M&T Still Fogbound

Investors in M&T Bank (NYSE: MTB ) aren't breathing easy yet -- not that they should expect to. Results for the bank's third quarter missed Wall Street's projections, reflecting the drawn-out, difficult environment in which banks have recently operated.

While the quarter didn't show the same level of stress as the bank's first quarter, it also wasn't able to build on the bit of progress it made in Q2. Part of M&T's $0.10 shortfall versus analysts' expectations came from a $0.09-per-share impact from its investment in Bayview Lending Group earlier this year. Even if we adjust for that loss, though, results were still relatively discouraging.

Annualized return on average assets and average common shareholder equity were 1.37% and 12.78%, respectively, down from 1.49% and 13.72% the prior year. This was also a drop from 1.49% and 13.92% in Q2 of this year.

Part of the difficulty stems from the continued pressure on the interest margins -- annualized interest income as a percentage of average earning assets -- that banks have been able to earn. For Q3, M&T's net interest margin was at 3.65%, down from 3.68% in the third quarter of 2006, and 3.67% in the second quarter of this year. Although three basis points doesn't seem like much, when applied to billions in earning assets, these changes can be a major pain for banks like M&T.

Not surprisingly, loan quality continues to hamper M&T as well. Alt-A loans haunted the bank in Q1, and it appears the problem hasn't disappeared. Nonperforming loans more than doubled year over year, and nonperforming loans as a percentage of total loans jumped to 0.83%, from 0.43% a year ago. There was also a notable 26% increase in nonperforming loans compared to last quarter.

While M&T has kept its ship upright -- if not exactly moving in the right direction -- any acceleration of the nonperforming loans on its books will be worth watching. With interest margins already tight, further trouble with its mortgage loans could stifle any attempt by its stock to get out of the doldrums.

Next week, M&T investors can also learn how competitors have been handling the environment by tuning into the earnings announcements for BB&T (NYSE: BBT ) , SunTrust (NSYE: STI), and PNC Financial (NYSE: PNC ) , all slated for next Thursday, Oct. 18.

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