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M&T Bank Corporation’s (MTB - Free Report) first-quarter 2013 operating earnings of $2.06 per share beat the Zacks Consensus Estimate of $1.94. However, this compares unfavorably with the prior-quarter earnings of $2.23 per share.

Better-than-expected earnings were primarily aided by reduced provision for credit losses. Moreover, capital ratios showed improvement. However, an increase in expenses and declining net interest and non-interest income were the headwinds.

On a GAAP basis, M&T Bank reported net income of $274.1 million or $1.98 per share, compared with $296.2 million or $2.16 per share in the prior quarter. Results for both the quarters included the impact of amortization of core deposit and other intangible assets and merger-related gains and expenses.

Quarter in Detail

M&T Bank’s total revenue was recorded at $1.2 billion, almost in line with the previous quarter. However, revenues surpassed the Zacks Consensus Estimate of $1.1 billion.

M&T Bank’s net interest income came in at $663 million, down 2% from the previous quarter. The decline reflected two lesser days in the reported quarter. Further, net interest margin declined by 3 basis points to 3.71% from the prior quarter.

M&T Bank’s non-interest income dropped 4% sequentially to $433 million, attributable mainly to a drop in mortgage banking revenues.

M&T Bank’s non-interest expense was $636 million, up 2% from the prior quarter. Excluding amortization of core deposit and other intangible assets and merger-related expenses, non-interest operating expenses came in at $618 million, up 1 % from the prior quarter. The sequential rise primarily reflected seasonally higher stock-based compensation and benefits expenses.

Efficiency ratio deteriorated to 55.9% from 53.6% in the previous quarter.

Loans and leases, net of unearned discount, were $65.9 billion at the end of the reported quarter, a marginal drop of 1% sequentially. Total deposits also declined 1% sequentially to $65.1 billion as of Mar 31, 2013 from $65.6 billion at the end of the prior quarter.

M&T Bank’s net operating income, expressed as an annualized rate of return on average tangible assets, and average tangible common shareholder equity was 1.48% and 18.71%, respectively, compared with 1.56% and 20.46% recorded in the earlier quarter.

Credit Quality

Credit quality was a mixed bag at M&T Bank. Provision for credit losses declined 22% to $38 million and net charge-offs declined 16% to $37 million. Net charge-offs, as a percentage of average loans outstanding were 0.23%, down from 0.27% in the preceding quarter. However, the ratio of non-accrual loans to total net loans increased to 1.60% from 1.52% in the previous quarter.

Capital Ratios

M&T Bank's tangible common equity to tangible assets ratio was 7.51% as of Mar 31, 2013, improving from 7.20% as of Dec 31, 2012. The company’s Tier 1 common ratio stood at 7.93% as of Mar 31, 2013 compared with 7.57% as of Dec 31, 2012.

Our Viewpoint

The company, with its solid business model and strategic acquisitions, is well poised for future growth. While the sluggish economic recovery, regulatory issues and low interest rate environment 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.

In Aug 2012, M&T agreed to takeover Hudson City Bancorp Inc. in a cash and stock deal worth $3.7 billion, based on M&T’s closing stock price on Aug 24, 2012. The deal would lead to an expansion of M&T Bank’s franchise in eastern U.S. and give it the fourth largest deposit share in N.J. Under the terms of the agreement, M&T will gain Hudson City’s 135 branch offices sited at N.J., N.Y and Conn., which will lead to a combined network of 870 branches ranging from Conn. to Va. The deal was expected to close in the second quarter of this year. However, on Apr 12, M&T Bank announced that they believe additional time will be required to obtain regulatory permission to complete their proposed merger.

M&T Bank currently retains its Zacks Rank #3 (Hold).

Among other regional banks, Comerica Incorporated (CMA - Free Report) is scheduled to announce its results on Apr 16, whereas BB&T Corporation (BBT - Free Report) is scheduled to announce its results on Apr 18.

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