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WRAPUP 3-US financial institutions hit by deposit flight as clients seek higher returns

(Adds details on Apple, updates share prices)

April 17 (Reuters) - Deposits at three financial institutions fell in the first quarter as the industry's biggest crisis in more than a decade prompted a flight of funds, with customers seeking better returns elsewhere.

Deposits at custodian bank State Street Corp and regional bank M&T Bank Corp fell 3% each, while those at Charles Schwab Corp shrank 11% from the prior quarter.

State Street's stock plunged 9.2% to close at $72.68 on Monday, dragging down peers Northern Trust Corp and Bank of New York Mellon Corp, while shares of brokerage and financial advisory firm Schwab closed 3.9% higher and M&T Bank shares were up nearly 8%.

The results mark a mixed start to a busy week during which a number of regional lenders are expected to report earnings and the impact from the crumbling of two banks last month.

Investors will also be parsing executive commentary for details on the economic impact from the Federal Reserve's quantitative tightening, which has boosted income earned via lending but has, at the same time, fueled uncertainty.

Both Schwab and M&T Bank rode a surge in interest income to beat profit expectations, but State Street fell short after an outflow of client funds hurt its fees.

Credit Suisse analyst Susan Katzke wrote in a research note that State Street's earnings fell short of estimates due to lower-than-expected net interest income. The firm showed heavier outflows from non-interest bearing accounts, Katzke wrote.

There is growing competition for deposits. Apple Inc said on Monday that Apple Card users can earn 4.15% on their savings account, which it said was ten times higher than the national average.

Federal Reserve data released on Friday showed deposits at all commercial banks rose to $17.43 trillion in the week ended April 5, an increase about evenly shared between the largest 25 banks and the small and mid-sized banks. That left deposits at the largest banks above the levels prior to the collapse of Silicon Valley Bank and Signature Bank, but at small banks still short of their previous levels.

Schwab, which was caught up in the crisis last month, paused stock buybacks, but moved to allay concerns about its financial strength. Its chief executive officer, Walter Bettinger, addressed commentary about portfolios of debt securities held by banks, including Schwab, which are disclosed as unrealized losses in their earnings.

"I would certainly hope that by this point the short-driven speculation that we would find ourselves in a position where we would be forced to sell securities that have temporary paper losses has been put to bed," Bettinger said on a conference call.

Fitch Senior Director Bain Rumohr said Schwab's net revenue may be modestly pressured throughout 2023 as higher cost funding sources weigh on net interest income, "but the firm’s size and scale ... should support profit margins at levels consistent with historical levels." (Reporting by Niket Nishant in Bengaluru Additional reporting by Siddarth S, Jaiveer Singh Shekhawat, Manya Saini and Saeed Azhar and Megan Davies Editing by Lananh Nguyen and Matthew Lewis)