M&T Bank’s annual report to shareholders for the year ended Demcember 31, 2014.

The year past was far from a typical one, either for U.S. banking or at M&T. The evolving nature of financial industry regulation, the attention paid to infrastructure and regulatory compliance, and the uneven character of the economic recovery, all merit attention.

M&T’s 2014 earnings did not match the record level of the previous year. Nonetheless, they remained strong despite elevated expenses, a consequence of investments in our infrastructure and the costs and complexity of responding to evolving regulatory compliance requirements.  Our headway in such an environment reflects the core strength and resilience of the company.

Net income prepared in accordance with generally accepted accounting principles (“GAAP”) was $1.07 billion for the past year, down 6% from $1.14 billion in the year prior. Diluted earnings per common share totaled $7.42 in 2014, a decline of 10% from the earlier period. Last year’s net income, expressed as a return on average total assets and average common equity, was 1.16% and 9.08%, respectively.  Comparable figures for 2013 were 1.36% and 10.93%.

Taxable-equivalent net interest income, which is comprised of interest received on loans and investments, less interest paid on deposits and borrowings, was $2.7 billion for 2014, a very slight increase from 2013, owing in part to the continued low interest rate environment, which has remained in place for some 24 quarters.  At the end of 2014, total loans were $66.7 billion, an increase of 4% from the end of the previous year.  Average interest-earning assets rose by 10% last year, to $81.7 billion.  The largest component of that increase was a $4.9 billion or 74% higher level of average investment securities.  New regulations require banks like M&T to hold more government-backed securities as a “liquid asset buffer” for times of economic stress.  Investment securities made up 13% of total assets at the end of 2014, compared with 10% of assets at the end of the previous year.  Those lower yielding investments, purchased with $3.2 billion of borrowings raised in the debt capital markets, were additive to net interest income but negatively impacted our net interest margin.  Taxable-equivalent net interest income expressed as a percentage of average earning assets – an important measure of balance sheet efficiency – was 3.31%, a decrease of 34 basis points (hundredths of one percent) from the year before.

As the economy continued to improve during the year, so did the repayment performance of M&T’s loan portfolio.  Net charge-offs were $121 million, an improvement from $183 million in 2013.  Net charge-offs expressed as a percentage of average loans outstanding were 0.19%, which is the lowest figure we’ve seen since the 0.16% level recorded in 2006, immediately prior to the last financial crisis.  M&T’s allowance for losses on loans and leases stood at $920 million as of December 31, 2014, representing 1.38% of loans outstanding.  The modest $3 million increase in the allowance from the end of the previous year reflects a provision for loan losses of $124 million for 2014, less the $121 million of net charge-offs.

Income from fees and other sources totaled $1.78 billion in 2014, a decrease of $86 million from 2013.  The previous year was marked by net securities and securitization gains of $110 million, as M&T repositioned its balance sheet in preparation for our first-time participation in the Federal Reserve’s 2014 Comprehensive Capital Analysis and Review (“CCAR”) program.  Those gains did not reoccur in 2014.  Revenues from mortgage banking increased by 10% to $363 million over the past year and trust revenues increased by 2% to $508 million.

As a result of increased expenses arising from our ongoing efforts to upgrade M&T’s bank secrecy and anti-money laundering (“BSA/AML”) compliance program, in addition to other key investments that position M&T for the new regulatory and operating environment, non-interest expenses increased to $2.74 billion last year, 4% higher than $2.64 billion in the previous year.  Contributing to the higher level of expenses was a 4% increase in employee salaries and benefits as well as a 9% increase in other costs of operations.

We continued to grow our capital base in 2014.  M&T’s Tier 1 common capital ratio, which is the one most closely followed by both regulators and the investment community, increased to 9.83% at the end of the year, an improvement of 61 basis points from 9.22% at the end of 2013, effectively closing the gap with our peer regional and super-regional banks.  Our tangible book value per share was $57.06 at December 31, 2014, an increase of 9% from the end of 2013.

M&T Bank: Pardon Our Dust

In the wake of our investments of the past two years, it is tempting to borrow a slogan one sees at stores changing their inventories or displays: “pardon our dust.”  It implies that change, in some ways difficult and inconvenient, is underway – but that something better is taking shape.  That’s certainly indicative of what’s been going on at M&T.

The year 2014 will be remembered as one in which we turned our focus inward, enhanced our infrastructure and broadened our knowledge base.  As discussed in these pages last year, a great deal of work was begun in 2013 to address heightened demands from our regulators.  We continued to invest considerable time, money, thought and labor in 2014 to make substantial progress on those efforts, while simultaneously working to build a better, stronger M&T Bank.  We have worked on improving technology, risk management and business processes while adding to our ranks of talented personnel.  We hired top professionals with expertise in emerging areas of focus.  Our technology and banking operations division alone was fortified by key hires with responsibilities spanning development, security, architecture and connectivity.  Those additions included a Chief Technology Officer and an Enterprise Security Officer – new positions that embody the changing nature of our bank and our industry.  Fundamentally, we know more about more topics than last year, and collectively we are acutely aware of the path required to succeed in tomorrow’s banking industry.

There is no denying that the work undertaken thus far has not been optional – it’s work that had to be done.  We spent $266 million in 2014 in a broad swath of efforts that will help M&T fulfill its regulatory obligations – an unprecedented amount in unprecedented times.  However, our construction efforts have not been limited to regulatory matters, nor does 2014 mark the end of such expenditures.  We will continue to invest heavily in data, technology and personnel in 2015 and beyond; these are investments that will enable our colleagues to serve our clients more efficiently while providing the products and services needed to achieve their financial objectives.

The notion of strengthening our foundation is not foreign.  There have been seminal moments in our history when we have paused to make significant investments driven by customer needs or movement into new markets.  Whenever we grow by way of acquisition, we then busy ourselves by digesting what we’ve become while trying to make it better.  Think of the work we’re doing now in much the same way, though in this case we are improving because we expect to continue to grow.

Risk Management Infrastructure: Enhancing our BSA/AML program consumed significant time, energy and money with investments of $151

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