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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York    16-0968385

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

One M & T Plaza

Buffalo, New York

   14203
(Address of principal executive offices)    (Zip Code)

(716) 635-4000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on October 31, 2014: 132,111,892 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2014

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements.

  
 

CONSOLIDATED BALANCE SHEET - September 30, 2014 and December 31, 2013

     3   
 

CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2014 and 2013

     4   
 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three and nine months ended September 30, 2014 and 2013

     5   
 

CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2014 and 2013

     6   
 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Nine months ended September  30, 2014 and 2013

     7   
 

NOTES TO FINANCIAL STATEMENTS

     8   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     55   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

     102   

Item 4.

 

Controls and Procedures.

     102   

Part II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings.

     102   

Item 1A.

 

Risk Factors.

     103   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

     104   

Item 3.

 

Defaults Upon Senior Securities.

     104   

Item 4.

 

Mine Safety Disclosures.

     104   

Item 5.

 

Other Information.

     104   

Item 6.

 

Exhibits.

     105   

SIGNATURES

     105   

EXHIBIT INDEX

     106   

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share

   September 30,
2014
    December 31,
2013
 

Assets

       
  

Cash and due from banks

   $ 1,445,877        1,573,361   
  

Interest-bearing deposits at banks

     7,676,064        1,651,138   
  

Federal funds sold

     77,766        99,573   
  

Trading account

     296,913        376,131   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,634,682 at September 30, 2014; $1,696,438 at December 31, 2013)

    
  

Available for sale (cost: $9,175,295 at September 30, 2014; $4,444,365 at December 31, 2013)

     9,384,017        4,531,786   
  

Held to maturity (fair value: $3,621,391 at September 30, 2014; $3,860,127 at December 31, 2013)

     3,635,815        3,966,130   
  

Other (fair value: $328,536 at September 30, 2014; $298,581 at December 31, 2013)

     328,536       298,581   
     

 

 

   

 

 

 
  

Total investment securities

     13,348,368       8,796,497   
     

 

 

   

 

 

 
  

Loans and leases

     65,800,972       64,325,783   
  

Unearned discount

     (228,613 )     (252,624
     

 

 

   

 

 

 
  

Loans and leases, net of unearned discount

     65,572,359        64,073,159   
  

Allowance for credit losses

     (918,633     (916,676
     

 

 

   

 

 

 
  

Loans and leases, net

     64,653,726       63,156,483   
     

 

 

   

 

 

 
  

Premises and equipment

     612,076        633,520   
  

Goodwill

     3,524,625        3,524,625   
  

Core deposit and other intangible assets

     42,197        68,851   
  

Accrued interest and other assets

     5,550,730       5,282,212   
     

 

 

   

 

 

 
  

Total assets

   $ 97,228,342       85,162,391   
     

 

 

   

 

 

 

Liabilities

       
  

Noninterest-bearing deposits

   $ 27,440,524        24,661,007   
  

NOW accounts

     2,098,577        1,989,441   
  

Savings deposits

     41,389,867        36,621,580   
  

Time deposits

     3,170,998        3,523,838   
  

Deposits at Cayman Islands office

     241,536        322,746   
     

 

 

   

 

 

 
  

Total deposits

     74,341,502       67,118,612   
     

 

 

   

 

 

 
  

Federal funds purchased and agreements to repurchase securities

     164,609        260,455   
  

Accrued interest and other liabilities

     1,327,524        1,368,922   
  

Long-term borrowings

     9,061,391        5,108,870   
     

 

 

   

 

 

 
  

Total liabilities

     84,895,026       73,856,859   
     

 

 

   

 

 

 

Shareholders’ equity

  

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at September 30, 2014; 381,500 shares at December 31, 2013; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2014 and December 31, 2013

     1,231,500        881,500   
  

Common stock, $.50 par, 250,000,000 shares authorized, 132,100,384 shares issued at September 30, 2014; 130,516,364 shares issued at December 31, 2013

     66,050        65,258   
  

Common stock issuable, 41,261 shares at September 30, 2014; 47,231 shares at December 31, 2013

     2,590        2,915   
  

Additional paid-in capital

     3,377,714        3,232,014   
  

Retained earnings

     7,642,995        7,188,004   
  

Accumulated other comprehensive income (loss), net

     12,467        (64,159
     

 

 

   

 

 

 
  

Total shareholders’ equity

     12,333,316       11,305,532   
     

 

 

   

 

 

 
  

Total liabilities and shareholders’ equity

   $ 97,228,342       85,162,391   
     

 

 

   

 

 

 

 

- 3 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended September 30     Nine months ended September 30  

In thousands, except per share

   2014     2013     2014     2013  

Interest income

  

Loans and leases, including fees

   $ 647,280        683,482      $ 1,937,531        2,071,332   
  

Investment securities

        
  

Fully taxable

     91,036        55,746        250,145        141,799   
  

Exempt from federal taxes

     1,271        1,617        4,068        5,223   
  

Deposits at banks

     3,198        1,650        7,617        3,372   
  

Other

     238        191        904        1,142   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest income

     743,023        742,686        2,200,265       2,222,868   
     

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

  

NOW accounts

     394        333        1,021        976   
  

Savings deposits

     11,532        13,733        34,314        41,560   
  

Time deposits

     3,805        6,129        11,600        21,809   
  

Deposits at Cayman Islands office

     161        213        550        801   
  

Short-term borrowings

     19        58        76        385   
  

Long-term borrowings

     58,053        49,112        158,098        150,592   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest expense

     73,964        69,578        205,659       216,123   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net interest income

     669,059        673,108        1,994,606        2,006,745   
  

Provision for credit losses

     29,000        48,000        91,000       143,000   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net interest income after provision for credit losses

     640,059        625,108        1,903,606       1,863,745   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other income

  

Mortgage banking revenues

     93,532        64,731        269,237        249,096   
  

Service charges on deposit accounts

     110,071        113,839        321,637        336,505   
  

Trust income

     128,671        123,801        379,816        370,132   
  

Brokerage services income

     17,416        16,871        51,403        49,840   
  

Trading account and foreign exchange gains

     6,988        8,987        21,477        27,138   
  

Gain on bank investment securities

     —          —          —          56,457   
  

Total other-than-temporary impairment (“OTTI”) losses

     —          —          —          (1,884
  

Portion of OTTI losses recognized in other comprehensive income (before taxes)

     —          —          —          (7,916
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net OTTI losses recognized in earnings

     —          —          —          (9,800
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Equity in earnings of Bayview Lending Group LLC

     (4,114     (3,881     (12,623     (9,990
  

Other revenues from operations

     98,547        153,040        296,683       349,581   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other income

     451,111        477,388        1,327,630       1,418,959   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

  

Salaries and employee benefits

     348,776        339,332        1,059,815        1,019,019   
  

Equipment and net occupancy

     67,713        66,220        206,964        195,657   
  

Printing, postage and supplies

     9,184        9,752        29,320        30,749   
  

Amortization of core deposit and other intangible assets

     7,358        10,628        26,654        36,473   
  

FDIC assessments

     13,193        14,877        43,836        52,010   
  

Other costs of operations

     233,060        217,817        696,160        558,905   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other expense

     679,284        658,626        2,062,749       1,892,813   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Income before taxes

     411,886        443,870        1,168,487        1,389,891   
  

Income taxes

     136,542        149,391        379,790       472,833   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net income

   $ 275,344        294,479      $ 788,697       917,058   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net income available to common shareholders

        
  

Basic

   $ 251,905        275,336      $ 724,307        858,944   
  

Diluted

     251,917        275,356        724,344        859,000   
  

Net income per common share

        
  

Basic

   $ 1.92        2.13      $ 5.54        6.69   
  

Diluted

     1.91        2.11        5.50        6.64   
  

Cash dividends per common share

   $ .70        .70      $ 2.10        2.10   
  

Average common shares outstanding

        
  

Basic

     131,265        129,171        130,782        128,369   
  

Diluted

     132,128        130,265        131,698        129,312   

 

- 4 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended September 30      Nine months ended September 30  

In thousands

   2014     2013      2014     2013  

Net income

   $ 275,344        294,479       $ 788,697        917,058   

Other comprehensive income (loss), net of tax and reclassification adjustments:

         

Net unrealized gains (losses) on investment securities

     (27,637     23,367         75,229        26,724   

Reclassification to income for amortization of gains on terminated cash flow hedges

     613        —           (98     —     

Foreign currency translation adjustment

     (1,817     1,251         (1,504     205   

Defined benefit plans liability adjustment

     1,000        5,091         2,999        15,273   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

     (27,841     29,709         76,626        42,202   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 247,503        324,188       $ 865,323        959,260   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

- 5 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Nine months ended September 30  

In thousands

        2014     2013  

Cash flows from operating activities

  

Net income

   $ 788,697        917,058   
  

Adjustments to reconcile net income to net cash provided by operating activities

    
  

Provision for credit losses

     91,000        143,000   
  

Depreciation and amortization of premises and equipment

     74,516        66,547   
  

Amortization of capitalized servicing rights

     51,572        46,966   
  

Amortization of core deposit and other intangible assets

     26,654        36,473   
  

Provision for deferred income taxes

     33,777        93,229   
  

Asset write-downs

     5,114        16,204   
  

Net gain on sales of assets

     (3,771     (124,375
  

Net change in accrued interest receivable, payable

     9,638        (2,819
  

Net change in other accrued income and expense

     (89,425     115,400   
  

Net change in loans originated for sale

     (224,425     (808,778
  

Net change in trading account assets and liabilities

     11,163       4,772   
     

 

 

   

 

 

 
  

Net cash provided by operating activities

     774,510       503,677   
     

 

 

   

 

 

 

Cash flows from investing activities

  

Proceeds from sales of investment securities

    
  

Available for sale

     16        1,081,747   
  

Other

     23,309        12,994   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     686,183        887,092   
  

Held to maturity

     337,677        216,627   
  

Purchases of investment securities

    
  

Available for sale

     (5,310,246     (41,358
  

Held to maturity

     (15,202     (1,586,425
  

Other

     (53,264     (8,825
  

Net (increase) decrease in loans and leases

     (1,420,572     905,491   
  

Net increase in interest-bearing deposits at banks

     (6,024,926     (1,795,866
  

Capital expenditures, net

     (50,400     (85,964
  

Net increase in loan servicing advances

     (340,750     (185,507
  

Other, net

     38,707       37,860   
     

 

 

   

 

 

 
  

Net cash used by investing activities

     (12,129,468 )     (562,134
     

 

 

   

 

 

 

Cash flows from financing activities

  

Net increase in deposits

     7,225,487        604,311   
  

Net decrease in short-term borrowings

     (95,846     (828,463
  

Proceeds from long-term borrowings

     4,345,478        799,760   
  

Payments on long-term borrowings

     (373,642     (258,937
  

Proceeds from issuance of preferred stock

     346,500        —     
  

Dividends paid - common

     (278,118     (273,518
  

Dividends paid - preferred

     (46,966     (31,494
  

Other, net

     82,774       119,936   
     

 

 

   

 

 

 
  

Net cash provided by financing activities

     11,205,667       131,595   
     

 

 

   

 

 

 
  

Net increase (decrease) in cash and cash equivalents

     (149,291     73,138   
  

Cash and cash equivalents at beginning of period

     1,672,934        1,986,615   
     

 

 

   

 

 

 
  

Cash and cash equivalents at end of period

   $ 1,523,643       2,059,753   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

  

Interest received during the period

   $ 2,147,236        2,184,128   
  

Interest paid during the period

     185,377        226,335   
  

Income taxes paid during the period

     329,621       331,117   
     

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

  

Securitization of residential mortgage loans allocated to

    
  

Available for sale investment securities

   $ 110,971        1,807,180   
  

Held to maturity investment securities

     —          917,045   
  

Capitalized servicing rights

     1,429        29,264   
  

Real estate acquired in settlement of loans

     35,422        35,865   

 

- 6 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share

   Preferred
stock
     Common
stock
     Common
stock
issuable
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
(loss), net
    Total  

2013

                

Balance - January 1, 2013

   $ 872,500         64,088         3,473        3,025,520        6,477,276        (240,264     10,202,593   

Total comprehensive income

     —           —           —          —          917,058        42,202        959,260   

Preferred stock cash dividends

     —           —           —          —          (40,088     —          (40,088

Amortization of preferred stock discount

     6,510         —           —          —          (6,510     —          —     

Exercise of 407,542 Series C stock warrants into 186,589 shares of common stock

     —           93         —          (93     —          —          —     

Exercise of 57,327 Series A stock warrants into 21,130 shares of common stock

     —           11         —          (11     —          —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           147         —          29,826        —          —          29,973   

Exercises of stock options, net

     —           747         —          133,981        —          —          134,728   

Directors’ stock plan

     —           6         —          1,223        —          —          1,229   

Deferred compensation plans, net, including dividend equivalents

     —           5         (584     568        (98     —          (109

Other

     —           —           —          1,967        —          —          1,967   

Common stock cash dividends - $2.10 per share

     —           —           —          —          (273,351     —          (273,351
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - September 30, 2013

   $ 879,010        65,097        2,889        3,192,981       7,074,287        (198,062 )     11,016,202   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2014

                

Balance - January 1, 2014

   $ 881,500         65,258         2,915        3,232,014        7,188,004        (64,159     11,305,532   

Total comprehensive income

     —           —           —          —          788,697        76,626        865,323   

Preferred stock cash dividends

     —           —           —          —          (55,560     —          (55,560

Issuance of Series E preferred stock

     350,000         —           —          (3,500     —          —          346,500   

Exercise of 395,905 Series A stock warrants into 156,521 shares of common stock

     —           78         —          (78     —          —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           128         —          34,117        —          —          34,245   

Exercises of stock options, net

     —           535         —          102,695        —          —          103,230   

Stock purchase plan

     —           43         —          9,545        —          —          9,588   

Directors’ stock plan

     —           5         —          1,266        —          —          1,271   

Deferred compensation plans, net, including dividend equivalents

     —           3         (325     335        (87     —          (74

Other

     —           —           —          1,320        —          —          1,320   

Common stock cash dividends - $2.10 per share

     —           —           —          —          (278,059     —          (278,059
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - September 30, 2014

   $ 1,231,500        66,050        2,590        3,377,714       7,642,995        12,467       12,333,316   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 7 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS

 

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2013 Annual Report. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

 

2. Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of September 30, 2014, total consideration to be paid was valued at approximately $5.4 billion.

At September 30, 2014, Hudson City had $37.2 billion of assets, including $22.4 billion of loans and $8.4 billion of investment securities, and $32.3 billion of liabilities, including $20.0 billion of deposits. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals.

On June 17, 2013, M&T and Manufacturers and Traders Trust Company (“M&T Bank”), M&T’s principal banking subsidiary, entered into a written agreement with the Federal Reserve Bank of New York (“Federal Reserve Bank”). Under the terms of the agreement, M&T and M&T Bank are required to submit to the Federal Reserve Bank a revised compliance risk management program designed to ensure compliance with the Bank Secrecy Act and anti-money-laundering laws and regulations and to take certain other steps to enhance their compliance practices. The Company has commenced a major initiative, including the hiring of outside consulting firms, intended to fully address the Federal Reserve Bank’s concerns. In view of the timeframe required to implement this initiative, demonstrate its efficacy to the satisfaction of the Federal Reserve Bank and otherwise meet any other regulatory requirements that may be imposed in connection with these matters, M&T and Hudson City extended the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed to December 31, 2014. Nevertheless, there can be no assurances that the merger will be completed by that date.

In connection with the pending acquisition, the Company incurred merger-related expenses related to preparing for systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with planning for the conversion of systems and/or integration of operations; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; travel costs; and printing, postage, supplies and other costs of planning for the transaction and commencing operations in new markets and offices.

 

- 8 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

A summary of merger-related expenses in 2013 associated with the pending Hudson City acquisition included in the consolidated statement of income is presented below. There were no merger-related expenses during the three-month or nine-month periods ended September 30, 2014, or during the three-month period ended September 30, 2013.

 

     Nine months ended
September 30, 2013
 
     (in thousands)  

Salaries and employee benefits

   $ 836   

Equipment and net occupancy

     690   

Printing, postage and supplies

     1,825   

Other costs of operations

     9,013   
  

 

 

 
   $ 12,364   
  

 

 

 

 

3. Investment securities

The amortized cost and estimated fair value of investment securities were as follows:

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair value
 
     (in thousands)  

September 30, 2014

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 166,092         206         111       $ 166,187   

Obligations of states and political subdivisions

     9,174         270         53         9,391   

Mortgage-backed securities:

           

Government issued or guaranteed

     8,751,108         145,708         2,765         8,894,051   

Privately issued

     112         4         4         112   

Collateralized debt obligations

     30,788         24,383         363         54,808   

Other debt securities

     138,278         2,304         15,183         125,399   

Equity securities

     79,743         54,732         406         134,069   
  

 

 

    

 

 

    

 

 

    

 

 

 
     9,175,295         227,607         18,885         9,384,017   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     151,789         3,284         92         154,981   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,269,344         50,477         18,196         3,301,625   

Privately issued

     206,695         —           49,897         156,798   

Other debt securities

     7,987         —           —           7,987   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,635,815         53,761         68,185         3,621,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     328,536         —           —           328,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,139,646         281,368         87,070       $ 13,333,944   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 9 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair value
 
     (in thousands)  

December 31, 2013

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 37,396         382         2       $ 37,776   

Obligations of states and political subdivisions

     10,484         333         6         10,811   

Mortgage-backed securities:

           

Government issued or guaranteed

     4,123,435         61,001         19,350         4,165,086   

Privately issued

     1,468         387         5         1,850   

Collateralized debt obligations

     42,274         21,666         857         63,083   

Other debt securities

     137,828         1,722         19,465         120,085   

Equity securities

     91,480         41,842         227         133,095   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,444,365         127,333         39,912         4,531,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     169,684         3,744         135         173,293   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,567,905         16,160         65,149         3,518,916   

Privately issued

     219,628         —           60,623         159,005   

Other debt securities

     8,913         —           —           8,913   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,966,130         19,904         125,907         3,860,127   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     298,581         —           —           298,581   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,709,076         147,237         165,819       $ 8,690,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no gross realized gains or losses from the sale of investment securities for the three-month and nine-month periods ended September 30, 2014 or for the three-month period ended September 30, 2013. Gross realized gains on investment securities were $116 million for the nine-month period ended September 30, 2013. During the second quarter of 2013, the Company sold its holdings of Visa Class B shares for a gain of approximately $90 million and its holdings of MasterCard Class B shares for a gain of $13 million. Gross realized losses on investment securities were $60 million for the nine-month period ended September 30, 2013. During the second quarter of 2013, the Company sold substantially all of its privately issued mortgage-backed securities that had been held in the available-for-sale investment securities portfolio. In total, $1.0 billion of such securities were sold for a net loss of approximately $46 million.

There were $10 million of pre-tax other-than-temporary impairment (“OTTI”) losses recognized during the first quarter of 2013 related to privately issued mortgage-backed securities. The impairment charges were recognized in light of deterioration of real estate values and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The OTTI losses represented management’s estimate of credit losses inherent in the debt securities considering projected cash flows using assumptions for delinquency rates, loss severities, and other estimates for future collateral performance. The Company did not recognize any OTTI losses during the first nine months of 2014 or during the second and third quarters of 2013.

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

Changes in credit losses associated with debt securities for which OTTI losses had been recognized in earnings for the three months and nine months ended September 30, 2013 follow:

 

    Three months ended
September 30, 2013
    Nine months ended
September 30, 2013
 
    (in thousands)  

Beginning balance

  $ 794        197,809   

Additions for credit losses not previously recognized

    —          9,800   

Reductions for realized losses

    (626     (207,441
 

 

 

   

 

 

 

Ending balance

  $ 168        168   
 

 

 

   

 

 

 

There were no significant credit losses associated with debt securities held by the Company as of September 30, 2014 or December 31, 2013.

At September 30, 2014, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:

 

     Amortized
cost
     Estimated
fair value
 
     (in thousands)  

Debt securities available for sale:

     

Due in one year or less

   $ 12,359         12,439   

Due after one year through five years

     164,546         164,995   

Due after five years through ten years

     4,322         4,456   

Due after ten years

     163,105         173,895   
  

 

 

    

 

 

 
     344,332         355,785   

Mortgage-backed securities available for sale

     8,751,220         8,894,163   
  

 

 

    

 

 

 
   $ 9,095,552         9,249,948   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 21,190         21,354   

Due after one year through five years

     80,804         82,554   

Due after five years through ten years

     49,795         51,073   

Due after ten years

     7,987         7,987   
  

 

 

    

 

 

 
     159,776         162,968   

Mortgage-backed securities held to maturity

     3,476,039         3,458,423   
  

 

 

    

 

 

 
   $ 3,635,815         3,621,391   
  

 

 

    

 

 

 

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of September 30, 2014 and December 31, 2013 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:

 

     Less than 12 months     12 months or more  
     Fair value      Unrealized
losses
    Fair value      Unrealized
losses
 
     (in thousands)  

September 30, 2014

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 104,495         (111     —           —     

Obligations of states and political subdivisions

     1,756         (52     323         (1

Mortgage-backed securities:

          

Government issued or guaranteed

     1,420,096         (2,560     8,006         (205

Privately issued

     —           —          72         (4

Collateralized debt obligations

     2,436         (340     5,871         (23

Other debt securities

     4,506         (58     95,497         (15,125

Equity securities

     2,264         (406     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,535,553         (3,527     109,769         (15,358
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     15,456         (77     1,836         (15

Mortgage-backed securities:

          

Government issued or guaranteed

     180,033         (1,168     705,988         (17,028

Privately issued

     —           —          156,798         (49,897
  

 

 

    

 

 

   

 

 

    

 

 

 
     195,489         (1,245     864,622         (66,940
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,731,042         (4,772     974,391         (82,298
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2013

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 745         (2     —           —     

Obligations of states and political subdivisions

     —           —          558         (6

Mortgage-backed securities:

          

Government issued or guaranteed

     1,697,094         (19,225     5,815         (125

Privately issued

     —           —          98         (5

Collateralized debt obligations

     —           —          6,257         (857

Other debt securities

     1,428         (4     103,602         (19,461

Equity securities

     159         (227     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,699,426         (19,458     116,330         (20,454
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     13,517         (120     1,558         (15

Mortgage-backed securities:

          

Government issued or guaranteed

     2,629,950         (65,149     —           —     

Privately issued

     —           —          159,005         (60,623
  

 

 

    

 

 

   

 

 

    

 

 

 
     2,643,467         (65,269     160,563         (60,638
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,342,893         (84,727     276,893         (81,092
  

 

 

    

 

 

   

 

 

    

 

 

 

 

- 12 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 386 individual investment securities with aggregate gross unrealized losses of $87 million at September 30, 2014. Based on a review of each of the securities in the investment securities portfolio at September 30, 2014, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 30, 2014, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At September 30, 2014, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $329 million of cost method investment securities.

 

4. Loans and leases and the allowance for credit losses

The outstanding principal balance and the carrying amount of acquired loans that were recorded at fair value at the acquisition date and included in the consolidated balance sheet follow:

 

     September 30,
2014
     December 31,
2013
 
     (in thousands)  

Outstanding principal balance

   $ 3,416,175         4,656,811   

Carrying amount:

     

Commercial, financial, leasing, etc.

     299,161         580,685   

Commercial real estate

     1,094,030         1,541,368   

Residential real estate

     485,365         576,473   

Consumer

     1,013,238         1,308,926   
  

 

 

    

 

 

 
   $ 2,891,794         4,007,452   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $237 million at September 30, 2014 and $331 million at December 31, 2013, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for acquired loans for the three months and nine months ended September 30, 2014 and 2013 follows:

 

     Three months ended September 30  
     2014     2013  
     Purchased
impaired
    Other
acquired
    Purchased
impaired
    Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 26,082        450,970      $ 55,149        622,093   

Interest income

       (4,149       (39,019     (10,428       (60,786

Reclassifications from nonaccretable balance, net

     129        9,673        172        —     

Other (a)

     —          1,870        —          6,254   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,062        423,494      $ 44,893        567,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine months ended September 30  
     2014     2013  
     Purchased
impaired
    Other
acquired
    Purchased
impaired
    Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 37,230        538,633      $ 42,252        638,272   

Interest income

     (15,583     (135,105     (28,879     (190,072

Reclassifications from nonaccretable balance, net

     415        10,448        31,520        122,519   

Other (a)

     —          9,518        —          (3,158
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,062        423,494      $ 44,893        567,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Other changes in expected cash flows including changes in interest rates and prepayment assumptions.

 

- 13 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

A summary of current, past due and nonaccrual loans as of September 30, 2014 and December 31, 2013 follows:

 

            30-89      90 Days or
more past
due and accruing
     Purchased                
     Current      Days
past due
     Non-
acquired
     Acquired
(a)
     impaired
(b)
     Nonaccrual      Total  
                   (in thousands)                       

September 30, 2014

                    

Commercial, financial, leasing, etc.

   $ 18,855,986         41,296         3,278         5,422         14,777         191,250       $ 19,112,009   

Real estate:

                    

Commercial

     21,646,276         101,671         36,688         24,196         62,739         173,285         22,044,855   

Residential builder and developer

     1,211,005         21,432         1,615         13,786         96,917         73,296         1,418,051   

Other commercial construction

     3,392,260         18,749         3,927         1,516         36,114         27,375         3,479,941   

Residential

     7,578,177         222,214         263,529         42,286         23,551         183,681         8,313,438   

Residential Alt-A

     254,188         15,765         —           —           —           80,017         349,970   

Consumer:

                    

Home equity lines and loans

     5,909,631         36,408         —           28,320         2,564         85,122         6,062,045   

Automobile

     1,808,300         24,692         —           209         —           17,417         1,850,618   

Other

     2,869,863         34,863         3,953         16,412         —           16,341         2,941,432   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63,525,686         517,090         312,990         132,147         236,662         847,784       $ 65,572,359   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

            30-89      90 Days or
more past
due and accruing
     Purchased                
     Current      Days
past due
     Non-
acquired
     Acquired
(a)
     impaired
(b)
     Nonaccrual      Total  
                   (in thousands)                       

December 31, 2013

                    

Commercial, financial, leasing, etc.

   $ 18,489,474         77,538         4,981         6,778         15,706         110,739       $ 18,705,216   

Real estate:

                    

Commercial

     21,236,071         145,749         63,353         35,603         88,034         173,048         21,741,858   

Residential builder and developer

     1,025,984         8,486         141         7,930         137,544         96,427         1,276,512   

Other commercial construction

     2,986,598         42,234         —           8,031         57,707         35,268         3,129,838   

Residential

     7,630,368         295,131         294,649         43,700         29,184         252,805         8,545,837   

Residential Alt-A

     283,253         18,009         —           —           —           81,122         382,384   

Consumer:

                    

Home equity lines and loans

     5,972,365         40,537         —           27,754         2,617         78,516         6,121,789   

Automobile

     1,314,246         29,144         —           366         —           21,144         1,364,900   

Other

     2,726,522         47,830         5,386         —           —           25,087         2,804,825   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,664,881         704,658         368,510         130,162         330,792         874,156       $ 64,073,159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Acquired loans that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately.
(b) Accruing loans that were impaired at acquisition date and were recorded at fair value.

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

One-to-four family residential mortgage loans originated for sale were $466 million and $401 million at September 30, 2014 and December 31, 2013, respectively. Commercial mortgage loans held for sale were $159 million at September 30, 2014 and $68 million at December 31, 2013.

Changes in the allowance for credit losses for the three months ended September 30, 2014 were as follows:

 

    

Commercial,

Financial,

    Real Estate                    
     Leasing, etc.     Commercial     Residential     Consumer     Unallocated     Total  
     (in thousands)  

Beginning balance

   $ 292,251        311,254        72,404        165,871        75,886      $ 917,666   

Provision for credit losses

     2,373        8,046        (3,187     21,815        (47     29,000   

Net charge-offs

            

Charge-offs

     (15,921     (1,666     (4,193     (21,312     —          (43,092

Recoveries

     7,849        1,267        2,498        3,445        —          15,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (8,072     (399     (1,695     (17,867     —          (28,033
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 286,552        318,901        67,522        169,819        75,839      $ 918,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the allowance for credit losses for the three months ended September 30, 2013 were as follows:

 

     Commercial,
Financial,
    Real Estate                     
     Leasing, etc.     Commercial     Residential     Consumer     Unallocated      Total  
     (in thousands)  

Beginning balance

   $ 268,867        324,264        85,311        174,291        74,332       $ 927,065   

Provision for credit losses

     20,209        12,139        315        14,935        402         48,000   

Allowance related to loans securitized and sold

     —          —          —          (11,000     —           (11,000

Net charge-offs

             

Charge-offs

     (30,931     (7,701     (5,320     (20,242     —           (64,194

Recoveries

     5,150        4,751        2,399        4,199        —           16,499   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (25,781     (2,950     (2,921     (16,043     —           (47,695
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 263,295        333,453        82,705        162,183        74,734       $ 916,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in the allowance for credit losses for the nine months ended September 30, 2014 were as follows:

 

     Commercial,
Financial,
    Real Estate                     
     Leasing, etc.     Commercial     Residential     Consumer     Unallocated      Total  
     (in thousands)  

Beginning balance

   $ 273,383        324,978        78,656        164,644        75,015       $ 916,676   

Provision for credit losses

     40,527        (4,067     (916     54,632        824         91,000   

Net charge-offs

             

Charge-offs

     (44,872     (7,966     (17,124     (62,407     —           (132,369

Recoveries

     17,514        5,956        6,906        12,950        —           43,326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (27,358     (2,010     (10,218     (49,457     —           (89,043
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 286,552        318,901        67,522        169,819        75,839       $ 918,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

Changes in the allowance for credit losses for the nine months ended September 30, 2013 were as follows:

 

     Commercial,
Financial,
    Real Estate                     
     Leasing, etc.     Commercial     Residential     Consumer     Unallocated      Total  
     (in thousands)  

Beginning balance

   $ 246,759        337,101        88,807        179,418        73,775       $ 925,860   

Provision for credit losses

     93,736        914        3,913        43,478        959         143,000   

Allowance related to loans securitized and sold

     —          —          —          (11,000     —           (11,000

Net charge-offs

             

Charge-offs

     (86,787     (21,493     (18,583     (62,905     —           (189,768

Recoveries

     9,587        16,931        8,568        13,192        —           48,278   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (77,200     (4,562     (10,015     (49,713     —           (141,490
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 263,295        333,453        82,705        162,183        74,734       $ 916,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any loan or lease type.

In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan-by-loan analysis of larger balance commercial and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also monitored by the Company’s loan review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes at any time. Except for consumer and residential real estate loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Modified loans, including smaller balance homogenous loans, that are considered to be troubled debt restructurings are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows.

The following tables provide information with respect to loans and leases that were considered impaired as of September 30, 2014 and December 31, 2013 and for the three months and nine months ended September 30, 2014 and September 30, 2013.

 

     September 30, 2014      December 31, 2013  
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

                 

Commercial, financial, leasing, etc.

   $ 138,884         168,163         33,805         90,293         112,092         24,614   

Real estate:

                 

Commercial

     94,124         112,373         16,172         113,570         132,325         19,520   

Residential builder and developer

     16,306         20,309         1,218         33,311         55,122         4,379   

Other commercial construction

     12,937         15,302         4,071         86,260         90,515         4,022   

Residential

     88,879         106,795         4,621         96,508         114,521         7,146   

Residential Alt-A

     105,489         119,616         9,000         111,911         124,528         14,000   

Consumer:

                 

Home equity lines and loans

     19,343         20,436         6,030         13,672         14,796         3,312   

Automobile

     31,843         31,843         8,516         40,441         40,441         11,074   

Other

     18,743         18,743         5,051         17,660         17,660         4,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     526,548         613,580         88,484         603,626         702,000         92,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     78,849         82,176         —           28,093         33,095         —     

Real estate:

                 

Commercial

     88,258         97,806         —           65,271         84,333         —     

Residential builder and developer

     67,401         103,996         —           72,366         104,768         —     

Other commercial construction

     14,974         34,212         —           7,369         11,493         —     

Residential

     18,155         27,999         —           84,144         95,358         —     

Residential Alt-A

     25,110         45,705         —           28,357         52,211         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     292,747         391,894         —           285,600         381,258         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     217,733         250,339         33,805         118,386         145,187         24,614   

Real estate:

                 

Commercial

     182,382         210,179         16,172         178,841         216,658         19,520   

Residential builder and developer

     83,707         124,305         1,218         105,677         159,890         4,379   

Other commercial construction

     27,911         49,514         4,071         93,629         102,008         4,022   

Residential

     107,034         134,794         4,621         180,652         209,879         7,146   

Residential Alt-A

     130,599         165,321         9,000         140,268         176,739         14,000   

Consumer:

                 

Home equity lines and loans

     19,343         20,436         6,030         13,672         14,796         3,312   

Automobile

     31,843         31,843         8,516         40,441         40,441         11,074   

Other

     18,743         18,743         5,051         17,660         17,660         4,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 819,295         1,005,474         88,484         889,226         1,083,258         92,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 17 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

     Three months ended
September 30, 2014
     Three months ended
September 30, 2013
 
            Interest income
recognized
            Interest income
recognized
 
     Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 228,749         611         611         149,357         516         516   

Real estate:

                 

Commercial

     189,952         821         821         205,971         716         716   

Residential builder and developer

     90,493         18         18         130,855         213         188   

Other commercial construction

     58,500         251         251         95,486         208         208   

Residential

     104,516         1,328         776         180,995         1,391         865   

Residential Alt-A

     131,574         1,643         681         147,056         1,763         692   

Consumer:

                 

Home equity lines and loans

     19,268         219         81         12,810         167         49   

Automobile

     33,666         528         67         42,957         710         127   

Other

     18,677         177         44         15,791         161         50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 875,395           5,596           3,350            981,278           5,845           3,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months ended
September 30, 2014
     Nine months ended
September 30, 2013
 
            Interest income
recognized
            Interest income
recognized
 
     Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 171,227         1,379         1,379         164,877         6,358         6,358   

Real estate:

                 

Commercial

     194,337         2,616         2,616         200,354         1,428         1,428   

Residential builder and developer

     94,453         131         131         159,308         871         637   

Other commercial construction

     74,531         1,694         1,694         97,268         3,322         3,322   

Residential

     132,606         7,784         6,146         184,719         4,795         3,188   

Residential Alt-A

     135,374         5,002         1,900         151,992         5,173         1,799   

Consumer:

                 

Home equity lines and loans

     17,902         540         182         12,633         499         127   

Automobile

     36,560         1,742         228         45,075         2,226         404   

Other

     18,229         517         145         15,438         468         153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 875,219         21,405         14,421         1,031,664         25,140         17,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 18 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

In accordance with the previously described policies, the Company utilizes a loan grading system that is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger balance criticized commercial and commercial real estate loans are individually reviewed by centralized loan review personnel each quarter to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. Smaller balance criticized loans are analyzed by business line risk management areas to ensure proper loan grade classification. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Company’s commercial and commercial real estate loans.

 

            Real Estate  
     Commercial,
Financial,
Leasing, etc.
     Commercial      Residential
Builder and
Developer
     Other
Commercial
Construction
 
     (in thousands)  

September 30, 2014

     

Pass

   $ 18,283,543         21,236,852         1,293,815         3,285,953   

Criticized accrual

     637,216         634,718         50,940         166,613   

Criticized nonaccrual

     191,250         173,285         73,296         27,375   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,112,009         22,044,855         1,418,051         3,479,941   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

     

Pass

   $ 17,894,592         20,972,257         1,107,144         3,040,106   

Criticized accrual

     699,885         596,553         72,941         54,464   

Criticized nonaccrual

     110,739         173,048         96,427         35,268   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,705,216         21,741,858         1,276,512         3,129,838   
  

 

 

    

 

 

    

 

 

    

 

 

 

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of the original balance of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. The carrying value of residential real estate loans and home equity loans and lines of credit for which a partial charge-off has been recognized aggregated $64 million and $18 million, respectively, at September 30, 2014 and $58 million and $18 million, respectively, at December 31, 2013.

 

- 19 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

The allocation of the allowance for credit losses summarized on the basis of the Company’s impairment methodology was as follows:

 

     Commercial,
Financial,
Leasing, etc.
    

 

Real Estate

               
        Commercial      Residential      Consumer      Total  
     (in thousands)  

September 30, 2014

              

Individually evaluated for impairment

   $ 33,805         21,148         13,602         19,597       $ 88,152   

Collectively evaluated for impairment

     247,951         297,169         52,206         149,430         746,756   

Purchased impaired

     4,796         584         1,714         792         7,886   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 286,552         318,901         67,522         169,819         842,794   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

           75,839   
              

 

 

 

Total

         $ 918,633   
              

 

 

 

December 31, 2013

        

Individually evaluated for impairment

   $ 24,614         27,563         21,127         18,927       $ 92,231   

Collectively evaluated for impairment

     246,096         296,781         55,864         144,210         742,951   

Purchased impaired

     2,673         634         1,665         1,507         6,479   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 273,383         324,978         78,656         164,644         841,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

           75,015   
              

 

 

 

Total

         $ 916,676   
              

 

 

 

 

- 20 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology was as follows:

 

     Commercial,
Financial,
Leasing, etc.
    

 

Real Estate

               
        Commercial      Residential      Consumer      Total  
     (in thousands)  

September 30, 2014

              

Individually evaluated for impairment

   $ 217,733         292,932         237,247         69,929       $ 817,841   

Collectively evaluated for impairment

     18,879,499         26,454,145         8,402,610         10,781,602         64,517,856   

Purchased impaired

     14,777         195,770         23,551         2,564         236,662   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,112,009         26,942,847         8,663,408         10,854,095       $ 65,572,359   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Individually evaluated for impairment

   $ 118,386         376,339         320,360         71,773       $ 886,858   

Collectively evaluated for impairment

     18,571,124         25,488,584         8,578,677         10,217,124         62,855,509   

Purchased impaired

     15,706         283,285         29,184         2,617         330,792   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,705,216         26,148,208         8,928,221         10,291,514       $ 64,073,159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the normal course of business, the Company modifies loans to maximize recovery efforts. If the borrower is experiencing financial difficulty and a concession is granted, the Company considers such modifications as troubled debt restructurings and classifies those loans as either nonaccrual loans or renegotiated loans. The types of concessions that the Company grants typically include principal deferrals and interest rate concessions, but may also include other types of concessions.

 

- 21 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended September 30, 2014 and 2013:

 

            Recorded investment      Financial effects of
modification
 

Three months ended September 30, 2014

   Number      Pre-
modification
     Post-
modification
     Recorded
investment
(a)
    Interest
(b)
 
     (dollars in thousands)  

Commercial, financial, leasing, etc.

        

Principal deferral

     15       $ 1,305       $ 1,300       $ (5   $ —     

Real estate:

        

Commercial

        

Principal deferral

     8         2,081         2,068         (13     —     

Other

     1         650         —           (650     —     

Combination of concession types

     4         483         478         (5     (95

Residential builder and developer

        

Principal deferral

     1         241         241         —          —     

Other commercial construction

        

Principal deferral

     1         145         142         (3     —     

Residential

        

Principal deferral

     3         98         97         (1     —     

Combination of concession types

     8         1,100         1,136         36        (135

Residential Alt-A

        

Combination of concession types

     3         349         369         20        (64

Consumer:

        

Home equity lines and loans

        

Combination of concession types

     5         519         519         —          (67

Automobile

        

Principal deferral

     45         1,003         1,003         —          —     

Interest rate reduction

     3         30         30         —          (2

Other

     7         96         96         —          —     

Combination of concession types

     19         348         348         —          (21

Other

        

Principal deferral

     6         48         48         —          —     

Interest rate reduction

     1         2         2         —          —     

Combination of concession types

     24         511         511         —          (121
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     154       $ 9,009       $ 8,388       $ (621   $ (505
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.
(b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

            Recorded investment      Financial effects of
modification
 

Three months ended September 30, 2013

   Number      Pre-
modification
     Post-
modification
     Recorded
investment
(a)
    Interest
(b)
 
     (dollars in thousands)  

Commercial, financial, leasing, etc.

        

Principal deferral

     14       $ 2,407       $ 2,266       $ (141   $ —     

Other

     2         1,773         2,067         294        —     

Combination of concession types

     3         374         374         —          (25

Real estate:

        

Commercial

        

Principal deferral

     10         4,160         4,134         (26     —     

Other

     2         449         475         26        —     

Combination of concession types

     6         1,868         2,264         396        (156

Residential builder and developer

        

Principal deferral

     1         249         241         (8     —     

Other commercial construction

        

Principal deferral

     1         226         158         (68     —     

Residential

        

Principal deferral

     6         860         912         52        —     

Combination of concession types

     14         1,258         1,308         50        (197

Residential Alt-A

        

Principal deferral

     5         764         773         9        —     

Combination of concession types

     4         332         496         164        (252

Consumer:

        

Home equity lines and loans

        

Principal deferral

     2         179         179         —          —     

Combination of concession types

     9         682         682         —          (79

Automobile

        

Principal deferral

     121         1,718         1,718         —          —     

Interest rate reduction

     2         19         19         —          (2

Other

     20         42         42         —          —     

Combination of concession types

     61         551         551         —          (33

Other

        

Principal deferral

     9         60         60         —          —     

Combination of concession types

     18         470         470         —          (86
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     310       $ 18,441       $ 19,189       $ 748      $ (830
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.
(b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the nine months ended September 30, 2014 and 2013:

 

            Recorded investment      Financial effects of
modification
 

Nine months ended September 30, 2014

   Number      Pre-
modification
     Post-
modification
     Recorded
investment
(a)
    Interest
(b)
 
     (dollars in thousands)  

Commercial, financial, leasing, etc.

        

Principal deferral

     66       $ 20,673       $ 20,499       $ (174   $ —     

Other

     1         19,593         19,593         —          —     

Combination of concession types

     5         9,836         9,766         (70     (14

Real estate:

        

Commercial

        

Principal deferral

     32         17,452         17,384         (68     —     

Other

     1         650         —           (650     —     

Interest rate reduction

     1         255         252         (3     (48

Combination of concession types

     6         892         940         48        (208

Residential builder and developer

        

Principal deferral

     2         1,639         1,639         —          —     

Other commercial construction

        

Principal deferral

     4         6,703         6,611         (92     —     

Residential

        

Principal deferral

     19         1,842         1,926         84        —     

Interest rate reduction

     1         98         104         6        (32

Other

     1         188         188         —          —     

Combination of concession types

     30         4,211         4,287         76        (483

Residential Alt-A

        

Principal deferral

     5         828         900         72        —     

Combination of concession types

     19         3,101         3,134         33        (345

Consumer:

        

Home equity lines and loans

        

Principal deferral

     3         280         280         —          —     

Interest rate reduction

     5         341         341         —          (76

Combination of concession types

     41         4,147         4,147         —          (443

Automobile

        

Principal deferral

     168         2,599         2,599         —          —     

Interest rate reduction

     6         90         90         —          (5

Other

     26         204         204         —          —     

Combination of concession types

     65         939         939         —          (83

Other

        

Principal deferral

     21         141         141         —          —     

Interest rate reduction

     4         293         293         —          (63

Other

     1         45         45         —          —     

Combination of concession types

     57         1,883         1,883         —          (585
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     590       $ 98,923       $ 98,185       $ (738   $ (2,385
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.
(b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

4. Loans and leases and the allowance for credit losses, continued

 

            Recorded investment      Financial effects of
modification
 

Nine months ended September 30, 2013

   Number      Pre-
modification
     Post-
modification
     Recorded
investment
(a)
    Interest
(b)
 
     (dollars in thousands)  

Commercial, financial, leasing, etc.

        

Principal deferral

     53       $ 9,283       $ 9,070       $ (213   $ —     

Other

     4         50,433         50,924         491        —     

Combination of concession types

     6         2,206         1,696         (510     (25

Real estate:

        

Commercial

        

Principal deferral

     23         38,187         38,027         (160     —     

Other

     2         449         475         26        —     

Combination of concession types

     8         2,450         2,845         395        (212

Residential builder and developer

        

Principal deferral

     16         19,102         18,303         (799     —     

Other

     1         4,039         3,888         (151     —     

Combination of concession types

     3         15,580         15,514         (66     (535

Other commercial construction

        

Principal deferral

     3         590         521         (69     —     

Residential

        

Principal deferral

     21         2,642         2,877         235        —     

Other

     1         195         195         —          —     

Combination of concession types

     52         72,917         69,734         (3,183     (754

Residential Alt-A

        

Principal deferral

     6         863         875         12        —     

Combination of concession types

     17         2,426         2,715         289        (640

Consumer:

        

Home equity lines and loans

        

Principal deferral

     6         359         361         2        —     

Interest rate reduction

     1         99         99         —          (8

Other

     1         106         106         —          —     

Combination of concession types

     19         1,299         1,299         —          (176

Automobile

        

Principal deferral

     359         4,933         4,933         —          —     

Interest rate reduction

     11         159         159         —          (17

Other

     65         274         274         —          —     

Combination of concession types

     184         2,148         2,148         —          (162

Other

        

Principal deferral

     29         290         290         —          —     

Interest rate reduction

     1         12         12         —          (2

Other

     1         12         12         —          —     

Combination of concession types

     90         2,394         2,394         —          (587
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     983       $ 233,447       $ 229,746       $ (3,701   $ (3,118
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.
(b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended September 30, 2014 and for which there was a subsequent payment default during the nine-month period ended September 30, 2014 were $3 million. Loans that were modified as troubled debt restructurings during the twelve months ended September 30, 2013 and for

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

which there was a subsequent payment default during the nine-month period ended September 30, 2013 were $20 million (largely commercial real estate loans).

 

5. Borrowings

M&T had $835 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at September 30, 2014 which are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in M&T’s Tier 1 capital. However, in July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a final rule to comprehensively revise the capital framework for the U.S. banking sector. Under that rule, trust preferred capital securities will be phased out from inclusion in Tier 1 capital such that in 2015 only 25% of then-outstanding securities will be included in Tier 1 capital and beginning in 2016 none of the securities will be included in Tier 1 capital.

Holders of the Capital Securities receive preferential cumulative cash distributions unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures as allowed by the terms of each such debenture, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. In general, the agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T.

The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2033) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval.

On February 27, 2014, M&T redeemed all of the issued and outstanding 8.5% $350 million trust preferred securities issued by M&T Capital Trust IV and the related Junior Subordinated Debentures held by M&T Capital Trust IV.

Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of September 30, 2014 and December 31, 2013. The agreements are subject to legally enforceable master netting arrangements, however, the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral of $1.5 billion at September 30, 2014 and $1.6 billion at December 31, 2013.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity

M&T is authorized to issue 1,000,000 shares of preferred stock with a $1.00 par value per share. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference, but have no general voting rights.

Issued and outstanding preferred stock of M&T is presented below:

 

     Shares
issued and
outstanding
     Carrying
value
September 30, 2014
     Carrying
value
December 31, 2013
 
            (dollars in thousands)  

Series A (a)

        

Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference per share

     230,000       $ 230,000       $ 230,000   

Series C (a)

        

Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000 liquidation preference per share

     151,500         151,500         151,500   

Series D (b)

        

Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, $10,000 liquidation preference per share

     50,000         500,000         500,000   

Series E (c)

        

Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock Series E, $1,000 liquidation preference per share

     350,000         350,000         —     

 

(a) Dividends, if declared, were paid quarterly at a rate of 5% per year through November 14, 2013 and are paid at 6.375% thereafter. M&T has agreed to not redeem the preferred shares until on or after November 15, 2018. Warrants to purchase M&T common stock were issued in connection with the Series A and C preferred stock (Series A – 1,218,522 common shares at $73.86 per share; Series C – 407,542 common shares at $55.76 per share). In March 2013, the Series C warrants were exercised in a “cashless” exercise, resulting in the issuance of 186,589 common shares. During the nine months ended September 30, 2014, 395,905 of the Series A warrants were exercised in “cashless” exercises, resulting in the issuance of 156,521 common shares. Remaining outstanding Series A warrants were 753,490 at September 30, 2014.
(b) Dividends, if declared, will be paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.
(c) Dividends, if declared, will be paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month London Interbank Offered Rate (“LIBOR”) plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

In addition to the Series A and Series C warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at September 30, 2014 and December 31, 2013. The obligation under that warrant was assumed by M&T in an acquisition.

 

7. Pension plans and other postretirement benefits

The Company provides defined benefit pension and other postretirement benefits (including health care and life insurance benefits) to qualified retired employees. Net periodic defined benefit cost for defined benefit plans consisted of the following:

 

     Pension
benefits
    Other
postretirement
benefits
 
     Three months ended September 30  
     2014     2013     2014     2013  
     (in thousands)  

Service cost

   $ 5,130        6,090        151        186   

Interest cost on projected benefit obligation

     17,290        15,032        695        673   

Expected return on plan assets

     (22,892     (21,838     —          —     

Amortization of prior service cost

     (1,638     (1,639     (340     (340

Amortization of net actuarial loss

     3,624        10,269        —          90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,514        7,914        506        609   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Pension
benefits
    Other
postretirement
benefits
 
     Nine months ended September 30  
     2014     2013     2014     2013  
     (in thousands)  

Service cost

   $ 15,390        18,270        453        557   

Interest cost on projected benefit obligation

     51,871        45,097        2,084        2,018   

Expected return on plan assets

     (68,676     (65,515     —          —     

Amortization of prior service cost

     (4,914     (4,917     (1,019     (1,019

Amortization of net actuarial loss

     10,871        30,807        —          270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 4,542        23,742        1,518        1,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $13,558,000 and $12,440,000 for the three months ended September 30, 2014 and 2013, respectively, and $41,963,000 and $40,757,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

     Three months ended
September 30
    Nine months ended
September 30
 
     2014     2013     2014     2013  
     (in thousands, except per share)  

Income available to common shareholders:

        

Net income

   $ 275,344        294,479      $ 788,697        917,058   

Less: Preferred stock dividends (a)

     (20,443     (13,363     (55,560     (40,088

 Amortization of preferred stock discount (a)

     —          (2,235     —          (6,575
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common equity

     254,901        278,881        733,137        870,395   

Less: Income attributable to unvested stock-based compensation awards

     (2,996     (3,545     (8,830     (11,451
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 251,905        275,336      $ 724,307        858,944   

Weighted-average shares outstanding:

        

Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards

     132,832        130,836        132,372        130,088   

Less: Unvested stock-based compensation awards

     (1,567     (1,665     (1,590     (1,719
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding

     131,265        129,171        130,782        128,369   

Basic earnings per common share

   $ 1.92        2.13      $ 5.54        6.69   

 

(a) Including impact of not as yet declared cumulative dividends.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

    

Three months ended

September 30

    Nine months ended
September 30
 
     2014     2013     2014     2013  
     (in thousands, except per share)  

Net income available to common equity

   $ 254,901        278,881      $ 733,137        870,395   

Less: Income attributable to unvested stock-based compensation awards

     (2,984     (3,525     (8,793     (11,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 251,917        275,356      $ 724,344        859,000   

Adjusted weighted-average shares outstanding:

        

Common and unvested stock-based compensation awards

     132,832        130,836        132,372        130,088   

Less: Unvested stock-based compensation awards

     (1,567     (1,665     (1,590     (1,719

Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock

     863        1,094        916        943   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted-average shares outstanding

     132,128        130,265        131,698        129,312   

Diluted earnings per common share

   $ 1.91        2.11      $ 5.50        6.64   

GAAP defines unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities that shall be included in the computation of earnings per common share pursuant to the two-class method. The Company has issued stock-based compensation awards in the form of restricted stock and restricted stock units, which, in accordance with GAAP, are considered participating securities.

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 1.7 million and 3.1 million common shares during the three-month periods ended September 30, 2014 and 2013, respectively, and 2.1 million and 4.1 million common shares during the nine-month periods ended September 30, 2014 and 2013, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income

The following table displays the components of other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income (loss) to net income:

 

     Investment Securities                                 
     With
OTTI
     All
other
     Defined
benefit
plans
    Other     Total
amount
before tax
    Income
tax
    Net  
     (in thousands)  

Balance – January 1, 2014

   $ 37,255         18,450         (161,617     115      $ (105,797     41,638      $ (64,159

Other comprehensive income before reclassifications:

                

Unrealized holding gains, net

     12,038         109,263         —          —          121,301        (47,615     73,686   

Foreign currency translation adjustment

     —           —           —          (2,314     (2,314     810        (1,504

Unrealized losses on cash flow hedges

     —           —           —          (162     (162     64        (98
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     12,038         109,263         —          (2,476     118,825        (46,741     72,084   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income that (increase)decrease net income:

                

Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities

     1         2,539         —          —          2,540  (a)      (997     1,543   

Amortization of prior service credit

     —           —           (5,933     —          (5,933 )(d)      2,328        (3,605

Amortization of actuarial losses

     —           —           10,871        —          10,871  (d)      (4,267     6,604   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     1         2,539         4,938        —          7,478        (2,936     4,542   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     12,039         111,802         4,938        (2,476     126,303        (49,677     76,626   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2014

   $ 49,294         130,252         (156,679     (2,361   $ 20,506        (8,039   $ 12,467   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 31 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

     Investment Securities                                
     With
OTTI
    All
other
    Defined
benefit
plans
    Other     Total
amount
before tax
    Income
tax
    Net  
     (in thousands)  

Balance – January 1, 2013

   $ (91,835     152,199        (455,590     (431   $ (395,657     155,393      $ (240,264

Other comprehensive income before reclassifications:

              

Unrealized holding gains (losses), net

     59,523        (61,706     —          —          (2,183     814        (1,369

Foreign currency translation adjustment

     —          —          —          296        296        (91     205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     59,523        (61,706     —          296        (1,887     723        (1,164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:

              

Accretion of unrealized holding losses on HTM securities

     230        3,127        —          —          3,357  (a)      (1,318     2,039   

OTTI charges recognized in net income

     9,800        —          —          —          9,800  (b)      (3,847     5,953   

Losses (gains) realized in net income

     41,217        (8,129     —          —          33,088  (c)      (12,987     20,101   

Amortization of prior service credit

     —          —          (5,936     —          (5,936 )(d)      2,330        (3,606

Amortization of actuarial losses

     —          —          31,077        —          31,077  (d)      (12,198     18,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     51,247        (5,002     25,141        —          71,386        (28,020     43,366   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     110,770        (66,708     25,141        296        69,499        (27,297     42,202   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2013

   $ 18,935        85,491        (430,449     (135   $ (326,158     128,096      $ (198,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Included in interest income
(b) Included in OTTI losses recognized in earnings
(c) Included in gain (loss) on bank investment securities
(d) Included in salaries and employee benefits expense

Accumulated other comprehensive income (loss), net consisted of the following:

 

     Investment securities      Defined
benefit
plans
    Other     Total  
     With OTTI      All other         
     (in thousands)  

Balance – December 31, 2013

   $ 22,632         11,294         (98,182     97      $ (64,159

Net gain (loss) during period

     7,314         67,915         2,999        (1,602     76,626   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance – September 30, 2014

   $ 29,946         79,209         (95,183     (1,505   $ 12,467   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

- 32 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts is not significant as of September 30, 2014.

The net effect of interest rate swap agreements was to increase net interest income by $11 million for each of the three-month periods ended September 30, 2014 and 2013, and $34 million and $30 million for the nine-month periods ended September 30, 2014 and 2013, respectively.

At September 30, 2014, interest rate swap agreements were used as fair value hedges for approximately $1.4 billion of outstanding fixed rate long-term borrowings. Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

 

     Notional
amount
     Average
maturity
     Weighted-
average rate
 
         Fixed     Variable  
     (in thousands)      (in years)               

September 30, 2014

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         2.9         4.42     1.19
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         3.7         4.42     1.20
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate.

The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale.

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $17.2 billion and $17.4 billion at September 30, 2014 and December 31, 2013, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.0 billion and $1.4 billion at September 30, 2014 and December 31, 2013, respectively.

 

- 33 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

Information about the fair values of derivative instruments in the Company’s consolidated balance sheet and consolidated statement of income follows:

 

     Asset derivatives      Liability derivatives  
     Fair value      Fair value  
     September 30,
2014
     December 31,
2013
     September 30,
2014
     December 31,
2013
 
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements (a)

   $ 76,249         102,875       $ —           —     

Commitments to sell real estate loans (a)

     1,454         6,957         2,438         487   
  

 

 

    

 

 

    

 

 

    

 

 

 
     77,703         109,832         2,438         487   

Derivatives not designated and qualifying as hedging instruments

           

Mortgage-related commitments to originate real estate loans for sale (a)

     16,732         7,616         240         3,675   

Commitments to sell real estate loans (a)

     1,387         6,120         3,157         230   

Trading:

           

Interest rate contracts (b)

     203,779         274,864         165,065         234,455   

Foreign exchange and other option and futures contracts (b)

     17,049         15,831         16,677         15,342   
  

 

 

    

 

 

    

 

 

    

 

 

 
     238,947         304,431         185,139         253,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $