GAAP Results of Operations. In a quarter in which M&T closed and converted its third largest acquisition, it reported diluted earnings per common share measured in accordance with generally accepted accounting principles ("GAAP") of $.36. GAAP-basis net income in the recent quarter aggregated $51 million. GAAP-basis net income for the second quarter of 2009 expressed as an annualized rate of return on average assets and average common stockholders' equity was .31% and 2.53%, respectively.

M&T's recent quarter results reflect several notable events. Most significantly, M&T completed its acquisition of Provident Bankshares Corporation ("Provident"), effective May 23, 2009, including the related issuance by M&T of 5.8 million common shares. Results of the operations acquired from Provident are reflected in M&T's results since the acquisition date. In addition, expenses associated with systems conversions and other costs of integrating operations and introducing Provident's former customers to M&T's products and services aggregated $40 million, after applicable tax effect, or $.35 of diluted earnings per common share, during the three-month period ended June 30, 2009. During the recent quarter, the Federal Deposit Insurance Corporation ("FDIC") announced that it would levy a special assessment on insured financial institutions to rebuild the Deposit Insurance Fund. The charge recognized in 2009's second quarter for that special assessment amounted to $32.5 million ($20 million after tax effect, or $.17 of diluted earnings per common share). Also reflected in the recent quarter's results were $25 million (pre-tax) of other-than-temporary impairment charges on certain available-for-sale investment securities. Those charges reduced net income and diluted earnings per common share by $15 million and $.13, respectively. However, because the investment securities were previously reflected at fair value on the consolidated balance sheet, the impairment charges did not reduce stockholders' equity.

Reflecting on M&T's second quarter performance, Rene F. Jones, Executive Vice President and Chief Financial Officer, commented, "This past quarter was a time of significant accomplishment. On May 23 we completed the acquisition of Provident, including the conversion of customer accounts to M&T systems. We are pleased to welcome former Provident employees to M&T and look forward to serving our new customers by providing them with a wide range of products and exceptional customer service. Diluted net operating earnings per common share, which exclude the impact of merger- related expenses and intangible amortization, increased 34% from this year's first quarter to $.79, despite the FDIC special assessment which reduced that measure by $.17 per share. That improvement was driven by several positive developments. Net interest margin dramatically improved from 3.19% in the first quarter of 2009 to 3.43%. Core deposits continued their impressive growth, up an annualized 24% from the initial quarter of 2009 excluding Provident's impact. Residential mortgage banking revenues remained strong as compared with record revenues recorded in the first quarter of this year. Fee income was improved from the first quarter, reflecting higher credit-related fees, insurance income and seasonally higher deposit service charges. Finally, credit costs for the quarter remain in line with internal expectations and we believe that they continue to remain favorable as compared with the industry."

Diluted earnings per common share were $1.44 and $.49 during the second quarter of 2008 and the initial 2009 quarter, respectively. Net income for those respective quarters was $160 million and $64 million. Net income expressed as an annualized rate of return on average assets and average common stockholders' equity for the second 2008 quarter was .98% and 9.96%, respectively, compared with .40% and 3.61%, respectively, in the first quarter of 2009.

Supplemental Reporting of Non-GAAP Results of Operations. 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 M&T, 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. Reconciliations of GAAP and non-GAAP measures are provided herein.

Diluted net operating earnings per common share, which exclude the impact of amortization of core deposit and other intangible assets and merger-related expenses, were $.79 in the second quarter of 2009, including the slightly accretive impact of the Provident acquisition. Diluted net operating earnings per common share were $1.53 in the year-earlier quarter and $.59 in the initial quarter of 2009. Net operating income during the recent quarter was $101 million, compared with $170 million and $75 million in the second quarter of 2008 and the first quarter of 2009, respectively. Expressed as an annualized rate of return on average tangible assets and average tangible common stockholders' equity, net operating income was .64% and 12.08%, respectively, in the recently completed quarter, compared with 1.10% and 22.20% in the second quarter of 2008 and .50% and 9.36% in the initial 2009 quarter.

Taxable-equivalent Net Interest Income. Taxable-equivalent net interest income aggregated $507 million in the second quarter of 2009, up 3% from $492 million in the year-earlier period and 12% higher than $453 million in the first quarter of 2009. The significant growth in such income from the initial 2009 quarter to the second quarter was predominantly due to a widening of the net interest margin, which grew from 3.19% to 3.43%. That improvement was largely attributable to declines in the rates paid on deposits and long-term borrowings. Reflected in average earning assets in the second 2009 quarter was the impact of assets obtained in the Provident transaction, which were outstanding for nearly one-half of the quarter. The acquisition added approximately $1.7 billion to average loans and leases and $447 million to average investment securities during the quarter. The transaction had little impact on the recent quarter's net interest margin.

Provision for Credit Losses/Asset Quality. The provision for credit losses increased to $147 million in the recent quarter from $100 million in the second quarter of 2008. Net charge-offs of loans totaled $138 million during the second 2009 quarter, up from $99 million in the year-earlier quarter. That rise in net charge-offs was largely attributable to the partial charge-off of a commercial loan transferred to nonaccrual status in this year's first quarter. During the first quarter of 2009, the provision for credit losses was $158 million, while net charge-offs aggregated $100 million. Expressed as an annualized percentage of average loans outstanding, net charge-offs were 1.09% and .81% in the second quarter of 2009 and 2008, respectively, .83% in the first quarter of 2009 and .96% for the first six months of 2009.

Loans obtained in connection with the Provident acquisition have been accounted for in accordance with Statement of Financial Accounting Standards No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R"), and/or Statement of Position 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"), if the loan experienced deterioration of credit quality at the time of acquisition. Both SFAS No. 141R and SOP 03-3 require that acquired loans be recorded at fair value and prohibit the carry over of the related allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans. Because SOP 03-3 loans have been recorded at fair value, such loans are not classified as nonaccrual even though some payments may be contractually past due. Estimated credit losses on all acquired loans were considered in the determination of fair value as of the acquisition date.

Loans classified as nonaccrual increased to $1.1 billion, or 2.11% of total loans at June 30, 2009 from $568 million or 1.16% a year earlier and $1.0 billion or 2.05% at March 31, 2009. The recessionary state of the U.S. economy has resulted in generally higher levels of nonaccrual loans and net charge-offs of loans. Contributing to the rise in nonaccrual loans from June 30, 2008 to June 30, 2009 were increases in residential real estate loans, loans to builders and developers of residential real estate, and commercial loans.

Assets taken in foreclosure of defaulted loans were $90 million at June 30, 2009, compared with $53 million at June 30, 2008 and down from $100 million at March 31, 2009. The higher levels of such assets in 2009 resulted predominantly from additions of residential real estate development projects.

In an effort to assist borrowers, M&T has modified the terms of select residential real estate loans, consisting largely of loans in M&T's portfolio of Alt-A loans. At June 30, 2009, outstanding balances of those modified loans totaled $259 million, of which $107 million were classified as nonaccrual. The remaining modified loans have demonstrated payment capability consistent with the modified terms and, accordingly, were classified as renegotiated loans and were accruing interest at June 30, 2009.

Loans past due 90 days or more and accruing interest were $155 million at the end of the recent quarter, compared with $94 million at June 30, 2008. Included in these past due but accruing amounts were loans guaranteed by government-related entities of $144 million and $89 million at June 30, 2009 and 2008, respectively.

Impaired loans obtained in the Provident acquisition that are held for investment and have been accounted for in accordance with SOP 03-3 had outstanding customer balances at June 30, 2009 of $170 million. The carrying value of those loans at that date reflected in the Consolidated Balance Sheet totaled $98 million.

Allowance for Credit Losses. M&T regularly performs detailed analyses of individual borrowers and portfolios for purposes of assessing the adequacy of the allowance for credit losses. Reflecting those analyses, the allowance totaled $855 million, $774 million and $846 million at June 30, 2009, June 30, 2008 and March 31, 2009, respectively. Expressed as a percentage of total loans, the allowance was 1.62% at the recent quarter-end, compared with 1.58% at June 30, 2008 and 1.73% at March 31, 2009. The decline in that ratio from the end of 2009's first quarter to June 30, 2009 was driven by the already noted accounting guidance applied to the Provident acquisition, which prohibits any carryover of an allowance for credit losses. Excluding loans obtained in the Provident acquisition, the allowance-to-legacy loan ratio at June 30, 2009 increased 3 basis points from March 31, 2009 to 1.76%.

Noninterest Income and Expense.