M&T Bank Corp. — 2016 Form 10-K Summary
Business context and period. Annual report for the fiscal year ended December 31, 2016. M&T is a regional bank holding company serving consumers and businesses mainly in the Northeast and Mid-Atlantic, with retail and commercial banking, mortgage, trust and wealth-management operations. The 2015 Hudson City acquisition materially expanded the company’s New Jersey, Connecticut and New York presence; 2016 results include a full year of acquired operations. At year-end, consolidated assets were $123.4 billion, deposits $95.5 billion and shareholders’ equity $16.5 billion.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net income | $1.315 billion | $1.080 billion |
| Diluted EPS | $7.78 | $7.18 |
| Net interest income, taxable-equivalent | $3.497 billion | $2.867 billion |
| Net interest margin | 3.11% | 3.14% |
| Provision for credit losses | $190 million | $170 million |
| Net charge-offs / average loans | $157 million / 0.18% | $134 million / 0.19% |
| Other income | $1.826 billion | $1.825 billion |
| Other expense | $3.047 billion | $2.823 billion |
| Efficiency ratio | 56.1% | 58.0% |
| Return on average assets | 1.06% | 1.06% |
| Return on average common equity | 8.16% | 8.32% |
- Balance sheet: Loans and leases, net of unearned discount, were $90.9 billion, up from $87.5 billion; allowance for credit losses was $989 million, or 1.09% of loans. Investment securities totaled $16.3 billion.
- Funding and debt: Deposits rose to $95.5 billion from $92.0 billion. Short-term borrowings were $163 million and long-term borrowings $9.49 billion, versus $2.13 billion and $10.65 billion, respectively, in 2015. Core deposits funded 82% of average earning assets.
- Liquidity and capital: Cash and cash equivalents were $1.32 billion and interest-bearing deposits at banks $5.00 billion. Management reported compliance with the phased-in liquidity coverage requirements and said available liquidity was adequate for normal funding needs. At year-end, CET1 was 10.70%, Tier 1 capital 11.92%, total capital 14.09% and leverage 9.99%.
- Cash flow: Operating cash flow was $1.18 billion, compared with $1.74 billion in 2015. Investing activities used $721 million and financing activities used $510 million; cash and cash equivalents declined $47 million. Cash flow reflects significant movements in loans, deposits, securities and borrowings and should be read in that context.
Material changes versus the prior period
- Net income rose 22% and diluted EPS 8%. Higher net interest income was primarily driven by the full-year effect of Hudson City and loan growth; average earning assets increased 23% to $112.6 billion.
- Margin narrowed three basis points to 3.11%, reflecting lower securities yields and higher rates paid on interest-bearing deposits, including Hudson City time deposits.
- Loans and leases increased about 4% at year-end. Average residential real estate loans rose sharply with the acquired portfolio; commercial real estate construction loans increased to $8.1 billion from $5.7 billion.
- Provision for credit losses rose 12%. Nonaccrual loans increased to $920 million from $799 million, with $190 million of newly nonaccrual residential mortgages associated with the acquired Hudson City portfolio. Nonaccrual loans were 1.01% of loans, versus 0.91%.
- Other expense increased 8%, reflecting the full-year acquired operations, higher salaries and benefits, and FDIC assessments. FDIC assessment expense was $105 million, compared with $52 million.
- Reported results included $36 million of Hudson City merger-related expenses before tax in 2016, versus $97 million in 2015, and $43 million of intangible amortization. Management’s non-GAAP net operating income was $1.36 billion, with diluted operating EPS of $8.08; these measures exclude specified acquisition-related items.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no numerical earnings or revenue guidance. Management said liquidity sources were adequate for anticipated normal-course needs. It cited continued economic improvement but cautioned about its durability, global conditions, interest rates and slower employment and population growth in parts of upstate New York and central Pennsylvania.
- Capital returns: The Federal Reserve did not object to M&T’s revised 2016 capital plan. The plan authorized up to $1.15 billion of common-stock repurchases through June 2017 and contemplated a quarterly dividend increase of up to $0.05, to $0.75, in the first quarter of 2017, subject to board declaration and regulatory limits. M&T repurchased $641 million of shares in 2016; $763 million remained under the plan at year-end. The 2016 dividend was $2.80 per common share.
- Credit and concentration risks: Real estate loans represented approximately 69% of the loan portfolio during 2016; approximately 55% of loans and leases were to customers in New York State and Pennsylvania. Commercial real estate values, residential mortgage performance, consumer credit and regional economic conditions are key sensitivities. Criticized commercial and commercial real estate loans totaled $2.4 billion, up from $2.1 billion.
- Regulatory and compliance matters: M&T and M&T Bank continued work to resolve outstanding issues under a 2013 Federal Reserve written agreement concerning the Bank Secrecy Act/anti-money-laundering program. The filing also cites uncertainty around regulatory reform and potential compliance costs.
- Legal matters: Wilmington Trust Corporation, acquired by M&T in 2011, was indicted in 2016 over alleged pre-acquisition conduct; trial was scheduled for October 2017. Related securities litigation had a trial scheduled for June 2018. The company stated that aggregate reasonably possible litigation losses beyond recorded liabilities ranged from $0 to $40 million, while noting outcomes could materially affect a particular future period. Separately, M&T Bank paid $64 million in May 2016 to settle federal investigations concerning certain FHA and GSE mortgage loans, without admitting liability; the company said the settlement did not materially affect 2016 results or financial condition.
- Unusual items: M&T sold collateralized debt obligations in 2016 for a $30 million gain to comply with the Volcker Rule. It also accelerated $32 million of consumer-loan charge-offs associated with deceased or bankrupt customers; $22 million of those balances were current when charged off. The filing reports no other-than-temporary impairment charges on investment securities in 2016.
Important facts for investors to verify
- How much of the earnings and loan growth reflects sustainable organic performance versus the full-year Hudson City contribution, and how integration benefits and costs are progressing.
- Whether net interest margin stabilizes as rates and deposit costs change, and how the bank’s reported interest-rate sensitivity performs in practice.
- Credit trends in residential mortgages, commercial real estate construction and consumer lending, including the migration of Hudson City loans into nonaccrual status and adequacy of the allowance.
- Capital and liquidity headroom, the effect of the February 2017 commercial real estate risk-weight revision (which reduced the previously estimated CET1 ratio by 26 basis points), and capacity for planned dividends and repurchases.
- Developments in the BSA/AML written agreement, the Wilmington Trust criminal and securities matters, and any new estimates of legal exposure or regulatory restrictions.
- Cash-flow and funding movements, including deposit mix, debt maturities, credit-facility availability and the costs of regulatory liquidity requirements.