M&T Remains Bullish on Hudson City Deal

M&T Bank (MTB) remains comfortable with its decision to acquire Hudson City Bancorp (HCBK) even though a recent rise in mortgage rates could crimp Hudson City's profits.

Though the merger is on hold while Buffalo, N.Y.-based M&T deals with anti-money-laundering matters, M&T Chief Financial Officer Rene Jones told analysts Wednesday that the rise in rates has not altered its acquisition plans. Mortgage applications are expected decline sharply over the next few quarters because of rising rates, and Hudson City, of Paramus, N.J., could feel the pain more than most because its loan portfolio is made up almost entirely of one- to four-family mortgages.

Jones pointed out that an increase in interest rates is generally good for banks because it means the economy is improving. He noted, too, that final Basel III rules that came out this month were less onerous with regards to mortgage lending than banks initially feared.

"There's nothing that makes us uncomfortable about the transaction relative to where we were before" the deal was put on hold, Jones said on a conference call discussing M&T's second-quarter results.

M&T said in April that its acquisition of the $40 billion-asset Hudson City — announced last year — would be delayed at least until January while it addressed regulators' concerns about Bank Secrecy Act and anti-money laundering violations. In June, the Federal Reserve ordered the $83 billion-asset M&T to take a series a steps to improve its anti-money-laundering controls that included establishing a more formal process for monitoring and reporting suspicious transactions.

On Wednesday's call, Jones acknowledged that M&T has "work to do" to satisfy the Fed's enforcement order, but said that the bank is committed to developing industry-leading anti-money-laundering policies and procedures.

"You want to build a first-rate process, not one that just meets the hurdle," he said.

M&T posted a profit of $348 million for the second quarter, 49% higher than in the second quarter of 2012. Per-share earnings of $2.55 beat the expectations of analysts polled by Bloomberg by 46 cents.

M&T's strong quarter was driven by gains on the sale of its holdings in Visa and MasterCard, which brought in $103 million. Including this gain, M&T's noninterest income rose 30%, to $508.7 million. Mortgage banking revenue rose 31%, to $91.3 million, and trading and foreign-exchange gains rose 48%, to $9.2 million. The bank's gain on Visa and MasterCard sales was partially offset by a $46 million loss on the sale of privately issued collateralized mortgage debt.

M&T's net interest income was $677.6 million, 5% higher than in the second quarter of 2012, despite a tightening of its net interest margin by 3 basis points, to 3.71%. Its portfolio of loans and leases grew by 7%, to $66 billion.

M&T's expenses related to bad loans remained roughly level, as its provision for loan losses dipped to $57 million, $3 million lower than in the year-prior period, while chargeoffs rose to $57 million, $5 million higher.

M&T's noninterest expense fell 4%, to $599 million, due largely to the amortization of deposits and other assets and lower costs related to the Federal Deposit Insurance Corp.'s assessment of foreclosed assets.

Expenses could increase in future quarters as the company adds staff to address anti-money-laundering issues and prepare for future Fed stress tests, Jones said. Earlier this month M&T also added roughly 500 mortgage servicing employees resulting from its takeover of a Buffalo-area facility that had previously been run by Bank of America (BAC).