Allfirst purchase helps boost M&T Bank Corp.'s profit 42%

Earnings beat estimates, despite cost of takeover

October 11, 2003|By Paul Adams | Paul Adams,SUN STAFF

M&T Bank Corp.'s purchase of Baltimore's Allfirst Financial Inc. in April helped lift third-quarter earnings by 42 percent, beating Wall Street estimates despite merger expenses of $12.4 million and slimmer profits on loans.

Officials at Buffalo, N.Y.-based M&T said yesterday that the $3.1 billion merger cost $50 million to $60 million less than originally projected and is likely to have a negligible effect on earnings in the current quarter. The merger vaulted M&T into the top 20 U.S. banks but cost 657 jobs in Maryland.

The bank's third-quarter net income was $156 million, or $1.28 per share, compared with $110.1 million, or $1.16 per share, in the third quarter last year. Without the merger expenses, the bank's earnings were $1.38 per share, or one penny more than the average forecast of analysts surveyed by Thomson Financial.

The numbers were mostly lauded by analysts, who said the merger has gone better than expected considering the size of the acquisition.

"Bank acquisitions traditionally under-deliver in terms of getting the promised cost savings, so it's nice to see everything under plan," said Erik Eisenstein, a senior industry analyst with Standard & Poor's. "I give them credit there."

The bank's shares fell 45 cents in trading yesterday to $91.51 per share.

Eisenstein called M&T a solid regional bank, but said the shares are overvalued. He has a target price of $85 per share.

"It's a good bank and it deserves a premium," he said. "But not this much, in my opinion."

The addition of Allfirst added $10.3 billion in loans to M&T's balance sheet last April and helped to boost average loans outstanding by 43 percent to $37 billion in the third quarter, the bank said. But net interest margin - a measure of how much money the bank makes on loans - fell to 4 percent from 4.4 percent in the corresponding quarter a year ago.

M&T officials said the decline occurred in part because Allfirst placed a larger percentage of its assets in securities, which have a lower yield than loans, and issued a number of loans to larger corporations, which tend to command thinner margins.

The bank also paid a higher rate on certain deposit products, further thinning margins. Continued low interest rates added to the problem, analysts said.

"It's going to take them a while to change the mix," said Rosalind Looby, an analyst with Credit Suisse First Boston. Looby has a target price of $93 on the company's shares.

Michael S. Piemonte, M&T's senior vice president of corporate finance, said the bank would gradually alter the mix of loans to focus less on large corporate customers.

"I think it was a good quarter in a lot of respects and an OK quarter in other respects. The [commercial] loan growth picture wasn't as bright as we'd like it to be, but I think it's just a reflection of the economy."

Piemonte said the bank had originally projected pretax merger costs of $190 million. To date, the company has charged off $38 million in after-tax merger expenses.

"We had never done anything this large and we were making sure we were conservative about how much it was going to cost us to make the conversion," he said.

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