Overview
Net income for M&T Bank Corporation ("M&T") in the first quarter of 2009 was $64 million or $.49 of diluted earnings per common share, compared with $202 million or $1.82 of diluted earnings per common share in the first quarter of 2008. During the fourth quarter of 2008, net income totaled $102 million or $.92 of diluted earnings per common share. Basic earnings per common share were $.49 in the initial quarter of 2009, compared with $1.84 and $.92 in the first and fourth quarters of 2008, respectively. The after-tax impact of acquisition and integration-related expenses (included herein as merger-related expenses) associated with M&T's pending acquisition of Provident Bankshares Corporation ("Provident"), expected to close in the second quarter of 2009, was $1 million ($2 million pre-tax), or $.01 of basic and diluted earnings per common share in the recent quarter. Merger-related expenses in the first 2008 quarter related to the November 30, 2007 acquisition of Partners Trust Financial Group, Inc. ("Partners Trust") and the December 7, 2007 acquisition by M&T Bank, the principal bank subsidiary of M&T, of the Mid-Atlantic retail banking franchise of First Horizon Bank ("First Horizon") totaled $2 million ($4 million pre-tax) or $.02 of basic and diluted earnings per common share in the first quarter of 2008. There were no similar expenses in 2008's final quarter.
The annualized rate of return on average total assets for M&T and its consolidated subsidiaries ("the Company") in the first quarter of 2009 was .40%, compared with 1.25% in the initial 2008 quarter and .63% in the fourth quarter of 2008. The annualized rate of return on average common stockholders' equity was 3.61% in the first three months of 2009, compared with 12.49% and 6.41% in the first and fourth quarters of 2008, respectively.
The Company's financial results for the first quarter of 2009 were significantly affected by the recessionary state of the U.S. economy and the continued deterioration of residential real estate values throughout much of the country. Specifically, the provision for credit losses rose to $158 million in the initial 2009 quarter from $60 million in the first quarter of 2008. Net loan charge-offs were $100 million in the recent quarter, up from $46 million in the year-earlier period. The provision and net charge-offs in the final quarter of 2008 were $151 million and $144 million, respectively. The excess of the recent quarter's provision above net charge-offs was deemed necessary due largely to a commercial loan transferred to nonaccrual status during the quarter for which the full collectibility is in question.
Reflecting the early adoption of recently issued accounting pronouncements issued by the Financial Accounting Standards Board ("FASB"), other-than-temporary impairment charges of $32 million ($20 million after taxes, or $.18 of diluted earnings per common share) were recorded during the initial quarter of 2009 on privately issued collateralized mortgage obligations ("CMOs"). Those securities, which are collateralized by residential real estate loans, are held in the Company's available-for-sale investment securities portfolio and have an adjusted cost basis after the impairment charges of $59 million and estimated market value of $28 million as of March 31, 2009. The impact of adopting the new accounting pronouncements is discussed herein under the headings "Capital" and "Recent Accounting Developments" and in note 3 of Notes to Financial Statements. The Company recorded other-than-temporary impairment charges of $24 million ($14 million after taxes, or $.13 of diluted earnings per common share) in the final quarter of 2008 related to certain private CMOs and collateralized debt obligations ("CDOs"). The Company continues to hold those bonds in its available-for-sale investment securities portfolio at an adjusted cost basis of $2 million.

Reflected in the Company's financial results for the first three months of 2008 was $29 million, or $.26 of diluted earnings per share, resulting from the status of M&T Bank, the principal bank subsidiary of M&T, as a member bank of Visa. During the last quarter of 2007, Visa completed a reorganization in contemplation of its initial public offering ("IPO") in 2008. As part of that reorganization M&T Bank and other member banks of Visa received shares of Class B common stock of Visa. Those banks are also obligated under various agreements with Visa to share in losses stemming from certain litigation involving Visa ("Covered Litigation"). As of December 31, 2007, although Visa was expected to set aside a portion of the proceeds from its IPO in an escrow account to fund any judgments or settlements that may arise out of the Covered Litigation, guidance from the Securities and Exchange Commission ("SEC") indicated that Visa member banks should record a liability for the fair value of the contingent obligation to Visa. The estimation of the Company's proportionate share of any potential losses related to the Covered Litigation was extremely difficult and involved a great deal of judgment. Nevertheless, in the fourth quarter of 2007 the Company recorded a pre-tax charge of $23 million ($14 million after tax effect, or $.13 per diluted common share) related to the Covered Litigation. In accordance with generally accepted accounting principles ("GAAP") and consistent with the SEC guidance, the Company did not recognize any value for its common stock ownership interest in Visa as of the 2007 year-end. During the first quarter of 2008, Visa completed its IPO and, as part of the transaction, funded an escrow account with $3 billion from the proceeds of the IPO to cover potential settlements arising out of the Covered Litigation. As a result, during the first three months of 2008, the Company reversed approximately $15 million of the $23 million accrued during the fourth quarter of 2007 for the Covered Litigation. In addition, M&T Bank was allocated 1,967,028 Class B common shares of Visa based on its proportionate ownership of Visa. Of those shares, 760,455 were mandatorily redeemed in March 2008 for an after-tax gain of $20 million ($33 million pre-tax). That pre-tax amount was recorded as gain on bank investment securities in the consolidated statement of income for 2008's initial quarter. During the fourth quarter of 2008, Visa announced that it had settled an additional portion of the Covered Litigation and it further funded the escrow account to provide for that settlement. That settlement and subsequent funding of the escrow account did not result in a material impact to the Company's consolidated financial position or results of operations.
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 $3.4 billion at each of March 31, 2009, March 31, 2008 and December 31, 2008. Included in such intangible assets was goodwill of $3.2 billion at each of those dates. Amortization of core deposit and other intangible assets, after tax effect, was $9 million ($.09 per diluted common share) during 2009's initial quarter, $11 million ($.10 per diluted common share) during the first quarter of 2008, and $10 million ($.08 per diluted common share) in the fourth quarter of 2008.
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 expenses associated with merging acquired operations into the Company, since such expenses 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 totaled $75 million in the first quarter of 2009, compared with $216 million in the year-earlier quarter. Diluted net operating earnings per common share for the initial quarter of 2009 were $.59, compared with $1.94 in the corresponding 2008 quarter. Net operating income and diluted net operating earnings per common share were $112 million and $1.00, respectively, in the fourth quarter of 2008.
Net operating income in the recently completed quarter represented an annualized rate of return on average tangible assets of .50%, compared with 1.41% and .72% in the first and fourth quarters of 2008, respectively. Net operating income expressed as an annualized return on average tangible common equity was 9.36% in the first quarter of 2009, compared with 27.86% in the year-earlier quarter and 15.01% in the last quarter of 2008.
Reconciliations of GAAP results with non-GAAP results are provided in table 2.
Taxable-equivalent Net Interest Income
Taxable-equivalent net interest income aggregated $453 million in the first quarter of 2009, down 7% from $485 million in the corresponding 2008 quarter and 8% below $491 million in the fourth quarter of 2008. The decline in the recent quarter's total as compared with the first quarter of 2008 was predominantly due to a 19 basis point (hundredths of one percent) narrowing of the Company's net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets, to 3.19% from 3.38%. That narrowing was largely the result of a lower contribution from interest-free funds due to a decline in the rates paid on interest-bearing liabilities, which are used to value such funds. The decrease in net interest income from the fourth quarter of 2008 to the recently completed quarter was also due to a narrowing of the net interest margin, which declined 18 basis points from 3.37% in 2008's final quarter. That narrowing was largely attributable to a rapid decline in market interest rates late in the fourth quarter of 2008 and the impact on rates earned on loans repricing more quickly than the rates paid on interest-bearing liabilities.
Average loans and leases totaled $48.8 billion in each of the first quarter of 2009 and the fourth quarter of 2008, up from $48.6 billion in 2008's initial quarter. Commercial loans and leases averaged $14.0 billion in the first 2009 quarter, up 5% from $13.3 billion in the year-earlier quarter. Average commercial real estate loans rose $801 million or 4% to $18.8 billion in the recent quarter from $18.0 billion in the first quarter of 2008. The Company's residential real estate loan portfolio averaged $5.0 billion in 2009's initial quarter, down $943 million or 16% from $6.0 billion in the similar quarter of 2008. Included in that portfolio were loans held for sale, which averaged $548 million in the recently completed quarter, compared with $718 million in the first quarter of 2008. Excluding such loans, average residential real estate loans declined $773 million from the first quarter of 2008 to the first quarter of 2009. That decline was largely attributable to securitization transactions in June and July 2008, which aggregated $875 million and resulted in the transfer of balances from loans to investment securities. Similar securitizations in March 2009 were completed aggregating $141 million, lowering average residential real estate loan balances in 2009's first quarter by approximately $38 million. In each of those transactions, residential real estate loans were securitized into mortgage-backed securities guaranteed by the Federal National Mortgage Association ("Fannie Mae"), which are now held in the Company's available-for-sale investment securities portfolio. The securitizations were completed to improve the Company's liquidity because securities may be more easily pledged as collateral for borrowings and to enhance regulatory capital ratios because Fannie Mae guaranteed securities have a lower risk rating than whole

loans for regulatory capital purposes. Average consumer loans and leases totaled $11.0 billion in the recent quarter, down $330 million or 3% from $11.3 billion in the year-earlier period.
Total average loan balances in the recent quarter were little changed from the fourth quarter of 2008. Relatively modest changes were experienced in each of the major loan categories during the recent quarter as compared with the final quarter of 2008. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.

AVERAGE LOANS AND LEASES
(net of unearned discount)

                                                          Percent increase
                                                           (decrease) from
                                        1st Qtr.      1st Qtr.        4th Qtr.
          Dollars in millions             2009          2008            2008
          Commercial, financial, etc.   $  14,031             5 %            (1 )%
          Real estate - commercial         18,795             4               1
          Real estate - consumer            5,033           (16 )             3
          Consumer
          Automobile                        3,269           (13 )            (3 )
          Home equity lines                 4,768            10               2
          Home equity loans                   942           (18 )            (5 )
          Other                             1,986            (5 )            (1 )

          Total consumer                   10,965            (3 )            (1 )

          Total                         $  48,824             1 %             - %

The investment securities portfolio averaged $8.5 billion during the initial quarter of 2009, down from $8.9 billion in each of the first and fourth quarters of 2008. The decline in such securities from the first quarter of 2008 largely reflects maturities and paydowns, partially offset by the Fannie Mae mortgage-backed securities created in the June and July 2008 securitization transactions already noted. The decrease from the fourth quarter of 2008 was also largely the result of maturities and paydowns of mortgage-backed securities. The investment securities portfolio is largely comprised of residential and commercial mortgage-backed securities and collateralized mortgage obligations, 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 risks assumed, including prepayments. In managing its 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 noted, an other-than-temporary impairment charge of $32 million was recognized in the first quarter of 2009 related to certain CMOs held in the Company's available-for-sale investment securities portfolio. During the fourth quarter of 2008, other-than-temporary impairment charges of $24 million were recognized on certain CMOs backed by option adjustable-rate residential mortgages ("ARMs") that had an amortized cost of $13 million and on three CDOs backed by bank preferred capital securities that had an amortized cost of $12 million. The CDOs were obtained in the Partners Trust transaction. As of March 31, 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 headings "Capital" and "Recent Accounting Developments." Additional information about the investment securities portfolio is included in notes 3 and 9 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 $195 million in the recently completed quarter, compared with $214 million and $215 million in the first and fourth quarters of 2008, 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 $57.5 billion in the first quarter of 2009, compared with $57.7 billion in the corresponding 2008 quarter. Average earning assets aggregated $57.9 billion in the fourth quarter of 2008.
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 bank subsidiary of M&T, are also included in core deposits. Core deposits averaged $34.7 billion in the first quarter of 2009, up from $30.6 billion in the similar quarter of 2008 and $33.1 billion in the final quarter of 2008. The growth in such deposits since the first quarter of 2008 was due, in part, to a lower interest rate environment during the two most recent quarters and to the continuing recessionary environment in the U.S., and its impact on the attractiveness of alternative investments to the Company's customers. 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.

AVERAGE CORE DEPOSITS

                                                            Percent increase
                                                             (decrease) from
                                          1st Qtr.      1st Qtr.        4th Qtr.
       Dollars in millions                  2009          2008            2008
       NOW accounts                       $     512             6 %            (3 )%
       Savings deposits                      20,333            21               7
       Time deposits less than $100,000       5,327           (11 )            (2 )
       Noninterest-bearing deposits           8,554            15               7

       Total                              $  34,726            13 %             5 %

Additional sources of funding for the Company include domestic time deposits of $100,000 or more, deposits originated through the Company's offshore branch office, and brokered deposits. Domestic time deposits over $100,000, excluding brokered certificates of deposit, averaged $3.0 billion during each of the first quarter of 2009 and the last 2008 quarter, compared with $2.6 billion in the first quarter of 2008. Offshore branch deposits, primarily comprised of accounts with balances of $100,000 or more, averaged $2.5 billion, $4.8 billion and $3.0 billion for the quarters ended March 31, 2009, March 31, 2008 and December 31, 2008, respectively. Average brokered time deposits totaled $435 million during the recently completed quarter, compared with $1.8 billion and $948 million in the first and fourth quarters of 2008,

respectively. In connection with the Company's management of interest rate risk, interest rate swap agreements have been entered into under which the Company receives a fixed rate of interest and pays a variable rate and that have notional amounts and terms substantially similar to the amounts and terms of $70 million of brokered time deposits. The Company also had brokered NOW and brokered money-market deposit accounts which in the aggregate averaged $894 million during the first quarter of 2009, compared with $102 million in the year-earlier quarter and $465 million in the fourth quarter of 2008. The significant rise in such average brokered deposit balances in the recent quarter as compared with the first and fourth quarters of 2008 was the result of customer demand for such deposits, largely resulting from the uncertain economic markets and the desire of brokerage firms to earn reasonable yields while ensuring that customer deposits are fully insured. Offshore branch deposits and brokered deposits have been used by the Company as an alternative to short-term borrowings. Additional amounts of offshore branch deposits or brokered deposits may be solicited in the future depending on market conditions, including demand by customers and other investors for such deposits, and the cost of funds available from alternative sources at the time.
The Company also uses borrowings from banks, securities dealers, various Federal Home Loan Banks ("FHLBs"), the Federal Reserve and others as sources of funding. The average balance of short-term borrowings was $3.5 billion in the initial 2009 quarter, compared with $7.2 billion in the year-earlier quarter and $5.0 billion in the final 2008 quarter. Beginning in the second quarter of 2008, the Company has actively sought to increase the average maturity of its non-deposit sources of funds and to reduce short-term borrowings. Included in short-term borrowings were unsecured federal funds borrowings, which generally mature daily, that averaged $1.8 billion in the recent quarter, compared with $5.6 billion and $2.9 billion in the first and fourth quarters of 2008, respectively. Overnight federal funds borrowings have historically represented the largest component of short-term borrowings and are obtained from a wide variety of banks and other financial institutions. Also included in short-term borrowings were secured borrowings with the Federal Reserve through their Term Auction Facility ("TAF"). Borrowings under the TAF averaged $467 million, $62 million and $457 million in the three-month periods ended March 31, 2009, March 31, 2008 and December 31, 2008, respectively. There were no outstanding borrowings under the TAF at March 31, 2009. Also included in average short-term borrowings in the first and fourth quarters of 2008 was a $500 million revolving asset-backed structured borrowing secured by automobile loans that was paid off during the final quarter of 2008. All of the available amount of that structured borrowing was in use during the initial 2008 quarter, while the average balance of that borrowing during 2008's fourth quarter was $353 million. Average short-term borrowings during the recent quarter included $1.0 billion of borrowings from the FHLB of New York, compared with $781 million and $982 million in the first and fourth quarters of 2008, respectively.
Long-term borrowings averaged $11.6 billion in the first quarter of 2009, compared with $10.3 billion in the similar 2008 quarter and $12.1 billion in the fourth quarter of 2008. Included in average long-term borrowings were amounts borrowed from the FHLBs of $6.7 billion in the initial quarter of 2009, and $5.4 billion and $7.1 billion in the first and fourth quarters of 2008, respectively, and subordinated capital notes of $1.9 billion in each of the quarters ended March 31, 2009, March 31, 2008 and December 31, 2008. Junior subordinated debentures associated with trust preferred securities that were included in average long-term borrowings were $1.1 billion in each of the first quarter of 2009 and the fourth quarter of 2008, compared with $981 million in the first quarter of 2008. During January 2008, M&T issued $350 million of Enhanced Trust Preferred Securities, bearing a fixed rate of interest of 8.50% and maturing in 2068. The related junior subordinated debentures are included in long-term borrowings. Information regarding trust preferred securities and the related junior subordinated debentures is provided in note 4 of Notes to Financial Statements. Also included in long-term borrowings were agreements to repurchase securities, which averaged $1.6 billion during each of the first quarters of 2009 and 2008 and the fourth

quarter of 2008. The agreements have various repurchase dates through 2017, however, the contractual maturities of the underlying securities extend beyond such repurchase dates.
Changes in the composition of the Company's earning assets and interest-bearing liabilities as described herein, as well as changes in interest rates and spreads, can impact net interest income. Net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities, was 2.91% in the first quarter of 2009 and 2.94% in the year-earlier quarter. The yield on earning assets during the recent quarter was 4.65%, down 155 basis points from 6.20% in the first quarter of 2008, while the rate paid on interest-bearing liabilities decreased 152 basis points to 1.74% from 3.26%. In the fourth quarter of 2008, the net interest spread was 3.03%, the yield on earning assets was 5.35% and the rate paid on interest-bearing liabilities was 2.32%. The decline in rates resulted from the Federal Reserve lowering its benchmark overnight federal funds target rate throughout 2008 seven times, such that, at December 31, 2008 and March 31, 2009, the Federal Reserve's target rate for overnight federal funds was expressed as a range from 0% to .25%. The twelve basis point decline in spread from the fourth quarter of 2008 to the initial 2009 quarter was due largely to the steep decline in market interest rates late in the fourth quarter of 2008 and the quicker repricing of rates earned on loans as compared with rates paid on interest-bearing liabilities.
Net interest-free funds consist largely of noninterest-bearing demand deposits and stockholders' equity, partially offset by bank owned life insurance and non-earning assets, including goodwill, core deposit and other intangible assets and M&T's investment in Bayview Lending Group ("BLG"), of which M&T owns 20%. Net interest-free funds averaged $9.5 billion in the first quarter of 2009, . . .