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M&T cites flattened earnings as it grows; Wilmington purchase negates revenue rise1

M&T Bank Corp. said first-quarter earnings were flat from a year ago, while per-share earnings fell, as higher operating expenses from its purchase of Wilmington Trust Corp. last May outweighed higher loan and fee revenues and lower credit costs.

The Buffalo-based parent of M&T Bank, one of the nation's 20 largest U.S. banks, reported net income of $206 million in each of the first quarters of 2012 and 2011. However, per-share profits fell by 5.7 percent, to $1.50, from $1.59 a year ago, because the bank has more shares outstanding after the acquisition.

Not counting merger-related costs and accounting issues, net operating income rose by just under 1 percent to $218 million, from $216 million a year ago. But net operating earnings per share fell by 5 percent, to $1.59, from $1.67, again because of the increased shares outstanding.

Results still beat Wall Street expectations of $1.48 per share. "We view M&T as one of the highest-quality banks in our coverage," said Kevin St. Pierre, an analyst at Sanford C. Bernstein Research in New York, who cited the bank's "high-quality, consistent results."

"All things considered, the company looks to be firing on all cylinders," said analyst Joseph Fenech of Sandler O'Neill & Partners LP in New York.

M&T reported higher net interest income from taking deposits and making loans, as well as higher trust income and residential mortgage banking revenues. Average loans also grew by 10 percent annualized during the quarter, while credit costs fell sharply. But operating expenses soared by 28.4 percent, to $620 million, driven by the additional costs of running the Wilmington Trust operations.

"It was a solid quarter. As you look at all the revenue categories, it wasn't just one thing," said Executive Vice President and Chief Financial Officer Rene F. Jones. "There was really not much to complain about. You only get those results when the underlying economy has got some improvement in it."

Looking forward, Jones said the bank expects the profit margin on lending to face more pressure because the bank is adding new loans and securities at lower yields than those that are maturing. But that should be offset by lower deposit and borrowing costs, although he still expects the overall margin for the year to be lower than in 2011.

Responding to an analyst's question on a Wall Street conference call, Jones said the bank still plans to repay its remaining $381.5 million in government funds under the Troubled Asset Relief Program, or TARP, but doesn't have a schedule.

"Our plan is to just keep dialoguing with Treasury, and we'll pay back the remaining balance when we find that it's practical," he said. "We'll get rid of it as soon as we can."

Net interest income rose by 9 percent, to $627 million. That stemmed from a $8.96 billion increase in average earning assets outstanding, which was partly offset by a significant narrowing of the profit margin. Both factors were due largely to the Wilmington Trust acquisition.

Total assets rose by 17 percent from a year ago, to $79.2 billion, while loans and leases rose by 17 percent, to $60.9 billion, and total deposits were up by 21 percent, to $60.9 billion. Specifically, business loans rose by 15 percent, commercial real estate rose by 17 percent, mortgages rose by 41 percent, and consumer loans rose by 5 percent, while noninterest deposits rose by 36 percent, and interest deposits rose by 16 percent.

But Jones cautioned that lending is getting unreasonably competitive again. "Silly is back," he said. "Many of the community banks are pretty aggressive on pricing, and when you get to some of the larger institutions, they've been willing to do things that were a little lower than expected. So it's pretty competitive."

On an annualized basis -- one quarter's pace multiplied by 4 -- business loans grew by 9 percent in the first three months of 2012, while commercial real estate grew by 8 percent, mortgages grew by 43 percent, and consumer loans fell by 6 percent on lower auto and home equity lending. The bank took $2.4 billion in mortgage applications.

Geographically, deposits grew by 11 percent annualized in upstate New York, due to market disruption from HSBC Bank USA's planned exit from the retail market. "With our dense network and our folks on the ground, we've been making really good progress in getting new customers," Jones said.

Deposits in the New York City and Philadelphia metro areas grew by 4 percent, as did deposits in Pennsylvania, while those in the Mid-Atlantic region grew by 2 percent.

The bank set aside $49 million for loan losses in the first quarter and wrote off $48 million as uncollectible during the quarter. That's sharply improved from a $75 million and $74 million, respectively, a year ago.

Fee and other income, after excluding gains and losses from investment securities and other special items, rose by 33 percent, to $388 million, driven by a near quadrupling of trust income from Wilmington Trust and a 24 percent increase in mortgage banking revenues. In particular, Jones cited Wilmington Trust's business of serving as a trustee in major corporate bankruptcies and transactions, where it administers paperwork and payments for a fee but isn't exposed to any credit risks.

"The diversity of the Wilmington Trust business is a nice thing," Jones said. "There's a win in some places when there isn't in others. We're pretty pleased with trust."

Higher expenses included a 30 percent increase in salaries and benefits, a 15 percent increase in equipment and occupancy costs, a 29 percent rise in printing, postage and supplies, and a 52 percent jump in federal deposit insurance assessments.

Still, Jones noted, the bank is already on track to achieve its target of cutting Wilmington Trust's costs by 15 percent, even before it converts the trust and wealth management systems in the second quarter, so the ultimate savings from the deal should exceed the goal.

"We're knocking on that door already," Jones said. "We're probably going to outperform that original number."

email: jepstein@buffnews.com