Overview
Net income for M&T Bank Corporation ("M&T") in the third quarter of 2009 was $128 million or $.97 of diluted earnings per common share, compared with $91 million or $.82 of diluted earnings per common share in the third quarter of 2008. During the second quarter of 2009, net income was $51 million or $.36 of diluted earnings per common share. Basic earnings per common share were $.97 in the recent quarter, compared with $.83 in the year-earlier quarter and $.36 in the second quarter of 2009. The after-tax impact of acquisition and integration-related gains and expenses (included herein as merger-related expenses) related to 2009 acquisition transactions resulted in income of $9 million ($15 million pre-tax) or $.08 of basic and diluted earnings per common share in the third quarter of 2009. Merger-related expenses in the second quarter of 2009 totaled $40 million ($66 million pre-tax) or $.35 of basic and diluted earnings per common share. There were no merger-related expenses during the third quarter of 2008. For the nine months ended September 30, 2009, net income was $243 million or $1.84 per diluted common share, compared with $454 million or $4.09 per diluted common share during the corresponding period of 2008. Basic earnings per common share were $1.84 for the first nine months of 2009, compared with $4.12 in the similar nine-month period of 2008. The after-tax impact of merger-related gains and expenses was $33 million ($54 million pre-tax) or $.28 of basic and diluted earnings per common share in the nine-month period ended September 30, 2009. Similar merger-related expenses associated with late-2007 acquisitions were $2 million ($4 million pre-tax) or $.02 of basic and diluted earnings per common share in the first nine months of 2008.
The annualized rate of return on average total assets for M&T and its consolidated subsidiaries ("the Company") in the recent quarter was .73%, compared with .56% in the third quarter of 2008 and .31% in the second quarter of 2009. The annualized rate of return on average common stockholders' equity was 6.72% in the third quarter of 2009, compared with 5.66% in the year-earlier quarter and 2.53% in 2009's second quarter. During the first nine months of 2009, the annualized rates of return on average assets and average common stockholders' equity were .49% and 4.35%, respectively, compared with .93% and 9.37%, respectively, in the similar 2008 period.
Several noteworthy items are reflected in M&T's third quarter 2009 results. On August 28, 2009 M&T Bank, M&T's principal banking subsidiary, entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation ("FDIC") to assume all of the deposits and acquire certain assets of Bradford Bank ("Bradford"), Baltimore, Maryland. As part of the transaction, M&T Bank entered into a loss-share arrangement with the FDIC whereby M&T Bank will be reimbursed by the FDIC for most losses it incurs on the acquired loan portfolio. Assets acquired in the transaction totaled approximately $469 million, including $302 million of loans, and liabilities assumed aggregated $440 million, including $361 million of deposits. In accordance with generally accepted accounting principles ("GAAP"), M&T Bank recorded an after-tax gain on the transaction of $18 million ($29 million before taxes) during the recent quarter. Merger-related expenses associated with this transaction and with M&T's second quarter acquisition of Provident Bankshares Corporation ("Provident") totaled $9 million, after applicable tax effect, in the recent quarter. Also reflected in M&T's third quarter 2009 results were $29 million of after-tax other-than-temporary impairment charges ($47 million before taxes) on certain available-for-sale investment securities. Specifically, such charges related to certain privately issued collateralized mortgage obligations ("CMOs") backed by residential real estate loans and collateralized debt obligations ("CDOs")

backed by pooled trust preferred securities of financial institutions. However, because those investment securities were previously reflected at fair value on the consolidated balance sheet, the impairment charges did not reduce stockholders' equity. Finally, M&T's results benefited from a $10 million reversal of accrued income taxes for previously uncertain tax positions in various jurisdictions. The overall impact of the items described herein was to reduce M&T's third quarter 2009 net income by approximately $9 million, or $.08 of diluted earnings per common share.
On May 23, 2009, M&T completed the acquisition of Provident, a bank holding company based in Baltimore, Maryland. Provident Bank, Provident's banking subsidiary, was merged into M&T Bank on that date. The results of operations acquired in the Provident transaction have been included in the Company's financial results since May 23, 2009. Provident common shareholders received .171625 shares of M&T common stock in exchange for each share of Provident common stock, resulting in M&T issuing a total of 5,838,308 common shares in connection with the acquisition. In addition, based on the merger agreement, outstanding and unexercised options to purchase common stock of Provident converted to options to purchase the common stock of M&T. The fair value of those options was approximately $1 million. In total, the purchase price was approximately $274 million based on the fair value on the acquisition date of M&T common stock exchanged and the fair value of the options to purchase M&T common stock. Holders of Provident's preferred stock were issued shares of new Series B and Series C Preferred Stock of M&T having substantially identical terms. That preferred stock added $156 million to M&T's stockholders' equity. The Series B Preferred Stock has a preference value of $27 million, pays non-cumulative dividends at a rate of 10%, and is convertible into 433,148 shares of M&T common stock. The Series C Preferred Stock has a preference value of $152 million, pays cumulative dividends at a rate of 5% through November 2013 and 9% thereafter, and is held by the U.S. Department of Treasury under the Troubled Asset Relief Program - Capital Purchase Program.
The Provident transaction has been accounted for using the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded by M&T at their estimated fair values as of the acquisition date. Assets acquired totaled $6.3 billion, including $4.0 billion of loans and leases (including approximately $1.7 billion of commercial real estate loans, $1.4 billion of consumer loans, $700 million of commercial loans and leases and $300 million of residential real estate loans) and $1.0 billion of investment securities. Liabilities assumed were $5.9 billion, including $5.1 billion of deposits. The transaction added $436 million to M&T's stockholders' equity, including $280 million of common equity and $156 million of preferred equity. In connection with the acquisition, the Company recorded $332 million of goodwill and $63 million of core deposit intangible. The core deposit intangible is being amortized over seven years using an accelerated method. The acquisition of Provident expands the Company's presence in the Mid-Atlantic area, gives the Company the second largest deposit share in Maryland, and tripled the Company's presence in Virginia. The previously described transaction to acquire certain assets and liabilities of Bradford was also accounted for using the acquisition method of accounting.
Application of the acquisition method requires that acquired loans be recorded at fair value and prohibits the carry over of the acquired entity's allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans. The impact of estimated credit losses on all acquired loans was considered in the estimation of future cash flows used in the determination of estimated fair value as of the acquisition date.

Merger-related expenses associated with the acquisition of Provident incurred during the quarter ended June 30, 2009 totaled $66 million ($40 million after tax effect). Such expenses were for professional services and other temporary help fees associated with the conversion of systems and/or integration of operations; costs related to branch and office consolidations; costs related to termination of existing Provident contractual arrangements for various services; initial marketing and promotion expenses designed to introduce M&T Bank to Provident's customers; severance and incentive compensation costs; travel costs; and printing, supplies and other costs of commencing operations in new markets and offices. Additional information about the acquisition of Provident is provided in note 2 of Notes to Financial Statements.
The condition of the residential real estate marketplace and the U.S. economy since 2007 has had a significant impact on the financial services industry as a whole, and specifically on the financial results of the Company. A pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate values and higher delinquencies and charge-offs of loans, including loans to builders and developers of residential real estate. During 2009, the Company has experienced higher delinquencies and charge-offs related to its commercial loan and commercial real estate loan portfolios as well. Additionally, investment securities backed by residential and commercial real estate have reflected substantial unrealized losses due to a lack of liquidity in the financial markets and anticipated credit losses. Many financial institutions, including the Company, have taken charges for those unrealized losses that were deemed to be other than temporary.
The Company's financial results for the second quarter of 2009 were adversely impacted by certain events. During that quarter, the FDIC announced that it would levy a special assessment on insured financial institutions to rebuild the Deposit Insurance Fund. That special assessment amounted to $33 million ($20 million after tax effect, or $.17 of diluted earnings per common share). Also during the second quarter of 2009, other-than-temporary impairment charges of $25 million (pre-tax) were recorded on certain privately issued CMOs backed by residential real estate loans and CDOs backed by pooled trust preferred securities of financial institutions. Such securities are held in the Company's available-for-sale investment securities portfolio. Those charges reduced net income and diluted earnings per common share by $15 million and $.13, respectively.
Results recorded by the Company in the third quarter of 2008 were affected by two noteworthy events. During that quarter, a $153 million (pre-tax) other-than-temporary impairment charge was recorded related to preferred stock issuances of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The write-down was taken on preferred stock with a basis of $162 million following the U.S. Government's placement of Fannie Mae and Freddie Mac under conservatorship on September 7, 2008. As a result of the impairment charge and the recognition of available income tax benefits, M&T's reported net income in the third quarter of 2008 was reduced by $97 million, or $.88 of diluted earnings per common share. Also during that quarter, the Company resolved certain tax issues related to its activities in various jurisdictions during the years 1999-2007. As a result, the Company paid $40 million to settle those issues, but was able to reduce previously accrued income tax expense in 2008's third quarter by $40 million, thereby adding $.36 to diluted earnings per common share.

Supplemental Reporting of Non-GAAP Results of Operations As a result of business combinations and other acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $3.7 billion at September 30, 2009, compared with $3.4 billion at each of September 30, 2008 and December 31, 2008. Included in such intangible assets was goodwill of $3.5 billion at September 30, 2009 and $3.2 billion at each of September 30 and December 31, 2008. Amortization of core deposit and other intangible assets, after tax effect, totaled $10 million ($.09 per diluted common share) during each of the third quarters of 2009 and 2008, and $9 million ($.08 per diluted common share) during the second quarter of 2009. For the nine-month periods ended September 30, 2009 and 2008, amortization of core deposit and other intangible assets, after tax effect, totaled $29 million ($.25 per diluted common share) and $31 million ($.28 per diluted common share), respectively.
M&T consistently provides supplemental reporting of its results on a "net operating" or "tangible" basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and gains and expenses associated with merging acquired operations into the Company, since such items are considered by management to be "nonoperating" in nature. Although "net operating income" as defined by M&T is not a GAAP measure, M&T's management believes that this information helps investors understand the effect of acquisition activity in reported results.
Net operating income was $129 million in the third quarter of 2009, compared with $101 million in the year-earlier quarter. Diluted net operating earnings per common share for the recent quarter were $.98, compared with $.91 in the third quarter of 2008. Net operating income and diluted net operating earnings per common share were $101 million and $.79, respectively, in the second quarter of 2009. For the first nine months of 2009, net operating income and diluted net operating earnings per common share were $305 million and $2.37, respectively, compared with $487 million and $4.39 in the corresponding 2008 period.
Net operating income expressed as an annualized rate of return on average tangible assets was .78% in the recently completed quarter, compared with .65% in the third quarter of 2008 and .64% in 2009's second quarter. Net operating income expressed as an annualized return on average tangible common equity was 14.87% in the recent quarter, compared with 13.17% in the third quarter of 2008 and 12.08% in the second quarter of 2009. For the nine-month period ended September 30, 2009, net operating income represented an annualized return on average tangible assets and average tangible common stockholders' equity of .64% and 12.19%, respectively, compared with 1.05% and 21.10%, respectively, in the similar 2008 period.
Reconciliations of GAAP amounts with corresponding non-GAAP amounts are provided in table 2.
Taxable-equivalent Net Interest Income
Taxable-equivalent net interest income aggregated $553 million in the third quarter of 2009, 12% higher than $493 million in the year-earlier quarter and 9% above $507 million in the second quarter of 2009. The improvement from 2008's third quarter reflects a 22 basis point (hundredths of one percent) widening of the Company's net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets, and higher average earning assets, which increased $2.9 billion, or 5%, to $60.9 billion from $58.0 billion in the third quarter of 2008. The Company's net interest

margin was 3.61% in the third quarter of 2009, compared with 3.39% in the third quarter of 2008. The growth in taxable-equivalent net interest income from the second quarter of 2009 was due to an 18 basis point improvement in the net interest margin and higher earning asset balances, which rose $1.6 billion from 2009's second quarter. The most significant factors for the higher recent-quarter net interest margin as compared with the previous quarters were lower interest rates paid on deposits and long-term borrowings. The higher average earning asset level in the recent quarter resulted from the full-quarter impact of earning assets obtained in the Provident transaction, which at acquisition date totaled approximately $5.1 billion.
For the first nine months of 2009, taxable-equivalent net interest income was $1.51 billion, up 3% from $1.47 billion in the corresponding period of 2008. Contributing to that improvement were growth in average earning assets, which rose $1.2 billion, or 2%, and a widening of the Company's net interest margin of 3 basis points, to 3.41% in 2009 from 3.38% in 2008. The increase in average earning assets was due to the Provident acquisition and the improved net interest margin resulted from lower interest rates paid on deposits and borrowings.
Average loans and leases rose $3.8 billion, or 8%, to $52.3 billion in the recently completed quarter from $48.5 billion in the third quarter of 2008. Included in average loans and leases in the recent quarter were loans obtained in the Provident acquisition, which added approximately $3.9 billion to the average loan and lease total. The impact of the loans obtained in the Bradford transaction on average loan and lease balances in the recent quarter was not significant. Average commercial loan and lease balances were $13.8 billion in the recent quarter, compared with $13.9 billion in 2008's third quarter. The impact of such loans acquired from Provident added approximately $600 million to the recent quarter's average total. Offsetting that impact was a decline in average automobile floor plan loans of approximately $386 million, along with generally lower demand for commercial loans. Commercial real estate loans averaged $20.8 billion in the third quarter of 2009, up $2.3 billion or 12% from $18.6 billion in the year-earlier quarter, and reflected loans obtained from Provident averaging approximately $1.7 billion in the recent quarter. Average outstanding residential real estate loans increased $465 million or 9% to $5.4 billion in the recently completed quarter from $5.0 billion in the third quarter of 2008. Included in that portfolio were loans held for sale, which averaged $613 million in the recent quarter, compared with $493 million in the third quarter of 2008. Residential real estate loans acquired in the Provident transaction averaged approximately $266 million in the third quarter of 2009. Consumer loans averaged $12.2 billion in the third quarter of 2009, $1.2 billion or 11% higher than $11.1 billion in the year-earlier quarter. That growth was due to loans obtained from Provident, which averaged approximately $1.4 billion (largely home equity loans and lines of credit), and higher outstanding balances of home equity lines of credit, partially offset by declines in average outstanding automobile and home equity loan balances.
Average outstanding loan balances grew $1.8 billion, or 3% from the second to the third quarter of 2009, largely due to the full-quarter impact of loans acquired in the Provident transaction. Excluding Provident-related loans, total average loans in the recent quarter declined approximately $400 million from the second quarter of 2009. That decline was the result of lower average commercial loan balances, partially offset by growth in average commercial real estate loans outstanding. The following table summarizes quarterly changes in the major components of the loan and lease portfolio.

AVERAGE LOANS AND LEASES
(net of unearned discount)
Dollars in millions

                                                          Percent increase
                                                          (decrease) from
                                      3rd Qtr.      3rd Qtr.           2nd Qtr.
                                        2009          2008               2009
        Commercial, financial, etc.   $  13,801            (1 )%              (2 )%
        Real estate - commercial         20,843            12                  6
        Real estate - consumer            5,429             9                  3
        Consumer
        Automobile                        3,127           (11 )               (2 )
        Home equity lines                 5,763            28                 10
        Home equity loans                 1,066             3                  9
        Other                             2,291            13                  8

        Total consumer                   12,247            11                  6

        Total                         $  52,320             8 %                3 %

For the first nine months of 2009, average loans and leases aggregated $50.6 billion, up $1.7 billion or 4% from $48.9 billion in the similar 2008 period. That growth was predominantly the result of loans obtained from Provident. Excluding the impact of loans acquired from Provident, higher average commercial real estate loan balances were more than offset by declines in average outstanding balances of residential real estate loans (due largely to securitization transactions in June and July of 2008) and consumer loans.
The investment securities portfolio averaged $8.4 billion in the recent quarter, down $883 million or 9% from $9.3 billion in the year-earlier quarter. That decline largely reflects paydowns of mortgage-backed securities, partially offset by the investment securities obtained in the Provident transaction. Provident-related securities increased average investment securities balances in the recent quarter by approximately $1.0 billion. Average investment securities balances in the third quarter of 2009 were down 1% from the second quarter of 2009, as the impact of paydowns was offset by the full-quarter effect of the investment securities acquired from Provident. For the first nine months of 2009 and 2008, average investment securities were $8.5 billion and $9.0 billion, respectively.
The investment securities portfolio is largely comprised of residential mortgage-backed securities and CMOs, debt securities issued by municipalities, debt and preferred equity securities issued by government-sponsored agencies and certain financial institutions, and shorter-term U.S. Treasury and federal agency notes. When purchasing investment securities, the Company considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to the risks assumed, including prepayments. In managing the investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio following completion of a business combination.
The Company regularly reviews its investment securities for declines in value below amortized cost that might be characterized as "other than temporary." As previously discussed, an other-than-temporary impairment charge of $47 million (pre-tax) was recognized in the third quarter of 2009 related to certain privately issued CMOs and CDOs held in the Company's available-for-sale investment securities portfolio. During the second quarter of 2009, an other-than-temporary impairment charge of $25 million (pre-tax) was recognized on certain privately issued CMOs and CDOs. Finally, during 2008's third quarter, the Company recognized other-than-temporary impairment charges of $153 million (pre-tax) related to its holdings of preferred stock of Fannie Mae and Freddie Mac. Poor economic conditions, high unemployment and declining real estate values are significant factors contributing to the recognition of the other-

than-temporary impairment charges. As of September 30, 2009 and December 31, 2008, the Company concluded that the remaining declines associated with the rest of the investment securities portfolio were temporary in nature. That conclusion was based on management's assessment of future cash flows associated with individual investment securities as of each respective date. A further discussion of fair values of investment securities is included herein under the heading "Capital." Additional information about the investment securities portfolio is included in notes 3 and 10 of Notes to Financial Statements.
Other earning assets include deposits at banks, trading account assets, federal funds sold and agreements to resell securities. Those other earning assets in the aggregate averaged $160 million, $191 million and $235 million for the quarters ended September 30, 2009, September 30, 2008 and June 30, 2009, respectively. For the nine-month periods ended September 30, 2009 and 2008, average balances of other earning assets were $197 million and $192 million, respectively. The amounts of investment securities and other earning assets held by the Company are influenced by such factors as demand for loans, which generally yield more than investment securities and other earning assets, ongoing repayments, the level of deposits, and management of balance sheet size and resulting capital ratios.
As a result of the changes described herein, average earning assets aggregated $60.9 billion in the third quarter of 2009, compared with $58.0 billion in the year-earlier quarter. Average earning assets were $59.3 billion in the second quarter of 2009 and totaled $59.2 billion and $58.0 billion for the nine-month periods ended September 30, 2009 and 2008, respectively.
The most significant source of funding for the Company is core deposits, which are comprised of noninterest-bearing deposits, nonbrokered interest-bearing transaction accounts, nonbrokered savings deposits and nonbrokered domestic time deposits under $100,000. The Company's branch network is its principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Certificates of deposit under $100,000 generated on a nationwide basis by M&T Bank, National Association ("M&T Bank, N.A."), a wholly owned banking subsidiary of M&T, are also included in core deposits. Average core deposits totaled $40.9 billion in the third quarter of 2009, compared with $31.6 billion in the year-earlier quarter and $38.2 billion in the second quarter of 2009. The acquisition of Provident added approximately $1.4 billion and $3.0 billion to average core deposits during the quarters ended June 30 and September 30, 2009, respectively. Excluding deposits obtained in the Provident transaction, the growth in core deposits since the third quarter of 2008 was due, in part, to the impact on the attractiveness of alternative investments to the Company's customers resulting from lower interest rates and the continuing recessionary environment in the U.S. During the declining interest rate environment, over the last twelve months the Company has also experienced a shift in customer savings trends, as average time deposits have continued to decline, while average noninterest-bearing deposits and savings deposits have increased. The following table provides an analysis of quarterly changes in the components of average core deposits. For the nine-month . . .