M&T Bank Corporation annual report for the year ended December 2015.

M&T Bank Corporation 2015 Annual Report

The past year was another challenging one for the U.S. banking industry, testing the viability of business models and the ability of management teams at community-focused banks of all sizes across the country.

Complex, still-evolving regulatory requirements confront the industry and continue to drive heightened investment in compliance, risk and capital management infrastructure. A slow and uneven economic recovery, an unusually persistent low-rate environment, concerns abroad and rising competition from outside the regulated banking industry all placed further performance and consolidation pressures on small and mid-sized banks.

M&T Bank’s results were impacted by such factors in 2015, as they have been over the past several years. The progress we made on our risk management infrastructure earned some measure of validation through the approval and completion of the merger with Hudson City Bancorp, Inc. (“Hudson City”). It was an arduous journey, one that validated the need for those investments as well as extraordinary regulatory compliance costs, while reaffirming that scale, efficiency and credit discipline remain as competitive advantages.

Using generally accepted accounting principles (“GAAP”), net income was $1.08 billion in 2015, an increase of 1% from $1.07 billion in 2014, while diluted earnings per common share registered $7.18 in 2015, a decrease of 3% from the earlier period. The impact of merger and acquisition charges incurred in connection with the consummation of the Hudson City transaction on the first day of last November dampened those 2015 results by $61 million net of tax, or 44 cents per common share.

Following our traditional practice, which helps investors better understand the impact of merger activity on M&T’s financial statements, we also provide M&T’s results on a “net operating” or “tangible” basis. Net operating results exclude the effect of intangible assets as well as the after-tax impact of merger-related expenses on both the income statement and balance sheet. Such charges are akin to the cost of entry in consummating a merger and will not continue as part of the normal, ongoing expense required to operate the new franchise. Under this measure, M&T’s net operating income was $1.16 billion last year, improved by 6% from $1.09 billion the year prior. Diluted net operating income per common share amounted to $7.74 in 2015, a 2% rise from 2014. The net operating results for 2015, expressed as a rate of return on average tangible assets and average tangible common shareholders’ equity, were 1.18% and 13.00%, respectively.

M&T Bank’s primary source of revenue is net interest income, comprised of interest received on loans and investments, less interest paid on deposits and borrowings, which, expressed on a taxable-equivalent basis, was $2.9 billion for 2015, an increase of 6% from the prior year. Two somewhat o?setting factors combined to a?ect that rate of growth. First, average earning assets increased by $9.5 billion or 12%. Tempering the positive contribution from that growth, however, was a narrowing of the net interest margin, which is taxable-equivalent net interest income expressed as a percentage of average earning assets. Let’s review the details.

Average loans notched a 10% increase of $6.2 billion, rising to $70.8 billion, while average holdings of investment securities grew by $2.9 billion to nearly $14.5 billion. Those investment securities expanded M&T’s layer of high-quality liquid assets, funds which otherwise could be used to expand lending, but which are being held in reserve so that they can be readily turned into cash in times of economic stress. Total loans at December 31, 2015 were $87.5 billion, inclusive of loans acquired from Hudson City.

The net interest margin was 3.14% in 2015, a decrease of 17 basis points from 3.31% the year before. The pressure on the net interest margin continued as a result of the low interest rate environment that prevailed throughout most of the year. Those pressures began to ease in late December, when the Federal Reserve raised its benchmark interest rate by 0.25%—the first increase since June 2006, some nine and a half years ago.

As the economy continued to improve during the year, however slowly, the repayment performance of M&T Bank’s loan portfolio remained steady. Net charge-offs expressed as a percentage of average loans outstanding were 0.19%, unchanged from the same figure in 2014 and just over half the bank’s long-term average of 0.36% since 1983. Expressed in dollar terms, net charge-offs were $134 million, compared with $121 million in the prior year. M&T Bank’s allowance for losses on loans and leases stood at $956 million as of December 31, 2015, representing 1.09% of loans outstanding.

Non-interest income from fees and other sources totaled $1.8 billion in 2015, an increase of 3% from 2014. Revenues from mortgage banking increased by 4% over the prior year to $376 million. Trust income declined by 7% to $471 million, which reflects the April divestiture of Wilmington Trust’s trade processing business and its associated revenues. This transaction is representative of our efforts to direct resources towards services that will provide the most value to our clients over time. In connection with the divestiture, M&T realized a $45 million gain, included in other revenue from operations.

Non-interest expense increased to $2.8 billion, up from $2.7 billion in the previous year. The increase primarily reflects the impact of the Hudson City merger, which includes two months of its operating expenses as well as $76 million of pre-tax merger-related expenses. The efficiency ratio, the cost to produce a dollar of revenue expressed in percentage terms, improved from 2014 by 1.31 percentage points, to 57.98%. Adjusting for the impact of the merger and a $40 million contribution to the M&T Charitable Foundation made in the second quarter, expenses declined slightly from 2014.

Upon reflection, our financial performance and condition in 2015 merit no small measure of pride. Considering the environment, our businesses have performed remarkably well. The retail banking business opened 178,119 consumer checking accounts, issued 38,001 credit cards, originated 63,665 auto loans totaling $1.5 billion and wrote 20,234 mortgages totaling $4.2 billion. On the commercial side, 17,714 loans totaling $19.4 billion were underwritten. Wilmington Trust was appointed to act as the trustee or agent on 4,149 new corporate debt, loan agency, structured finance and equipment finance transactions generating over $8 billion of average deposit and investment fund balances. The wealth advisory services group was engaged by 330 new clients to provide them with services to manage and preserve their assets.

M&T Bank’s fundamental performance in 2015, against the backdrop of the competitive environment and the significant investment made in its risk management infrastructure, remained strong relative to the industry, as evidenced by a return on tangible common equity of 13.0%, which is above the median of the 20 largest commercial bank holding companies headquartered in the United States. Over the past year, M&T’s tangible book value per share, an important measure of value creation for investors, grew by 12.7%, significantly outpacing this entire group. Over the past five years, our compound annualized growth rate of 14.1% was exceeded by just two others.

M&T Bank has long prided itself on a patient approach to mergers and acquisitions, entering into partnerships that made sense and which were additive to shareholder value. We are not motivated by

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