offs (NCOs) increased to 1.17% of average loans versus 0.77% for the prior quarter and 0.46% for Q4 2007. The heightened level of NPLs reflect deteriorating residential builder and development exposures and to a lesser degree C&I and residential mortgage loans. NCOs exhibited multiple loan types, including C&I, consumer, which was mostly indirect auto, residential builder and development and to a lesser degree residential mortgages. For 2008, loan loss provisions of $412 million exceeded NCOs by 1.08 times. M&T’s allowance for loan loss reserves to nonaccruals was adequate at 1.04 times. While credit costs are likely to increase over the intermediate term, given the deepening recession, M&T has substantial earnings generation, with roughly $1.3 billion in annual income before provisions and taxes, to absorb likely further credit losses without impairing its capital.

The Company’s NIM narrowed by two bps during Q4 2008, due to the non-payment of Fannie Mae preferred stock and the negative impact of the rapid decline in interest rates during December. During Q4 2008, M&T reported $24 million in OTTI related charges, most of which were related to mortgage backed securities, backed by option ARMS, and pooled trust preferred collateralized debt obligations (CDOs)

DBRS notes that M&T’s liquidity remains sufficient and is underpinned by a moderate sized core deposit base that represents 69% of net loans (at September 30, 2008). M&T exhibited solid deposit growth, due in part to a flight to quality. A securities portfolio, which represents 13% of total assets and access to the Federal Home Loan Bank and the Federal Reserve Discount Window, round out the Company’s liquidity profile.

The Company issued $600 million of preferred stock to the U.S. Department of the Treasury (the Treasury), as part of the Treasury’s Capital Purchase Program, which helped augment regulatory capital ratios and provide more of a cushion to absorb credit losses. DBRS notes that this was at the minimum of the range outlined by the Treasury. At December 31, 2008, M&T’s Tier 1 risk-based capital ratio was estimated to be 8.83%, up from 7.89% at September 30, 2008. However, M&T’s tangible common equity-to-tangible asset ratio declined to 4.59% and reflected an increase in unrealized AFS securities losses. DBRS notes that M&T’s tangible capital position will be further strained during Q2 2009, when its recently announced Provident Bankshares Corporation ($6.4 billion in assets) acquisition closes. Nonetheless, DBRS anticipates that the Company will strengthen its TE/TA position after the acquisition and return to its comfort range of between 5.2% and 5.6%.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.