M&T Bank's profit slips 2% as buybacks slow and its outlook reflects one more rate increase

M&T Bank Corporation said third-quarter net income slipped 2% to $775 million, though diluted earnings per share rose 5% to $5.04 as its average diluted share count fell 7%, and the Buffalo, New York-based lender cut share repurchases to $323 million from $465 million in the second quarter.

Lower profit, higher earnings per share

M&T Bank Corporation reported third-quarter net income of $775 million, down 2% from $792 million a year earlier and down from $818 million in the second quarter. Net income available to common shareholders was $732 million, compared with $754 million a year earlier. Diluted earnings per share rose to $5.04 from $4.82 a year earlier but fell from $5.32 in the second quarter. Average diluted shares outstanding were 145.2 million, 7% fewer than a year earlier.

Net operating earnings per share, a non-GAAP measure that excludes the after-tax amortization of core deposit and other intangible assets and, when incurred, merger-related expenses, were $5.08, compared with $4.87 a year earlier and $5.35 in the second quarter. The GAAP return on average common equity was 11.44%; return on average tangible common equity on a net operating basis, also non-GAAP, was 17.29%.

Revenue was $2.536 billion, up 1% from $2.513 billion a year earlier. Taxable-equivalent net interest income was $1.805 billion, little changed from $1.804 billion in the second quarter and up 2% from $1.773 billion a year earlier. The net interest margin narrowed to 3.65% from 3.7% in the second quarter. M&T's earnings presentation attributed 3 basis points of that decline to lower interest income on nonaccrual loans and 2 basis points to higher funding costs, net of asset repricing and interest-free funds.

Noninterest income was $743 million, compared with $740 million in the second quarter and $752 million a year earlier. Mortgage banking revenue rose $25 million from the second quarter to $152 million, which the company tied to higher residential mortgage sub-servicing income. M&T began sub-servicing an additional $62.9 billion of residential mortgage loans in June. Noninterest expense rose 3% from the second quarter to $1.393 billion, led by higher outside data processing and software costs. The efficiency ratio, a non-GAAP measure, was 54.4%, compared with 52.8% in the second quarter.

Buybacks slowed while higher rates cut into equity

M&T repurchased 1.3 million shares at a total cost of $323 million in the quarter, compared with $465 million in the second quarter and $409 million a year earlier. Cash dividends were $1.50 a common share, unchanged from a year earlier.

Accumulated other comprehensive income, a part of shareholders' equity that includes unrealized gains and losses on available-for-sale securities, declined $588 million in the quarter. The release said the decline reflected rising interest rates. In July, M&T moved $8.3 billion of residential mortgage-backed securities from its available-for-sale portfolio to its held-to-maturity portfolio, when those securities carried net unrealized gains of $8 million. By Sept. 30 they showed unrealized losses of $222 million, or $165 million after tax. Held-to-maturity securities are carried at amortized cost, so later changes in their market value are not recorded in accumulated other comprehensive income.

The estimated common equity Tier 1 capital ratio was 10.16% at Sept. 30, compared with 10.19% at June 30 and 10.99% a year earlier. The ratio of tangible common equity to tangible assets fell to 7.85% from 8.07% at June 30 and 8.79% a year earlier; M&T said the decline reflected loan growth, share repurchases and unrealized losses on available-for-sale securities. Common shareholders' equity per share was $174.95, down from $176.03 at June 30, and tangible equity per common share, a non-GAAP measure, was $115.88, down from $117.41. M&T's stress capital buffer is 2.7%.

Loans grew and charge-offs rose from the second quarter

Average loans rose $2.6 billion, or 2%, from the second quarter to $143.3 billion, led by a $1.6 billion increase in commercial real estate loans, and were up 5% from a year earlier. Average deposits were $166.8 billion, compared with $163.5 billion in the second quarter. Average interest-bearing deposits rose $3.5 billion, while average short-term borrowings from the Federal Home Loan Bank of New York fell $2.9 billion.

The provision for credit losses was $135 million, up from $120 million in the second quarter and $125 million a year earlier. Net charge-offs were $127 million, an annualized 0.35% of average loans, compared with 0.23% in the second quarter and 0.42% a year earlier. Nonaccrual loans were $1.298 billion, or 0.9% of loans, compared with 0.85% at June 30 and 1.11% a year earlier. The allowance for loan losses equaled 1.51% of loans, down from 1.53% at June 30.

Fourth-quarter outlook

In its earnings presentation, M&T forecast fourth-quarter taxable-equivalent net interest income of $1.83 billion to $1.85 billion and a net interest margin in the mid-3.60s. The presentation says that outlook reflects one additional rate increase in the fourth quarter. M&T also projected fee income of $710 million to $730 million, GAAP noninterest expense of $1.39 billion to $1.41 billion, net charge-offs of 35 to 40 basis points of average loans, average loans, including loans held for sale, of $145 billion to $146 billion, average deposits of $169 billion to $170 billion and a common equity Tier 1 ratio of 10% to 10.25%.

"M&T's third quarter results were highlighted by strong loan and deposit growth, stable credit and a solid capital position," Chief Financial Officer Daryl N. Bible said in the release. Executives were scheduled to discuss the results on a conference call at 8 a.m. ET on Friday.

Shares after the report

M&T shares opened Friday at $221.49 on the New York Stock Exchange, above Thursday's close of $218.65, and reached $223.46 before reversing. They were trading near $214.11 at about 1:30 p.m. ET, down about 2.1% on the day, according to market data pulled while this article was prepared. Prices change continuously; check a live quote for the current level.