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M&T Bank Corp.’s mortgage banking revenues dropped sharply in the third quarter from a year ago, but the bank is benefiting from taking on mortgage-servicing work formerly handled by Bank of America.

The Buffalo-based bank is also coping with higher expenses, stemming in part from steps that it has taken to strengthen its policies against money laundering. And its upstate New York market continues to be a strong source of loan growth.

Those were among the highlights from M&T’s July-through-September earnings report Thursday. The bank reported net income of $294.5 million, up by less than 1 percent from the third quarter of 2012.

Like many other banks, M&T felt the impact of a slowdown in mortgage originations during the quarter. Its mortgage banking revenues fell by 39 percent from a year ago, to $64.7 million.

“Assuming that interest rates stay where they are, some continued modest softness in mortgage origination seems likely,” said Rene F. Jones, M&T’s chief financial officer.

Meanwhile, M&T’s mortgage-servicing revenues increased by $7 million, to $30 million, reflecting one month’s worth of new servicing work that the bank recently added. Bank of America closed its mortgage-servicing center in Getzville; a third-party investor bought the mortgages from Bank of America and subcontracted the servicing work to M&T. The Buffalo bank also took over the lease to the Getzville facility and has hired staff for it.

The bank expects to generate an additional $15 million in mortgage servicing fees in the fourth quarter as that activity ramps up, providing M&T with a “cushion” against further declines in total mortgage banking income, Jones said.

M&T’s non-interest operating expenses rose by 8 percent from a year ago, to $648 million. That included a $16 million increase in salaries, driven in part by its hiring of 500 full-time equivalent employees for the mortgage servicing work. M&T has also hired more than 200 employees connected to its work on the Bank Secrecy Act/Anti-Money Laundering program; they are predominantly based in Western New York. M&T has been working to resolve the Federal Reserve’s concerns about deficiencies in its policies against money laundering, an expensive but necessary process.

“This is a big quarter of investments, and the next several will be the same,” Jones said.

M&T has made “considerable” progress toward resolving the Federal Reserve’s issues about its policies against money laundering, Jones said. Analysts on a Thursday conference call asked him for an update on M&T’s planned acquisition of New Jersey-based Hudson City Bancorp, which has been on hold.

M&T hasn’t “spent any time thinking about Hudson City lately” and has instead been concentrating on addressing the Federal Reserve’s concerns, Jones said. That doesn’t mean the planned Hudson City deal has disappeared, he said.

“Both sides are very committed, we really would like to move forward,” Jones said in an interview. Day to day, the bank is focusing on complying with the federal Bank Secrecy Act and policies against money laundering, he said.

Jones said in upstate New York, M&T’s average total loans grew by an annualized 5 percent from the second quarter. In that region, M&T has seen strong loan growth that began about two years ago with HSBC’s announced divestiture of its upstate branch network. “We got a lot of momentum, and I think we got a lot of, for lack of a better term, brand awareness, reminding people that we were around,” Jones said. “And a lot of that momentum has continued.”

M&T’s third-quarter net interest income was $679 million, up from $669 million a year ago. Its non-interest income was $477 million, down from $509 million a year earlier. Its diluted earnings per share were $2.11, beating the analysts’ estimate of $2.08.

email: mglynn@buffnews.com