M&T Bank Corporation — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it also reports fourth-quarter results. M&T is a bank holding company focused on retail and commercial banking, mortgage banking, and trust and wealth services, primarily in the Northeast and Mid-Atlantic. At year-end, consolidated assets were $96.7 billion, deposits $73.6 billion, loans and leases (net of unearned discount) $66.7 billion, and shareholders’ equity $12.3 billion.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Net income | $1.066 billion | $1.138 billion |
| Diluted earnings per common share | $7.42 | $8.20 |
| Net interest income, GAAP | $2.676 billion | $2.673 billion |
| Net interest margin, taxable-equivalent | 3.31% | 3.65% |
| Other income | $1.779 billion | $1.865 billion |
| Provision for credit losses | $124 million | $185 million |
| Net charge-offs / average loans and leases | $121 million / 0.19% | $183 million / 0.28% |
| Efficiency ratio | 60.5% | 57.0% |
| Return on average assets / common equity | 1.16% / 9.08% | 1.36% / 10.93% |
Net operating income, a company-defined non-GAAP measure excluding intangible amortization and merger-related expenses, was $1.087 billion versus $1.175 billion; diluted net operating EPS was $7.57 versus $8.48. These measures are supplemental and are not GAAP results.
Fourth quarter: Net income was $278 million, or $1.92 diluted EPS, compared with $221 million and $1.56 in fourth-quarter 2013. The quarter’s taxable-equivalent net interest margin was 3.10%, down from 3.56% a year earlier.
Financial position, cash flow and liquidity
- Total assets rose to $96.7 billion from $85.2 billion; deposits increased to $73.6 billion from $67.1 billion. Loans and leases, net of unearned discount, were $66.7 billion, up from $64.1 billion.
- Long-term borrowings increased to $9.0 billion from $5.1 billion; short-term borrowings were $193 million. The increase reflected senior-note and FHLB borrowing, with proceeds largely directed to liquid investments. M&T Bank issued another $1.5 billion of senior notes in February 2015.
- Cash flows from operating activities were $1.10 billion; investing activities used $11.71 billion and financing activities provided $10.31 billion. Cash and cash equivalents ended the year at $1.37 billion, down $300 million. The investing outflow primarily reflected purchases of investment securities and growth in interest-bearing deposits at banks.
- Core deposits averaged $69.1 billion and funded 85% of average earning assets. At year-end, the banks had approximately $13.1 billion of available Federal Reserve credit lines and M&T Bank had $8.1 billion of FHLB facilities; these are collateral-dependent. Management said liquidity was adequate for anticipated normal-course needs.
- Management estimated fully phased-in CET1 capital at 9.62% at year-end under the new rules effective January 1, 2015. The company reported an 8.11% tangible common equity-to-tangible-assets ratio. The filing states M&T and its bank subsidiaries met applicable year-end capital requirements.
- Common dividends remained $2.80 per share for the year; no common shares were repurchased under the announced program. Capital distributions remain subject to regulatory capital planning and Federal Reserve oversight.
Material changes versus 2013
- Annual net income fell 6% and diluted EPS fell 10%. Net interest income was essentially flat on a taxable-equivalent basis, as 10% growth in average earning assets was offset by a 34-basis-point NIM decline, reflecting lower loan yields and more low-yielding cash and securities.
- Credit costs improved: provision declined 33%, net charge-offs fell, nonaccrual loans decreased to $799 million from $874 million, and nonperforming assets declined to $863 million from $941 million.
- Other income was lower, in part because 2013 included investment-security gains and $63 million of loan-securitization gains. In 2014, mortgage banking revenue and trust income increased, while deposit service charges declined.
- Other expense rose 4% to $2.743 billion. Management cited higher professional-services and salary costs for BSA/AML compliance, capital planning, stress testing and risk management; the efficiency ratio worsened to 60.5%.
- Year-end investment securities increased to $13.0 billion from $8.8 billion, including purchases of government-backed mortgage securities. The company reported no 2014 investment-security gains or losses and no OTTI charges.
- Shareholders’ equity increased to $12.3 billion from $11.3 billion, but accumulated other comprehensive loss worsened, notably from pension-related changes.
Outlook, risks, contingencies and unusual items
- Hudson City transaction: The proposed acquisition was valued at approximately $5.4 billion and remained subject to regulatory approval and other closing conditions. The parties extended the termination date to April 30, 2015. Hudson City had reported $36.6 billion of assets and $19.4 billion of deposits at year-end 2014.
- BSA/AML regulatory matter: M&T and M&T Bank were operating under a June 2013 written agreement with the Federal Reserve Bank of New York to strengthen compliance controls. Management described a significant remediation effort, including outside consultants. Its completion and regulatory acceptance were relevant to the pending acquisition timeline.
- Legal proceedings: Wilmington Trust faced an ongoing DOJ investigation relating to pre-acquisition reporting and commercial real estate lending, as well as securities litigation in discovery. The filing reports aggregate reasonably possible litigation losses beyond recorded liabilities of $0–$40 million; outcomes could affect a future period’s results.
- Regulatory and operating risks: New Basel III capital rules took effect in 2015; the modified liquidity coverage ratio was scheduled to begin in 2016 and phase in through 2017. Other cited risks include interest-rate and margin pressure, credit and real estate concentration, regional economic weakness, competition, cyber and operational risk, and limits on dividends or acquisitions.
- Credit and geographic concentration: Approximately 64% of loans and leases were real-estate-related; 45% of loans and leases were to New York customers, 18% to Pennsylvania and 23% to the Mid-Atlantic region. Management noted uncertainty around the sustainability of economic improvement and weaker employment conditions in parts of upstate New York and central Pennsylvania.
- Unusual items: 2013 included a $40 million litigation accrual related to pre-acquisition Wilmington Trust matters, a $26 million reversal of an expired contingent-compensation accrual, and securities and securitization gains/losses. In 2014, updated pension mortality tables and a lower discount rate contributed to a $207 million after-tax reduction in other comprehensive income from benefit-plan adjustments.
- Guidance: The filing provides no specific earnings or revenue forecast. Management expected to comply with the new liquidity rules and stated that it believed the company could meet revised capital requirements.
Important facts for investors to verify
- Progress and regulatory status of the BSA/AML remediation, and the resulting timing and prospects for the Hudson City acquisition.
- Underlying drivers of net interest margin and whether asset growth can offset continued yield compression.
- Credit trends by portfolio, especially commercial real estate, residential mortgages, home equity and consumer loans, and the adequacy of the $920 million allowance.
- Funding costs, liquidity after debt issuance, and the effect of new capital and liquidity rules on dividends, acquisitions and lending.
- Potential costs or outcomes from the DOJ investigation, Wilmington Trust securities litigation and other legal contingencies.
- Effects of pension assumptions and market changes on funded status, accumulated other comprehensive income and future expense.