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M&T makes strides with Hudson City deal, looks to defend NIM

gave up some groundon its net interest margin amid the protracted low-rate environment, but its CFOsaid the bank is capitalizing on the acquisition of Hudson City Bancorp, pushingup commercial lending while taking out costs and bolstering efficiency.

Buffalo,N.Y.-based M&T, which closed the dealin November 2015, said that in its second full quarter following the acquisitionit grew second-quarter earningsper share to $1.98 from $1.73 in the first quarter. Net income rose 13% from theprevious quarter to $336 million.

Excludingmerger-related costs and other special items, second-quarter EPS came in at $2.07,on par with the S&P Capital IQ consensus estimate.

As iscustomary during deal integrations, M&T moved quickly to take out redundantcosts and push savings to its bottom line. Its second-quarter noninterest expenseof $750 million was down from $776 million in the first quarter. M&T's efficiencyratio improved to 55.1% in the second quarter from 57.0%.

M&Tcompleted the conversion of Hudson City in the first quarter.

Vining Sparks analyst Marty Mosby said in an interview that the improvements on expensesand efficiency, while expected, were welcomed and suggest the integration is progressingwell. "It's a continued step forward," he said.

Loansrose an annualized 3% during the second quarter, bolstered by strength in commerciallending. The commercial book grew an annualized 11% from the first quarter, whilenet charge-offs improved. The provision for credit losses totaled $32 million, exceedingnet charge-offs by $8 million.

"We'restill not seeing pressures on credit," CFO Darren King told analysts duringa call to discuss earningsafter the company released its resultsJuly 20.

Yet M&T'sstock slid about 3% in morning trading after it posted results. The bank's NIM inthe second quarter of 3.13% contracted from 3.18% the previous quarter, reflectingongoing pressure from low interest rates. Mosby noted that while M&T is successfullybuilding on the acquisition, the Street is eager to see even more substantial incomegains, especially given that the bank's efforts so far have not been enough to overshadowthe NIM challenges that bank investors are closely examining.

Kingtold analysts that, given the market's expectations amid global economic weakness,there is "little prospect" for Federal Reserve rate increases this year.Banks may have to wait until deep into 2017 to see a rate hike, he said. King, however,added that M&T is taking steps to bring down deposit costs to defend its NIM.It is re-pricing certain legacy Hudson City deposits. It expects some of those depositorsto accept the lower rates and others to take their money to other banks, a resultM&T can afford because it is currently flush with funding. The combination ofthose two outcomes, King said, should bring down deposit costs and help the NIM.

Meanwhile,he said, M&T expects that its expenses in the second half will be roughly flatwith the first half of 2016. Among other factors, King said the bank needs to investin training of Hudson City employees, helping them convert from a thrift model toa commercial banking model. It also will invest in advertising, more lenders andtechnology in hopes of deepening ties with Hudson City customers and bringing innew clients to fuel ongoing growth and capitalize on the combined banks' heft. Thoseadded costs will taper off over time and should result in income advances in comingquarters, King said.

GBT Capital Management founder and veteran bank investor Gary Townsend said in an interview that while fighting the perils of low rates is a challengefor many banks, the likes of M&T that have been able to bolster efficiency througha transformative deal should be well positioned for an income surge when rates doeventually rise. Interest income gains, he said, will stand out quickly and mostnotably for efficient banks.

"Theamount of earnings that could be generated could be truly impressive," Townsend said.

Kingalso said that M&T is "nearing completion" of a consent order regardingregulators' Bank Secrecy Act and anti-money launderingcompliance concerns. "We don't have a timeline on when that might happen,but we are always hopeful it will be soon," he said.

Whenthat consent order is lifted, King said M&T would have the wherewithal and potentialinterest in additional M&A, though he emphasized that "we will be patient."