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M&T Bank Corporation’s (MTB - Analyst Report) third quarter 2012 operating earnings of $2.24 per share were significantly above the Zacks Consensus Estimate of $1.84. In addition, it surpassed the prior-quarter earnings of $1.82 per share.

The results were aided by bolstered 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 reflected the company’s strong capital position and enhanced credit quality was a tailwind for the quarter.

On a GAAP basis, M&T Bank reported net income of $293 million or $2.17 per share, escalating from $233 million or $1.71 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 total revenue was recorded at $1.2 billion, up 9.1% from the previous quarter. Moreover, revenue results also surpassed the Zacks Consensus Estimate of $1.1 billion.

M&T Bank’s net interest income came in at $669 million, up 2.1% from the previous quarter. The improvement was primarily due to increase in average earning assets. The growth also stems from a hike in the net interest margin, which improved to 3.77% from 3.74% in the prior quarter.

M&T Bank’s non-interest income elevated 13.8% sequentially to $446 million and included pre-tax losses on investment securities. Excluding gains and losses from investment securities, non-interest income came in at $451 million, exhibiting an improvement of 10.5% from $408 million, reported in the last quarter. The sequential hike was primarily attributable to higher mortgage banking revenues.

M&T Bank’s non-interest expense was $616 million, down 1.8% from the prior quarter. Excluding non-operating expenses and other merger-related costs, non-interest operating expenses came in at $602 million, down 0.3% from the prior quarter. The sequential decline primarily reflected the continued realization of synergies from the integration of the operations from Wilmington Trust Corporation. Efficiency ratio improved to 53.7% from 56.9% in the previous quarter.

Loans and leases, net of unearned discount, were $64.1 billion at the end of the third quarter, up 1.9% sequentially from $62.9 billion. Total deposits increased 2.4% sequentially to $64.0 billion as of September 30, 2012 from $62.5 billion at the end of the prior quarter.

Credit quality reflected an improvement during the quarter under review. Provision for credit losses declined 23.3% to $46 million and net charge-offs dipped 19.2% to $42 million. Net charge-offs, as a percentage of average loans outstanding, were 0.26%, down from 0.34% in the preceding quarter. Moreover, the ratio of non-accrual loans to total net loans moved down to 1.44% from 1.54% 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 1.56% and 21.53%, respectively, compared with 1.30% and 18.54% recorded in the earlier quarter.

M&T Bank's tangible common equity to tangible assets ratio was 7.04% as of September 30, 2012, improving from 6.65% as of June 30, 2012. The company’s Tier 1 common ratio stood at 7.47% as of September 30, 2012 compared with 7.15% as of June 30, 2012.

Acquisition

Recently, M&T agreed to takeover Hudson City Bancorp Inc. (HCBK - Analyst Report) in cash and stock deal worth $3.7 billion, based on M&T’s closing stock price on August 24, 2012. The bank deal, the largest this year, would lead to an expansion of M&T Bank’s franchise in the eastern U.S. and give it the fourth largest deposit share in New Jersey. Under the terms of the agreement, M&T will gain Hudson City’s 135 branch offices sited at New Jersey, New York and Connecticut, which will lead to a combined network of 870 branches ranging from Connecticut to Virginia.

Our Viewpoint

With a solid business model and strategic acquisitions, the company is well poised for future growth. 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.

Among M&T Bank’s peers, KeyCorp (KEY - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report) are scheduled to announce their third quarter 2012 results on October 18.

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