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M&T's earnings show 5% rise; Delaware acquisition boosts lending, trust

M&T Bank Corp. said Wednesday that third-quarter operating earnings, not including merger charges, rose by 5 percent from a year ago, as its acquisition of Wilmington Trust Corp. in Delaware fueled higher revenues from lending and trust.

The Buffalo-based bank reported net operating income of $210 million, up from $200 million a year earlier. Per-share profits fell by 1 percent, to $1.53.

Those results don't include $16 million in merger-related charges stemming from its May 16 purchase of Wilmington Trust. Those one-time expenses included costs from converting computer systems, integrating the two companies' operations and introducing Wilmington Trust customers to M&T's products and services. There were no such costs a year ago.

Including those factors, net income fell by 4.7 percent, to $183 million, or $1.32 per share, from $192 million, or $1.48 per share, in the third quarter of 2010.

"It's another solid quarter," said Executive Vice President and Chief Financial Officer Rene F. Jones. "There was a lot of disruption back in July and August, with the downgrade of the U.S. and the debt markets stalling. Despite those head winds, our revenue growth held up."

However, both net and operating results missed Wall Street expectations of $1.65 per share. Shares fell by $4.18, or 5.4 percent, to $77.88, Wednesday.

Executives touted higher net interest income from taking deposits and making loans, as well as "significantly higher" trust income. In addition, the bank set aside less for loan losses, as the amount of money written off as uncollectible fell for the fourth straight quarter.

However, those factors were "muted" by higher operating expenses and lower revenues from residential mortgage banking, in which M&T originates and then sells home loans. The higher revenues and expenses were all related to Wilmington Trust. M&T completed the major conversions of the loan and deposit systems in late August, even as a hurricane was bearing down on Delaware.

"The integration process went really smoothly and was well above average," Jones said. "We're retaining customers, and we're very, very pleased to date with how that's going."

M&T profited from its $406 million stock purchase of the troubled Wilmington Trust, which was burdened by a heavy concentration of bad commercial real estate loans in southern Delaware. The deal gave it $10.8 billion in assets, $6.4 billion in loans and $8.9 billion in deposits, plus 55 branches and 16 wealth-management offices.

More significantly, it gained a much bigger trust and money management business, as well as a highly regarded corporate financial services division, both of which provide services nationally and even internationally. And assets under management for clients quadrupled, while trust revenues doubled.

Net interest income rose by 8.2 percent, to $623 million, driven by a $9.6 billion increase in average earning assets from Wilmington Trust, partly offset by a narrower profit margin.

Average core deposits rose by 9 percent annualized without Wilmington Trust, almost all in non-interest checking. Average loans during the quarter rose by $2.7 billion, to $58.2 billion, but were actually down by 1 percent annualized from June 30 when excluding Wilmington Trust. Annualized means one quarter's pace multiplied by 4.

Geographically, M&T's two strongest markets were upstate New York and the New York City and Philadelphia metro areas. Both saw 4 percent annualized growth in loans, and the upstate area recorded 22 percent growth in consumer and business checking accounts.

"There was a lot of activity in a lot of industries," Jones said. "We seem to be doing a very nice job in upstate New York."

Fee and other income rose by 27 percent, to $378 million, not including investment losses. That was driven by the surge in trust income, partly offset by lower mortgage banking revenues because M&T in July started to keep most new mortgages on its balance sheet to earn interest instead of selling them.

Fees in M&T's original markets were also hurt by the capital markets and commercial lending disruption in the summer. And the bank waived fees in Wilmington Trust's markets in a bid to retain customers.

"Our big issue is retaining customers. We're very focused on that," Jones said.

Not including the merger and accounting costs, expenses rose by 32.5 percent, to $619 million, because of Wilmington Trust. M&T expects $80 million in annual cost-savings through the merger, but those won't begin until the fourth quarter and won't be fully in place until after the trust system's conversion next year.

Jones said the bank is "getting to the point" where capital is at necessary levels, so that the bank can repay the remaining $381.5 million in federal money it holds from the Troubled Asset Relief Program. It already repaid $700 million in May.