Impacted by higher expenses and lower revenues, M&T Bank Corporation's (MTB) third-quarter 2014 net operating earnings of $1.94 per share lagged the Zacks Consensus Estimate of $1.98. Moreover, this compared unfavorably with $2.16 per share reported in the prior-year quarter.
Lower-than-expected results were due to increased non-interest expenses and lower topline. However, decrease in provisions, improved credit metrics and a strong capital position were the tailwinds.
On a GAAP basis, M&T Bank reported net income of $275 million or $1.91 per share, compared with $294 million or $2.11 per share in the prior-year quarter. Results for both the quarters included certain non-recurring items.
Quarter in Detail
M&T Bank's net revenue on a taxable-equivalent basis was recorded at $1.13 billion, down 2.6% from the prior-year quarter. However, the figure was in line with the Zacks Consensus Estimate.
M&T Bank's taxable-equivalent net interest income came in at $675 million, down slightly on a year-over-year basis. Further, net interest margin declined to 3.23% from 3.61% in the prior-year quarter. The decline in margin was driven by a rise in lower-yielding investment securities balances and deposits held at the Federal Reserve Bank of New York along with persistent downward pressure on yields earned on loans.
M&T Bank's other income decreased 5.5% year over year to $451 million. Notably, the prior-year quarter included net pre-tax gains of $56 million from loan securitization transactions. Excluding these gains, non-interest income was up 7.1% in the reported quarter, driven by increased residential mortgage banking revenues.
Non-interest expenses were $679 million, up 3% from the prior-year quarter. Excluding certain non-operating items, expenses came in at $672 million, up 3.7% from the prior-year quarter. The rise in non-interest operating expenses was mainly due to an increase in costs related to professional services along with salaries associated with BSA/AML activities, compliance, capital planning and stress test, and risk management operations.
Efficiency ratio increased to 59.7% from 56.0% in the prior-year quarter. A rise in efficiency ratio indicates a fall in profitability.
Loans and leases, net of unearned discount, rose 3% year over year to $65.6 billion at the end of the quarter. Moreover, total deposits rose around 12% year over year to $74.3 billion.
M&T Bank's net operating income reflected an annualized rate of return on average tangible assets and average tangible common shareholder equity of 1.24% and 13.80%, respectively compared with 1.48% and 17.64% recorded in the prior-year quarter.
Credit Quality
Credit quality exhibited continued improvement in the reported quarter. Provision for credit losses decreased 39.6% year over year to $29 million. Net charge-offs of loans came in at $28 million, down 41.7% year over year.
Net charge-offs as a percentage of average loans outstanding were 0.17%, down from 0.29% in the year-ago quarter. Moreover, the ratio of non-accrual loans to total net loans was 1.29%, down from 1.44% in the prior-year quarter. Further, non-performing assets decreased 9% year over year to $915.4 million.
Capital Ratios
M&T Bank’s capital ratios were strong during the quarter. The company's estimated Tier 1 common ratio was 9.77%, up from 9.08% as of Sep 30, 2013. Further, the company’s estimated common equity Tier 1 to risk-weighted assets ratio under the new capital rules, approved in Jul 2013, on a fully phased-in basis was 9.52% as of Sep 30, 2014.
Our Viewpoint
Following the financial crisis, the market witnessed a rise in the number of distressed banks ready to be taken over by their stronger counterparts. M&T Bank capitalized on such opportunities. In fact, strategic acquisitions have been a part of M&T Bank’s business expansion policy. The deal with Hudson City Bancorp Inc. (HCBK) will expectedly provide upside to M&T Bank’s top line by leveraging the former’s retail network as well as product and balance sheet diversification.
The company, with its solid business model and strategic acquisitions, is well poised for growth. While the sluggish economic recovery, regulatory issues and low interest rate environment remain headwinds for M&T Bank, we believe that its sound capital position, improving credit quality and growing core deposit bode well for the long run.
M&T Bank currently carries a Zacks Rank #3 (Hold).
Performance of Other Large Wall Street Firms
The third-quarter earnings season kick started with Wall Street biggies – Wells Fargo & Company (WFC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM). Driven by top-line growth, Wells Fargo earned $1.02 per share in third-quarter 2014, thereby surpassing 99 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate.
JPMorgan came out with earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39. The number also compares favorably with $1.42 earned in the year-ago quarter. Earnings exclude the impact of 26 cents per share related to the after-tax Firmwide legal expense. Considering this significant one-time item, the company has earned $1.36 per share.
Citigroup reported yet another impressive quarter. Adjusted earnings per share for third-quarter 2014 came in at $1.15, outpacing the Zacks Consensus Estimate of $1.12. Further, earnings compared favorably with the year-ago figure of $1.02 per share.
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