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Text: These statements speak only as of the date made, and M&T undertakes no obligation to update them.
Revenue in our fee generating businesses was particularly strong including mortgage banking, trust and brokerage and payments.
Credit trends are stable to improving, illustrated by net charge-offs, about half our long-term average, a modest reserve release and little change in the level of nonaccrual loans.
In alignment with the strong revenue trends and the improved profitability over the last year, incentive compensation is rising as well.
We'll offer some details on that in a moment.
Lastly, our capital levels continue to rise.
The CET1 ratio is near a record high as we await the closing of the People's United merger.
Now let's review our results for the quarter.
Diluted GAAP earnings per common share were $3.69 for the third quarter of 2021, improved from $3.41 in the second quarter of 2021 and $2.75 in the third quarter of 2020.
Net income for the quarter was $495 million, compared with $458 million in the linked quarter and $372 million in the year-ago quarter.
On a GAAP basis, M&T's third-quarter results produced an annualized rate of return on average assets of 1.28% and an annualized return on average common equity of 12.16%.
This compares with rates of 1.22% and 11.5%, respectively, in the previous quarter.
Included in GAAP results in the recent quarter were after-tax expenses from the amortization of intangible assets amounting to $2 million or $0.02 per common share, little change from the prior quarter.
Also included in the quarter's results were merger-related charges of $9 million related to M&T's proposed acquisition of People's United Financial.
This amounted to $7 million after tax or $0.05 per common share.
Results for this year's second quarter included $4 million of such charges amounting to $3 million after-tax effect or $0.02 per common share.
Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after-tax effect of amortization of intangible assets, as well as any gains or expenses associated with mergers and acquisitions.
M&T's net operating income for the third quarter, which excludes intangible amortization and the merger-related expenses, was $504 million.
Compare that with $463 million in the linked quarter and $375 million in last year's third quarter.
Diluted net operating earnings per common share were $3.76 for the recent quarter, improved from $3.45 in 2021 second quarter and up from $2.77 in the third quarter of 2020.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.34% and 17.54% for the recent quarter.
The comparable returns were 1.27% and 16.68% in the second quarter of 2021.
Let's take a look at some of the details that drove our results.
Taxable equivalent net interest income was $971 million in the third quarter of 2021, compared with $946 million in the linked quarter.
Higher income from PPP loans accounted for the majority of the $25 million quarter-over-quarter increase in net interest income and the second round of PPP loans began to receive forgiveness from the Small Business Administration.
The net interest margin for the past quarter was $2 dollars -- excuse me, 2.74%, down just three basis points from 2.77% in the linked quarter.
We estimate that the higher balance of cash on deposit at Federal Reserve contributed about 13 basis points of pressure to the margin.
Largely offsetting that was the higher income from PPP loans both scheduled amortization and accelerated recognition of fees from forgiven loans, which added an estimated 10 basis points to the margin.
All other factors including lower income from hedges, a slightly lower cost of deposits and an additional accrual day netted to zero impact.
Compared with the second quarter of 2021, average interest earning assets increased by 3%, reflecting a 22% increase in money market placements, primarily cash on deposit with the Fed and a 3% decline in investment securities.
Average loans outstanding declined about 3% compared with the previous quarter.
Looking at the loans by category, on an average basis compared with the linked quarter.
Overall, commercial and industrial loans declined by $3.3 billion or 12%.
The primary driver was a $2.4 billion decline in PPP loans.
Dealer floor plan loans declined by $803 million, reflecting the ongoing impact from vehicle production and inventory issues seen across the industry.
All other C&I loans were essentially a little changed from the prior quarter.
Commercial real estate loans were also little changed from the second quarter.
Residential real estate loans declined by just under 4%.
There are a few moving parts underlying that figure that are worth highlighting.
Balance decreases due to normal prepayments and principal amortization, including the Hudson City portfolio, drove some of the decrease, as well as repooling of loans previously purchased from Ginnie Mae servicing pools, offset -- those were offset by retention of new loan production, which will be a bigger factor in the fourth quarter.
Consumer loans were up 3%, consistent with the recent quarters and continuing to be led by growth in indirect auto and recreational finance loans.
On an end-of-period basis, total loans were down 4%, reflecting most of the same factors I just mentioned.
The 11% decline in C&I loans include a decline of PPP loans outstanding to $2.2 billion at September 30.
Average core customer deposits, which exclude CDs over $250,000, increased 2% or $2.8 billion compared with the second quarter.
That figure includes $3.8 billion of noninterest-bearing deposits partially offset by lower interest checking deposits.
Turning to noninterest income.
Noninterest income totaled $569 million in the third quarter, compared with $514 million in the linked quarter.
The recent quarter included an insignificant valuation gain on equity securities, largely on our remaining holdings of GSE preferred stock, while the prior quarter included $11 million of valuation losses.
Mortgage banking revenues were $160 million in the recent quarter, compared with $133 million in the linked quarter.
Revenues for our residential mortgage business, including both origination and servicing activities, were $110 million in the third quarter, compared with $98 million in the prior quarter.
Residential mortgage loans originated for sale were down about 7% to $1.1 billion when compared with the second quarter.
However, the lower volume was more than offset by higher gain on sale margins.
Commercial mortgage banking revenues were $50 million in the third quarter, compared with $35 million in the linked quarter.
Those results reflect a strong originations quarter combined with prepayment fees on loans previously securitized.
Trust income was $157 million in the recent quarter, compared with $163 million in the previous quarter.
Recall that the second quarter's results included $4 million of seasonal fees arising from tax preparation work we undertake for clients, which did not recur in the third quarter.
Also, in conjunction with the transfer of M&T's retail brokerage and advisory business to the platform of LPL Financial in mid-June of this year, about $10 million in revenues associated with managed investment accounts, previously classified as trust income, are now included in brokerage services income.
Service charges on deposit accounts were $105 million, compared with $99 million in the second quarter.
The primary driver of the increase was customer payments related activity.
Operating expenses for the third quarter, which exclude the amortization of intangible assets and merger-related expenses previously mentioned, were $888 million.
The comparable figure was $859 million in the linked quarter.
Salaries and benefits were $510 million for the quarter, compared with $479 million in the prior quarter.
As was the case in previous quarters this year, the higher salaries and benefits reflect revenue generation in certain business lines and incentive compensation associated with that revenue, notably commercial mortgage banking and trust.
Also, at the enterprise level, we are accruing the corporate incentive at a higher rate in 2021, reflecting our expectation that M&T's full-year earnings and profits will be higher than they were in 2020.
Other cost of operations in the recent quarter, including $5 million from the accelerated amortization of capitalized mortgage servicing rights as a result of the prepayments of previously securitized commercial mortgage loans that we referenced earlier.
Lastly, year-over-year growth in trust income and assets under management in our retirement business has carried with us an increase in the share of those fees paid to subadvisors, which are included in other cost of operations.
Also recall that the other cost of operations for the second quarter included an $8 million addition to the valuation allowance for our capitalized residential mortgage servicing rights.
There were no adjustments to the valuation allowance in the third quarter.
The efficiency ratio, which excludes intangible amortization and merger-related costs from the numerator and securities gains or losses from the denominator was 57.7% in the recent quarter, compared with 58.4% in 2021's second quarter.
Next, let's turn to credit.
Credit trends continue to stabilize, but as has been the case for the past little while, some industries are improving more rapidly than others, reflecting challenges such as the supply chain, pressure on materials costs, and the cost and availability of labor.
The allowance for credit losses declined by $60 million to stand at $1.5 billion at the end of the third quarter.
This reflects a $20 million recapture of previous provisions for credit losses, combined with $40 million of net charge-offs in the quarter.
At September 30, the allowance for credit losses as a percentage of loans outstanding was unchanged from June 30 at 1.62%.
Annualized net charge-offs as a percentage of total loans were 17 basis points for the third quarter, 19 basis points in the second quarter.
The allowance for credit losses at the end of the quarter reflects our assessment of credit losses in the portfolio under the CECL loss measurement methodology which includes our macroeconomic forecasts.
As we've previously indicated, our macroeconomic forecast uses a number of economic variables with the largest drivers being the unemployment rate and GDP.
Our forecast assumes the national unemployment rate continues to be elevated compared to prepandemic levels, averaging 5.5% over 2021, followed by a gradual improvement, reaching 3.5% by mid-2023.
The forecast also assumes that GDP grows at a 6.8% annual rate over 2021 and 2.7% annual rate during 2022.
Nonaccrual loans were essentially flat at $2.2 billion compared with June 30, but increased as a percentage of loans to 2.4%, compared with 2.31% of loans at the end of June.
We also expect to disclose that our level of criticized loans is a little changed from the second quarter when we file our third-quarter 10-Q in a few weeks.
Loans past due, on which we continue to accrue interest, were $1 billion at the end of the recent quarter.
M&T's Common Equity Tier 1 ratio was an estimated 11.1% at quarter end, compared with 10.7% at the end of the second quarter.
This reflects continued strong organic capital generation combined with lower risk-weighted assets.
As previously noted, while the People's merger is pending, we don't plan to engage in any stock repurchase activity.
Now let's turn to the outlook.
As we enter the final quarter of the year, we see a little need to change our outlook for the remainder of 2021.
We expect year-over-year loan growth to be flat to up slightly on a reported basis and flat to down slightly, excluding the impact from PPP loans, which reflects the decline in dealer floor plan loans.
We continue to expect net interest income to be down a low single-digit percentage from full-year 2020.
We noted on the July conference call that we expected net interest income in the third and fourth quarters to, on average, be in line with the $946 million in the second quarter.
We still expect that to be true, but the faster than expected forgiveness of PPP loans did pull some of that income forward into the third quarter from the fourth quarter.
We've slightly exceeded our outlook for low single-digit growth in noninterest income.
As we begin to retain the majority of residential mortgage loans we originate on the balance sheet, residential gains on sale will be primarily driven by Ginnie Mae repooling gains.
Momentum in the trust and payments-related businesses remain strong.
Expenses have grown faster than we forecast in January, but with most of that growth directly connected to better-than-expected revenue and better-than-expected net income trend.
The credit environment continues to improve along with the overall economy, but some segments are recovering more slowly than others.
We believe criticized assets are at or near their peak, but there still remains some risk of downgrades within criticized loans from accruing to nonaccruing.
Our preparations for completion of the merger with People's United continue while we wait for regulatory approval.
Our projections as to the financial impact remain largely in line with what we offered at the time of announcement this past February.
Following our usual practice, we'll offer our thoughts for 2022 on the January conference call.
Of course, as you are all aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.
Now let's open up the call to questions, before which Emma will briefly review the instructions.

user
compname reports q3 gaap earnings of $3.69 per share.
q3 operating earnings per share $3.76.
quarterly net interest income expressed on a taxable-equivalent basis totaled $971 million , up from $947 million in q3 2020.
q3 gaap earnings per share $3.69.
quarterly net loan charge-offs were $40 million versus $30 million.
allowance for credit losses totaled $1.52 billion or 1.62% of loans outstanding at september 30, 2021.
compname posts q3 gaap share $3.69.
qtrly net interest income expressed on a taxable-equivalent basis totaled $971 million , up from $947 million in q3 of 2020.
q3 gaap share $3.69.
qtrly net loan charge-offs were $40 million versus $30 million.

assistant