M&T Bank Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Annual results are for the full year; the fourth-quarter figures below are separately identified. M&T provides retail and commercial banking, mortgage, trust, wealth-management and related financial services, primarily in the Northeast and Mid-Atlantic. The November 1 acquisition of Hudson City Bancorp materially expanded the balance sheet and footprint.
Key financial results and position
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income (GAAP) | $2.843 billion | $2.676 billion |
| Net interest income, taxable-equivalent | $2.867 billion | $2.700 billion |
| Other income | $1.825 billion | $1.779 billion |
| Net income | $1.080 billion | $1.066 billion |
| Diluted EPS | $7.18 | $7.42 |
| Return on average assets / common equity | 1.06% / 8.32% | 1.16% / 9.08% |
| Net interest margin, taxable-equivalent | 3.14% | 3.31% |
| Efficiency ratio | 58.0% | 59.3% |
| Provision for credit losses | $170 million | $124 million |
At year-end, total assets were $122.8 billion, loans and leases net of unearned discount were $87.5 billion, deposits were $92.0 billion, total borrowings were $12.8 billion ($2.1 billion short-term and $10.7 billion long-term), and shareholders’ equity was $16.2 billion. The allowance for credit losses was $956 million, or 1.09% of loans; nonaccrual loans were $799 million (0.91% of loans), and total nonperforming assets were $994 million. Net charge-offs were $134 million, or 0.19% of average loans.
Operating cash flow was $1.742 billion; investing cash flow was positive $7.714 billion and financing cash flow was negative $9.462 billion. Cash and cash equivalents ended the year at $1.368 billion. Investing cash flow included a large increase in interest-bearing bank deposits; it should not be read as an equivalent increase in recurring cash generation.
Capital measures included a consolidated CET1 ratio of 11.08%, Tier 1 ratio of 12.68%, total capital ratio of 14.92%, and leverage ratio of 10.89%. Tangible common equity to tangible assets was 8.69%. Common dividends remained $2.80 per share for the year; no shares were repurchased under the announced program in 2015.
Material changes and fourth-quarter performance
- Hudson City added approximately $36.7 billion of assets, including $19.0 billion of loans, and $31.5 billion of liabilities. M&T paid $2.1 billion in cash and issued 25.95 million shares; purchase consideration was approximately $5.2 billion. It recorded $1.1 billion of goodwill and $132 million of core deposit intangibles. After closing, M&T sold $5.8 billion of acquired securities and repaid $10.6 billion of assumed borrowings.
- Year-end loans rose from $66.7 billion to $87.5 billion, and deposits from $73.6 billion to $92.0 billion, substantially reflecting the acquisition. Residential real estate loans rose sharply, including approximately $18.0 billion of acquired balances remaining at year-end.
- Annual net income increased modestly, but diluted EPS and reported returns declined. Higher average earning assets lifted taxable-equivalent net interest income 6%, while margin fell 17 basis points, principally from lower asset yields. Other expense increased 5%, reflecting acquired operations, higher compensation and charitable contributions.
- Fourth-quarter net income was $271 million versus $278 million a year earlier; diluted EPS was $1.65 versus $1.92. Taxable-equivalent net interest income was $813 million, up 18%, and the margin was 3.12% versus 3.10%. The quarter included $76 million of merger-related expense and a $21 million provision tied to acquired loans.
- Management’s non-GAAP net operating income was $1.157 billion, or $7.74 diluted per share, versus $1.087 billion, or $7.57, in 2014. This measure excludes specified merger costs and intangible amortization; it is not GAAP.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance is provided. Management expected additional Hudson City integration expenses in 2016; $56 million of incurred merger costs remained unpaid at year-end.
- M&T said it believed it was complying with the modified Liquidity Coverage Ratio requirements taking effect January 1, 2016; the requirement phases in fully by January 1, 2017. Management also said available liquidity was adequate for anticipated normal-course needs. Funding relies chiefly on core deposits, which funded 81% of average earning assets in 2015. Year-end committed borrowing capacity included approximately $20.5 billion of FHLB facilities and $11.9 billion of Federal Reserve lines, subject to collateral and availability terms.
- Key sensitivities include continued low rates and margin compression, credit quality and collateral values (especially real estate), regional economic weakness in upstate New York and central Pennsylvania, funding and liquidity access, regulatory capital and compliance costs, operational and cyber risk, and acquisition integration. Approximately 64% of loans were real-estate-related; commercial real estate exposure and regional concentration warrant attention.
- M&T and M&T Bank remained subject to a Federal Reserve written agreement concerning the Bank Secrecy Act/anti-money-laundering program and said work to resolve outstanding issues continued. In January 2016, the DOJ indicted Wilmington Trust Corporation over alleged pre-acquisition conduct; M&T said it would vigorously defend the subsidiary. An FHA and GSE mortgage-origination investigation remained under settlement discussion. Management expected a potential FHA/GSE settlement not to have a material impact, but no definitive agreement had been reached.
- For litigation and regulatory matters in aggregate, reasonably possible losses beyond recorded liabilities were estimated at $0–$40 million, excluding amounts not reasonably estimable. The filing cautions that particular-period operating results could still be materially affected.
- Other notable items: the trade-processing business sale produced a $45 million pretax gain ($23 million after tax); the 2015 accounting change for affordable-housing investments reclassified prior-period expenses into tax expense without a significant reported effect; and the allowance-to-loans ratio declined partly because acquired loans were recorded at fair value without carryover of the seller’s allowance.
Most important facts for investors to verify
- Hudson City integration costs, cost savings, deposit retention, loan performance and the acquired goodwill/intangible valuation.
- Quarterly net interest margin, deposit pricing, asset yields, and the effect of interest-rate and yield-curve changes.
- Credit trends in acquired residential and limited-documentation loans, commercial real estate, criticized loans, nonaccruals and charge-offs; reconcile reserve coverage with acquired-loan accounting.
- Regulatory capital ratios, CCAR/capital-plan permissions, liquidity-rule compliance and the actual availability of secured borrowing capacity.
- Developments in the BSA/AML written agreement, Wilmington Trust indictment, FHA/Fannie Mae/Freddie Mac investigations and any resulting liabilities or business restrictions.
- Cash-flow statement drivers and the distinction between GAAP earnings and management’s non-GAAP “net operating” results.