M&T Gets Modest Reward for Sticking to the Basics

Though the largest banks have reported soaring profits on investment banking gains, the chief financial officer of M&T Bank Corp. of Buffalo, Rene Jones, said he's happy making money the old-fashioned way.

"We don't have a lot of trading-type revenue. There is not a lot of volatility in our model," Jones said Monday. "We're focused on banking in the community. I think that has made us more stable. The places where we have had losses are places where we moved a little bit away from that."

He said the $70 billion-asset company's performance in the second quarter is a testament to bread-and-butter banking. M&T reported a relatively healthy — if narrowed — profit, while taking market share in its loan book and boosting margins through low-cost deposits.

Matthew Clark, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., said M&T stands apart from other regional banking companies, which are expected to post mixed second-quarter results because of an increase in problem residential and consumer loans. M&T tends to have tighter lending standards than its rivals, so its losses have tended to be lower.

"They are kind of their own animal," Clark said. "It's hard to draw a comparison directly with M&T and others."

Jones said the company benefits from operating in a region that has more favorable unemployment rates than the rest of the country. M&T has more than 800 branches in seven Northeast states, and home prices did not spiral out of control in its home turf, the CFO said.

"If you're not dealing with heavily inflated asset prices, that is a very large benefit," Jones said.

M&T took advantage of its financial heft by acquiring Provident Bankshares Corp. of Baltimore in May to increase its density in the Middle Atlantic region.

Jones said M&T is keeping its eyes open for other opportunities, in particular companies that would enable it to beef up in places where it has already established itself. "What we think we learned here is there are a lot of opportunities when you stay in markets that you know," he said.

M&T's net income in the second quarter fell 68% from a year earlier and 20% from the end of the first quarter, to $51.2 million, or 36 cents a share. On average, analysts polled by Bloomberg had expected earnings of 58 cents a share.

A handful of special charges dragged down the company's results. Merger expenses were $40 million, or 35 cents a share. The Federal Deposit Insurance Corp. special assessment was $32.5 million, or 17 cents a share. It also booked other-than-temporary impairment charges on securities slated for sale of $25 million, or 13 cents a share.

Several analysts said the company had a good quarter.

Joseph Fenech of Sandler O'Neill & Partners LP said in a research note that M&T's results were "relatively solid." He said net interest margins were higher than expected thanks to lower funding costs and lower provisions than he had anticipated.

Fenech said that while "credit issues seem to remain quite manageable," he "would have liked to see the company build reserves more aggressively," given the prospect of mounting loan losses.

M&T's allowance for loan losses was $855 million at June 30, up about 1% from the end of the first quarter and 10% from mid-2008.

Still, Clark said it appears the company is staying on top of its credit issues.

"For the most part, we were fairly impressed with the manageable deterioration in credit," Clark said. "Also, you saw some improved earning power in the franchise, which is encouraging."

He pointed to its net operating earnings of 79 cents a share, which excludes merger expenses and intangible amortization. That was a 34% increase compared with the first quarter.