M&T Bank Corporation’s (MTB) third quarter 2011 operating earnings of $1.53 per share were significantly below the Zacks Consensus Estimate of $1.67.
Earnings also lagged earnings of $2.16 per share in the prior quarter and $1.55 in the year-ago period.
Quarterly results were aided by an increase in net interest income and non-interest income coupled with substantially lower provision for credit losses. However, an increase in expenses was on the downside.
On a GAAP basis, M&T Bank reported net income of $183 million or $1.32 per share, down from $192 million or $1.48 per share in the prior-year quarter.
Behind the Headline Numbers
M&T Bank’s net interest income came in at $623 million, up 8% year over year. The growth stems from rise in average earning assets, which was partially offset by 19 basis points contraction in the net interest margin that deteriorated to 3.68% from 3.87% in the year-earlier quarter.
Contraction in the net interest margin reflected the impact of the Wilmington Trust acquisition in May. Moreover, higher earning balances on deposit with the Federal Reserve also contributed to the decline.
Loans and leases, net of unearned discount, were $58.4 billion at the end of the third quarter, up 15% from $50.8 billion a year earlier. Total deposits increased 22% to $59.5 billion at September 30, 2011 from $48.7 billion at the end of the prior-year quarter.
M&T Bank’s non-interest income increased 27% year over year to $368 million, including pre-tax losses from investment securities of $10 million. Excluding gainsand lossesfrom investment securities in all periods, noninterest income came in at $378 million, showing an improvement of 27% from $298 million reported in the year-earlier quarter.
The year-over-year increase was attributable to appreciably higher trust income, largely due to the Wilmington Trust transaction, partly offset by a decrease in residential mortgage banking revenues.
M&T Bank’s non-interest expense was $662 million, up 38% from the year-earlier quarter. Excluding non-operating expenses and other merger-related costs, non-interest operating expenses came in at $619 million, up 33% year over year, primarily due to higher expenses related to operations obtained in the Wilmington Trust acquisition. Efficiency ratio deteriorated to 61.8% from 53.4% in the year-earlier quarter.
Credit metrics improved during the quarter, witnessing a 38% year-over-year decline in provision for credit losses to $58 million and a 39% reduction in net charge-offs to $57 million. Net charge-offs as a percentage of average loans outstanding were 0.39%, down from 0.73% in the year-ago quarter. Moreover, the ratio of nonaccrual loans to total net loans moved down to 1.91% from 1.97% a year earlier.
M&T Bank’s net operating income expressed as an annualized rate of return on average tangible assets and average tangible common shareholders’ equity was 1.14% and 16.26%, respectively, compared with 1.24% and 19.58% in the comparable prior-year period. M&T Bank’s tangible common equity to tangible assets ratio was 6.46% as of September 30, 2011, compared with 5.96% as of September 30, 2010.
Our Take
M&T Bank’s closest competitor, JPMorgan Chase & Co. (JPM) reported third quarter earnings per share of $1.08, outpacing the Zacks Consensus Estimate of 93 cents. Results were also better than $1.01 earned in the prior-year quarter. The better-than-expected numbers were primarily backed by a slowdown in provision for credit losses and slightly higher net revenue, which more than offset an increase in non-interest expense and lower net interest income.
Going forward, we believe that the strategic acquisitions should help earnings augmentation at M&T. While the tepid economic recovery and regulatory issues remain headwinds for the stock, a sound capital position, with a growingcore deposit will uphold the bank in the long run.
M&T Bank currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we maintain our long-term Neutral recommendation on the stock.
