M&T Bank Corporation’s ( MTB - Analyst Report ) second quarter 2012 operating earnings of $1.82 per share were significantly above the Zacks Consensus Estimate of $1.68. In addition, this surpassed the prior-quarter earnings of $1.59 per share.

The results were aided by increased net interest and non-interest income as well as lower operating expenses. Mortgage banking revenues posted a decent rise in the quarter. Moreover, improved capital ratios also reflected the company’s strong capital position. However, the mixed credit metrics were the dampeners.

On a GAAP basis, M&T Bank reported net income of $233 million or $1.71 per share, growing from $206 million or $1.50 per share in the prior quarter. Results of the reported quarter included a number of special items, such as the impact of amortization of core deposit and other intangible assets as well as merger-related gains and expenses.

Quarter in Detail

M&T Bank’s net interest income came in at $655 million, up 4.5% from the previous quarter. The improvement was primarily due to increases in average earning assets and average loans outstanding. The growth also stems from a hike in the net interest margin, which improved to 3.74% from 3.69% in the prior quarter.

Expansion in net interest margin reflected an additional $14 million of interest income as a result of enhanced cash flows, which were expected to be collected on acquired loans.

M&T Bank’s non-interest income increased 4.0% sequentially to $392 million and included pre-tax losses on investment securities. Excluding gains and losses from investment securities in all periods and gain recorded in the prior-year quarter, related to the Wilmington Trust acquisition, non-interest income came in at $408 million, exhibiting an improvement of 5.2% from $388 million, reported in the last quarter. The sequential hike was primarily attributable to higher mortgage banking revenues and trust income.

M&T Bank’s non-interest expense was $627 million, down 2.0% from the prior quarter. Excluding non-operating expenses and other merger-related costs, non-interest operating expenses came in at $604 million, down 2.6% from the prior quarter. The sequential decline primarily reflected decreases in salaries and employee benefits, including stock-based compensation. Efficiency ratio improved to 56.9% from 61.1% in the previous quarter.

Loans and leases, net of unearned discount, were $62.9 billion at the end of the second quarter, up 3.3% sequentially from $60.9 billion. Total deposits increased 2.6% sequentially to $62.5 billion as of June 30, 2012 from $60.9 billion at the end of the prior quarter.

Credit metrics was a mixed bag during the quarter under review, where provision for credit losses grew 22.4% to $60 million and net charge-offs rose 8.3% to $52 million. Net charge-offs, as a percentage of average loans outstanding, were 0.34%, up from 0.32 % in the preceding quarter. However, the ratio of non-accrual loans to total net loans moved down to 1.54% from 1.75% in the previous quarter.

M&T Bank’s net operating income, expressed as an annualized rate of return on average tangible assets, and average tangible common shareholders' equity was 1.30% and 18.54%, respectively, compared with 1.18% and 16.79% recorded in the earlier quarter.

M&T Bank's tangible common equity to tangible assets ratio was 6.65% as of June 30, 2012, improving from 6.51% as of March 31, 2012. The company’s Tier 1 common ratio stood at 7.15% as of June 30, 2012 compared with 7.04% as of March 31, 2012.

Our Take

While the sluggish economic recovery, regulatory issues and low interest rates remain the headwinds for M&T Bank, we believe that a sound capital position, along with a growing core deposit, will uphold it in the long run.

M&T Bank currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain our long-term Neutral recommendation on the stock.

M&T Bank’s close competitors, KeyCorp ( KEY - Analyst Report ) and Fifth Third Bancorp ( FITB - Analyst Report ) , are scheduled to announce their second quarter 2012 results on July 19.