M&T Bank Corporation annual report for the year ended December 2015.
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 growth for growth’s sake and, even while cognizant of gaps that may exist in our geographic footprint, prudence has always dictated that we wait for the right opportunities for expansion. Such was the case with Hudson City, in which we moved in a meaningful way into new, adjacent markets with 135 branches utilized by 217,707 consumer households with 553,067 accounts. The fact that this merger was immediately accretive to operating earnings and tangible book value per share, and brought an increase of as much as 80 basis points to our regulatory capital ratios, demonstrates our unwavering commitment to the careful stewardship of our shareholders’ capital.
M&T Bank Corporation – Our Evolving Approach
In 1983, or 33 years ago, I became Chief Executive Officer of M&T Bank.
During that period, the bank’s total assets have grown from $2.1 billion to $122.8 billion. Concurrently, its earnings grew from $5.3 million to $1.1 billion, its personnel complement from 2,096 to 17,476 and its branches from 59 to 811. The value of its shares grew at a compounded rate of 14.8%—the best return of the 100 largest banks that were in existence at that time—only 23 of which are still around today. M&T Bank is among the eight banks that are able to borrow money in the public marketplace at the narrowest of spreads and is one of just seven banks out of the top 20 that have a rating of B+ or better in the S&P Stock Guide. During the financial crisis, it was one of just two commercial banks out of 20 then included in the S&P 500 that did not reduce its dividend, and at no point in the last 33 years has it had to raise additional common equity in the public markets. Within the entire universe of 586 U.S. publicly traded stocks that have traded continuously since January 1, 1980, M&T’s annualized total return through the end of 2015, including reinvested dividends, of 18.7% ranks twenty-fifth. Berkshire Hathaway, widely considered the gold standard for shareholder returns, returned 19.5%, ranking sixteenth in the same analysis.
The bank continues to maintain its headquarters in Buffalo, New York, where it was founded 160 years ago and where today almost 40% of our employees still work. Until 2003, save for a boutique operation in New York City, M&T’s franchise was essentially located in Rust Belt cities that are poorer than the national average—many in locations where people know when you are born and care when you die.
M&T Bank has always focused on serving its communities. It has had the highest possible Community Reinvestment Act (“CRA”) rating from its federal regulator since 1983. M&T encourages its colleagues to get involved with those institutions that enhance a community’s quality of life, and it has made $190 million in charitable contributions during the past 10 years. Last year alone, M&T employees contributed 307,873 hours of their time and served on 2,115 not-for-profit boards.
The bank also spends a great deal of time recruiting and developing its colleagues. In the last 10 years it has, without interruption, continued its long-standing practice of adding young talent to its ranks, enlisting 842 recent college and business school graduates into its training programs. These young people—combined with more seasoned external hires, all of whom bring a widely varied set of backgrounds and viewpoints—engender diversity that broadens our perspective, enriches the workplace and ultimately results in better dialogue. The bank further establishes bench strength by rotating high potential colleagues into different disciplines and geographies. Today, there are more than 800 who have worked in two locations, and 84 in three.
M&T Bank has 14 members on its Management Committee and they have been with the bank an average of 25 years. Bank-wide, the tenure of M&T’s employees averages 10.4 years—more than twice that of the financial services industry. These colleagues exhibit an intense personal responsibility to the bank and to one another. Their tenure and tenacity have meant that the bank has always gone the extra mile to correct any single mistake in its transactions or weakness in its overall systems.
M&T Bank concentrates on details—on getting things right no matter the amount of work involved—and demands the highest moral conduct of its colleagues. Fundamentally, M&T focuses on its clients and tries to do the right thing the right way. Taken together, these traits are part of the bank’s culture—overarching principles that have been essential to its success. It is in this context, with a sense of humility, that we say it should not have required a reminder from our regulators that stronger systems, programs and infrastructure were needed for a bank of our current size and complexity. We fell behind in building our risk management processes and have come to learn—the hard way—that the task of catching up is far more costly than simply keeping pace. This is a lesson that we have embraced and will not readily forget. The experience of the past three years has been additive to our cultural DNA.
We have worked tirelessly since 2013 to put our house in order. M&T Bank has engaged 12 consulting firms at an aggregate cost of $178 million over that time. The team handling the anti-money laundering program, consumer and corporate compliance, as well as capital planning and stress testing and other risk management areas increased from 128 to 807. Our overall cost of compliance, which peaked at $441 million in 2014, retreated somewhat to $432 million last year.
M&T Bank has built a vast and intricate system for capturing and tracking additional information and augmenting knowledge of our customers. We have already completed reviews of 71% of our 3,558,681 M&T clients that are required to go through the new process for determining risk of money laundering or other financial crimes. Imagine the permutations of letters, emails, phone calls and meetings it took to gather the required intelligence. We are cognizant of the inconvenience to our customers and aware that it came as the result of our having to play catch-up. By our own estimate, it was necessary to contact some individuals or businesses nearly five times to successfully collect the needed material. While we regret the necessity of putting our customers through this process, we do not regret the fact that we are now closer to those customers and know them better than ever before. And given the intensity with which we have tracked down the additional data, they most assuredly know us!
In addition to updating client profiles, the bank continues to screen transactions for suspicious activity. In 2015, M&T Bank’s automated monitoring system reviewed 768,984,034 transactions for signs of suspicious activity. Such scrutiny, along with the use of other money laundering detection tools, may help in uncovering financial crimes, money laundering or a terrorist cell by flagging transactions emanating from local establishments to notorious locations around the world.
So too has our capital governance process, put in place to ensure the bank’s capital structure is sufficiently robust, strengthened our internal planning and improved risk awareness across the bank. The publicly disclosed results of this process give the investment community more insight as to how M&T and its peers would perform in stressed economic conditions.
New capital rules provide better differentiation among the types of activities that M&T and other banks engage in by applying higher risk-weightings to assets such as equity exposures, certain trading portfolios, derivatives and securitizations, whether accounted for on or off bank balance sheets.
M&T Bank’s risk management infrastructure is, without a doubt, broader and more comprehensive. A steadfast commitment spans the organization, including intense involvement from both executive management and the Board of Directors. The Risk Committee of the Board provides oversight of a robust risk governance structure and, last year, convened 16 times to review 5,673 pages of materials and produced 141 pages of minutes. Executive management is actively engaged through the Management Risk Committee, which serves as the central forum for the identification and escalation of key risks. Organized under that body are eight Risk Governance Committees, each of which has oversight of a specific risk category. Since the implementation of this governance regime nearly two years ago, these committees have met 222 times to discuss existing, new and emerging risks, reviewed 34,196 pages of presentations and reports and produced 1,329 pages of meeting minutes. The comprehensive reach of the risk management framework that spans 189 committees across the bank has become a catalyst for improvement. For example, the quality of data has been enhanced, as has the transparency of information. The organization is, as a matter of consequence, more vigilant and more adept at policing itself.
There is little question that the lens of time has sharpened our perspective. M&T needed to improve its foundational infrastructure in order to deal with the challenges and pace of change of the world today. The bank has reinforced its risk management in a manner designed to support an organization that aspires to grow. This is not to say that our work is done—ongoing investment in compliance, technology, systems and personnel will be needed to keep pace with the evolving financial industry landscape well into the future.
M&T Bank Corporation – The Role Of Traditional Banking
It is hardly the case that M&T Bank and 6,174 other U.S. banks and thrifts are entirely content with the current environment in which we operate. The U.S., and indeed the global economy, suffered a financial crisis of horrific proportions—one in which a handful of banks, but not all, played a pivotal role. In its wake, public officials, reflecting the mood of the public at large, demanded change—and change, most assuredly, they have seen. Yet, from a banker’s perspective, the very word “bank” continues to be convenient political shorthand for financial shenanigans. For institutions that see local banking as both a service and a calling, convincing officials of our good intentions feels like a Sisyphean task.
Just as M&T Bank needed to keep pace with the rapid changes that have occurred in the world since the crisis, so too must the industry, the government and the public be cognizant of the need to stay abreast of the swiftly changing environment and move forward.
Since the 1980s, government agencies, regulators and politicians, in combination with market forces, have shifted the equilibrium of the banking industry. New entrants, public policy and enhanced regulatory oversight have all contributed to this change. In this environment, just at a time when disadvantaged members of our communities are in need, regional banks find themselves playing a diminished role in their traditional activity of supporting economic growth by taking deposits, extending credit and facilitating trade and commerce. A restoration of those crucial roles will require a healthier dialogue between bankers and regulators, an appreciation of the unintended consequences of new policies, a grasp of the implications of technological change, and an understanding of the rapidly evolving financial services industry as a whole.
IMPROVING THE DIALOGUE: Though small and mid-sized banks played little, if any, role in the crisis, they have been swept into this vast change, and the resulting disproportionate burden is distracting them from their traditional focus on servicing local families, businesses and farmers. Despite a shared objective of maintaining the safety and soundness of the financial system, today’s banking environment is typified by a relationship between institutions and governing agencies that is less than collaborative—a product, it seems, of a political atmosphere where pressure remains upon banks to prove themselves reformed.
There is sometimes a lack of coordination among different agencies. Post-crisis regulation conferred new powers and created new governing bodies. Each agency is attempting to administer and exercise its granted authority. However, various regulatory organizations can have different criteria for assessing the same issue. For example, M&T had three different agencies analyze its mortgage portfolio, and each required a unique sample of mortgages that the other two had not seen. In 2015, M&T Bank underwent 36 different inspections across 10 agencies. Each review brought as many as 15 regulators to the bank and, at one point last year, eight exams were being conducted simultaneously. In the past, some of the supervisory bodies conducted their examinations together, compiled their findings, and then made a joint presentation to an organization’s board of directors. More recently, such reviews have been conducted separately and accompanied by individual written reports and presentations to a bank’s board. This inevitably results in fragmented assessments of banks and makes it difficult for banks in defining priorities to facilitate necessary change.
A measure of improved coordination could help in reducing some of the unnecessary duplicative work needed to fulfill regulatory requests, and free up resources to make faster progress in reforming the system, allowing for a rebalancing of our responsibilities toward serving our customers.
Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”)—an agency whose mandate is as simple as it is broad: consumer protection. For 72 years, the Federal Trade Commission was tasked with protecting consumers from “unfair” or “deceptive” business practices. With its inception, Dodd-Frank added the term “abusive.” Although the CFPB has power under the law to promulgate regulations to ensure clarity, no further definition of this term has been published, creating a “you’ll know it—when I see it” atmosphere, leaving banks uncertain about what is required to remain above reproach.
While these are but a few examples, the recurring theme is that banks have been working with new regulations that are constantly evolving, sometimes with a lack of clarity, but always with a certain degree of urgency. In that regard, M&T Bank is no different from regional banks that have always endeavored to provide banking services in a manner that governing agencies, shareholders, clients and communities would find exemplary. However, that task becomes increasingly difficult when the rules of the game and the supervisory process are, at times, managed in a conflicting manner. Amidst the uncertainty and angst that this engenders, it is difficult for traditional banks to use their renewed culture, fortified by heightened risk management and compliance discipline, in the service of their core mission.
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