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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 June 30, 2015

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) 842-5445

(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 check mark 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 July 24, 2015: 133,238,280 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2015

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements.   
  

CONSOLIDATED BALANCE SHEET - June 30, 2015 and December 31, 2014

     3   
  

CONSOLIDATED STATEMENT OF INCOME - Three and six months ended June 30, 2015 and 2014

     4   
  

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME – Three and six months ended June 30, 2015 and 2014

     5   
  

CONSOLIDATED STATEMENT OF CASH FLOWS - Six months ended June 30, 2015 and 2014

     6   
  

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Six months ended June 30, 2015 and 2014

     7   
  

NOTES TO FINANCIAL STATEMENTS

     8   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations.      57   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk.      103   

Item 4.

   Controls and Procedures.      103   

Part II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings.      103   

Item 1A.

   Risk Factors.      104   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds.      105   

Item 3.

   Defaults Upon Senior Securities.      105   

Item 4.

   Mine Safety Disclosures.      105   

Item 5.

   Other Information.      105   

Item 6.

   Exhibits.      106   

SIGNATURES

     106   

EXHIBIT INDEX

     107   

 

–2–


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)

 

     June 30,     December 31,  

Dollars in thousands, except per share

   2015     2014  

Assets

  

Cash and due from banks

   $ 1,347,858        1,289,965   
  

Interest-bearing deposits at banks

     4,045,852        6,470,867   
  

Federal funds sold

     3,000        83,392   
  

Trading account

     277,009        308,175   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,615,114 at June 30, 2015; $1,631,267 at December 31, 2014)

    
  

Available for sale (cost: $11,093,093 at June 30, 2015;
$8,919,324 at December 31, 2014)

     11,250,877        9,156,932   
  

Held to maturity (fair value: $3,175,847 at June 30, 2015;
$3,538,282 at December 31, 2014)

     3,164,585        3,507,868   
  

Other (fair value: $336,175 at June 30, 2015; $328,742 at December 31, 2014)

     336,175        328,742   
     

 

 

   

 

 

 
  

Total investment securities

     14,751,637        12,993,542   
     

 

 

   

 

 

 
  

Loans and leases

     68,358,516        66,899,369   
  

Unearned discount

     (227,264     (230,413
     

 

 

   

 

 

 
  

Loans and leases, net of unearned discount

     68,131,252        66,668,956   
  

Allowance for credit losses

     (929,987     (919,562
     

 

 

   

 

 

 
  

Loans and leases, net

     67,201,265        65,749,394   
     

 

 

   

 

 

 
  

Premises and equipment

     590,567        612,984   
  

Goodwill

     3,513,325        3,524,625   
  

Core deposit and other intangible assets

     22,269        35,027   
  

Accrued interest and other assets

     5,327,294        5,617,564   
     

 

 

   

 

 

 
  

Total assets

   $ 97,080,076        96,685,535   
     

 

 

   

 

 

 

Liabilities

  

Noninterest-bearing deposits

   $ 27,674,588        26,947,880   
  

NOW accounts

     2,579,307        2,307,815   
  

Savings deposits

     39,306,647        41,085,803   
  

Time deposits

     2,901,636        3,063,973   
  

Deposits at Cayman Islands office

     167,441        176,582   
     

 

 

   

 

 

 
  

Total deposits

     72,629,619        73,582,053   
     

 

 

   

 

 

 
  

Federal funds purchased and agreements to repurchase securities

     153,299        192,676   
  

Accrued interest and other liabilities

     1,453,249        1,567,951   
  

Long-term borrowings

     10,175,912        9,006,959   
     

 

 

   

 

 

 
  

Total liabilities

     84,412,079        84,349,639   
     

 

 

   

 

 

 

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 June 30, 2015
and December 31, 2014; Liquidation preference of $10,000 per share:
50,000 shares at June 30, 2015 and December 31, 2014

     1,231,500        1,231,500   
  

Common stock, $.50 par, 250,000,000 shares authorized, 133,062,420 shares issued
at June 30, 2015; 132,312,931 shares issued at December 31, 2014

     66,531        66,157   
  

Common stock issuable, 36,511 shares at June 30, 2015;
41,330 shares at December 31, 2014

     2,332        2,608   
  

Additional paid-in capital

     3,477,611        3,409,506   
  

Retained earnings

     8,107,525        7,807,119   
  

Accumulated other comprehensive income (loss), net

     (217,502     (180,994
     

 

 

   

 

 

 
  

Total shareholders’ equity

     12,667,997        12,335,896   
     

 

 

   

 

 

 
  

Total liabilities and shareholders’ equity

   $ 97,080,076        96,685,535   
     

 

 

   

 

 

 

 

–3–


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended June 30     Six months ended June 30  

In thousands, except per share

   2015     2014     2015     2014  

Interest income

   Loans and leases, including fees    $ 662,633        645,029      $ 1,309,812        1,290,251   
   Investment securities         
  

Fully taxable

     93,144        85,210        179,101        159,109   
  

Exempt from federal taxes

     1,062        1,293        2,380        2,797   
   Deposits at banks      3,351        2,535        6,469        4,419   
   Other      164        223        679        666   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest income

     760,354        734,290        1,498,441        1,457,242   
     

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   NOW accounts      349        330        660        627   
   Savings deposits      10,361        11,181        20,580        22,782   
   Time deposits      3,690        3,855        7,430        7,795   
   Deposits at Cayman Islands office      150        181        297        389   
   Short-term borrowings      36        25        70        57   
   Long-term borrowings      62,640        49,604        126,688        100,045   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest expense

     77,226        65,176        155,725        131,695   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net interest income      683,128        669,114        1,342,716        1,325,547   
   Provision for credit losses      30,000        30,000        68,000        62,000   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net interest income after provision for credit losses      653,128        639,114        1,274,716        1,263,547   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other income

   Mortgage banking revenues      102,602        95,656        204,203        175,705   
   Service charges on deposit accounts      105,257        107,368        207,601        211,566   
   Trust income      118,598        129,893        242,332        251,145   
   Brokerage services income      16,861        17,487        32,322        33,987   
   Trading account and foreign exchange gains      6,046        8,042        12,277        14,489   
   Loss on bank investment securities      (10     —          (108     —     
   Equity in earnings of Bayview Lending Group LLC      (3,131     (4,055     (7,322     (8,509
   Other revenues from operations      150,804        102,021        245,925        198,136   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other income

     497,027        456,412        937,230        876,519   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

   Salaries and employee benefits      361,657        339,713        751,550        711,039   
   Equipment and net occupancy      66,852        68,084        133,322        139,251   
   Printing, postage and supplies      9,305        9,180        18,895        20,136   
   Amortization of core deposit and other intangible assets      5,965        9,234        12,758        19,296   
   FDIC assessments      10,801        15,155        21,461        30,643   
   Other costs of operations      242,048        226,294        445,017        437,529   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other expense

     696,628        667,660        1,383,003        1,357,894   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Income before taxes      453,527        427,866        828,943        782,172   
   Income taxes      166,839        143,530        300,642        268,819   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net income    $ 286,688        284,336      $ 528,301        513,353   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net income available to common shareholders         
  

Basic

   $ 263,471        260,680      $ 482,295        472,404   
  

Diluted

     263,481        260,695        482,313        472,429   
   Net income per common share         
  

Basic

   $ 1.99        1.99      $ 3.65        3.62   
  

Diluted

     1.98        1.98        3.63        3.59   
   Cash dividends per common share    $ .70        .70      $ 1.40        1.40   
   Average common shares outstanding         
  

Basic

     132,356        130,856        132,203        130,536   
  

Diluted

     133,116        131,828        132,944        131,479   

 

–4–


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended June 30     Six months ended June 30  

In thousands

   2015     2014     2015     2014  

Net income

   $ 286,688        284,336      $ 528,301        513,353   

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

        

Net unrealized gains (losses) on investment securities

     (72,618     64,652        (47,279     102,866   

Unrealized gains (losses) on cash flow hedges

     (24     (711     847        (711

Foreign currency translation adjustment

     1,866        449        (518     313   

Defined benefit plans liability adjustment

     5,765        1,179        10,442        1,999   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (65,011     65,569        (36,508     104,467   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 221,677        349,905      $ 491,793        617,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

–5–


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Six months ended June 30  

In thousands

   2015     2014  

Cash flows from operating activities

   Net income    $ 528,301        513,353   
  

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

    
  

Provision for credit losses

     68,000        62,000   
  

Depreciation and amortization of premises and equipment

     48,199        49,133   
  

Amortization of capitalized servicing rights

     24,572        34,868   
  

Amortization of core deposit and other intangible assets

     12,758        19,296   
  

Provision for deferred income taxes

     29,884        40,964   
  

Asset write-downs

     4,076        2,015   
  

Net gain on sales of assets

     (48,637     (1,991
  

Net change in accrued interest receivable, payable

     7,912        10,036   
  

Net change in other accrued income and expense

     (39,503     (82,817
  

Net change in loans originated for sale

     (77,677     (192,521
  

Net change in trading account assets and liabilities

     198        15,168   
     

 

 

   

 

 

 
  

Net cash provided by operating activities

     558,083        469,504   
     

 

 

   

 

 

 

Cash flows from investing activities

   Proceeds from sales of investment securities     
  

Available for sale

     2,539        16   
  

Other

     254        734   
   Proceeds from maturities of investment securities     
  

Available for sale

     859,904        375,372   
  

Held to maturity

     351,110        211,005   
   Purchases of investment securities     
  

Available for sale

     (3,013,384     (3,609,758
  

Held to maturity

     (17,403     (10,745
  

Other

     (7,686     (52,904
   Net increase in loans and leases      (1,465,261     (566,803
   Net (increase) decrease in interest-bearing deposits at banks      2,425,015        (1,381,392
   Capital expenditures, net      (23,395     (37,747
   Net (increase) decrease in loan servicing advances      317,276        (257,704
   Other, net      16,450        16,990   
     

 

 

   

 

 

 
  

Net cash used by investing activities

     (554,581     (5,312,936
     

 

 

   

 

 

 

Cash flows from financing activities

   Net increase (decrease) in deposits      (951,347     2,712,470   
   Net decrease in short-term borrowings      (39,377     (98,824
   Proceeds from long-term borrowings      1,500,000        2,647,688   
   Payments on long-term borrowings      (323,025     (360,345
   Proceeds from issuance of preferred stock      —          346,500   
   Dividends paid - common      (187,278     (185,134
   Dividends paid - preferred      (40,635     (29,348
   Other, net      15,661        54,927   
     

 

 

   

 

 

 
  

Net cash provided (used) by financing activities

     (26,001     5,087,934   
     

 

 

   

 

 

 
   Net increase (decrease) in cash and cash equivalents      (22,499     244,502   
   Cash and cash equivalents at beginning of period      1,373,357        1,672,934   
     

 

 

   

 

 

 
   Cash and cash equivalents at end of period    $ 1,350,858        1,917,436   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

   Interest received during the period    $ 1,478,848        1,420,720   
   Interest paid during the period      149,255        120,109   
   Income taxes paid during the period      225,107        198,028   
     

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

   Securitization of residential mortgage loans allocated to     
  

Available-for-sale investment securities

   $ 36,645        76,097   
  

Capitalized servicing rights

     368        976   
   Real estate acquired in settlement of loans      23,273        18,677   

 

–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  

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

     —           —           —          —          513,353        104,467        617,820   

Preferred stock cash dividends

     —           —           —          —          (35,117     —          (35,117

Issuance of Series E preferred stock

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

Exercise of 379,376 Series A stock warrants into 149,834 shares of common stock

     —           75         —          (75     —          —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           131         —          23,250        —          —          23,381   

Exercises of stock options, net

     —           442         —          84,002        —          —          84,444   

Stock purchase plan

     —           43         —          9,545        —          —          9,588   

Directors’ stock plan

     —           4         —          875        —          —          879   

Deferred compensation plans, net, including dividend equivalents

     —           3         (315     309        (58     —          (61

Other

     —           —           —          894        —          —          894   

Common stock cash dividends - $1.40 per share

     —           —           —          —          (185,105     —          (185,105
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2014

   $ 1,231,500         65,956         2,600        3,347,314        7,481,077        40,308        12,168,755   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2015

                

Balance - January 1, 2015

   $ 1,231,500         66,157         2,608        3,409,506        7,807,119        (180,994     12,335,896   

Total comprehensive income

     —           —           —          —          528,301        (36,508     491,793   

Preferred stock cash dividends

     —           —           —          —          (40,635     —          (40,635

Exercise of 2,315 Series A stock warrants into 904 shares of common stock

     —           1         —          (1     —          —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           144         —          20,966        —          —          21,110   

Exercises of stock options, net

     —           179         —          34,937        —          —          35,116   

Stock purchase plan

     —           45         —          10,301        —          —          10,346   

Directors’ stock plan

     —           3         —          827        —          —          830   

Deferred compensation plans, net, including dividend equivalents

     —           2         (276     274        (51     —          (51

Other

     —           —           —          801        —          —          801   

Common stock cash dividends - $1.40 per share

     —           —           —          —          (187,209     —          (187,209
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2015

   $ 1,231,500         66,531         2,332        3,477,611        8,107,525        (217,502     12,667,997   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

–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 2014 Annual Report. Additionally, effective January 1, 2015 the Company made an accounting policy election in accordance with amended accounting guidance issued by the Financial Accounting Standards Board in January 2014 to account for investments in qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The adoption of the amended guidance did not have a significant effect on the Company’s financial position or results of operations, but did result in the restatement of the consolidated statement of income for the three months and six months ended June 30, 2014 to remove $14 million and $26 million, respectively, of losses associated with qualified affordable housing projects from “other costs of operations” and include the amortization of the initial cost of the investment in income tax expense. The cumulative effect adjustment associated with adopting the amended guidance was not material as of the beginning of any period presented in these consolidated financial statements. See note 11 for information regarding the Company’s investments in qualified affordable housing projects.

In the opinion of management, all adjustments necessary for a fair presentation have been made and, except as described above, 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 June 30, 2015, total consideration to be paid was valued at approximately $5.5 billion.

At June 30, 2015, Hudson City had $35.4 billion of assets, including $19.9 billion of loans and $8.1 billion of investment securities, and $30.6 billion of liabilities, including $18.2 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 commenced a major initiative, including the hiring of outside consulting firms, intended to fully address the Federal Reserve Bank’s concerns. On April 3, 2015, M&T was advised that the Federal Reserve Board intends to act on the M&T and Hudson City merger application no later than September 30, 2015. As a result, 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 from April 30, 2015 to October 31, 2015. Nevertheless, there can be no assurances that the merger will be completed by that date.

 

–8–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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)  

June 30, 2015

     

Investment securities available for sale:

     

U.S. Treasury and federal agencies

   $ 197,315         1,404         1       $ 198,718   

Obligations of states and political subdivisions

     7,387         169         52         7,504   

Mortgage-backed securities:

     

Government issued or guaranteed

     10,637,736         174,277         40,121         10,771,892   

Privately issued

     89         2         3         88   

Collateralized debt obligations

     28,381         22,518         416         50,483   

Other debt securities

     138,525         1,672         18,243         121,954   

Equity securities

     83,660         16,777         199         100,238   
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,093,093         216,819         59,035         11,250,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

     

Obligations of states and political subdivisions

     136,922         1,584         391         138,115   

Mortgage-backed securities:

     

Government issued or guaranteed

     2,828,638         54,355         10,143         2,872,850   

Privately issued

     191,910         1,868         36,011         157,767   

Other debt securities

     7,115         —           —           7,115   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,164,585         57,807         46,545         3,175,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     336,175         —           —           336,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,593,853         274,626         105,580       $ 14,762,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

     

Investment securities available for sale:

     

U.S. Treasury and federal agencies

   $ 161,408         544         5       $ 161,947   

Obligations of states and political subdivisions

     8,027         224         53         8,198   

Mortgage-backed securities:

     

Government issued or guaranteed

     8,507,571         223,889         337         8,731,123   

Privately issued

     104         2         3         103   

Collateralized debt obligations

     30,073         21,276         1,033         50,316   

Other debt securities

     138,240         1,896         18,648         121,488   

Equity securities

     73,901         11,020         1,164         83,757   
  

 

 

    

 

 

    

 

 

    

 

 

 
     8,919,324         258,851         21,243         9,156,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

     

Obligations of states and political subdivisions

     148,961         2,551         189         151,323   

Mortgage-backed securities:

     

Government issued or guaranteed

     3,149,320         78,485         7,000         3,220,805   

Privately issued

     201,733         1,143         44,576         158,300   

Other debt securities

     7,854         —           —           7,854   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,507,868         82,179         51,765         3,538,282   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     328,742         —           —           328,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,755,934         341,030         73,008       $ 13,023,956   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

–9–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

There were no significant gross realized gains or losses from the sale of investment securities for the three-month and six-month periods ended June 30, 2015 and 2014, respectively.

At June 30, 2015, 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

   $ 10,418         10,461   

Due after one year through five years

     197,809         199,557   

Due after five years through ten years

     2,619         2,637   

Due after ten years

     160,762         166,004   
  

 

 

    

 

 

 
     371,608         378,659   

Mortgage-backed securities available for sale

     10,637,825         10,771,980   
  

 

 

    

 

 

 
   $ 11,009,433         11,150,639   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 28,570         28,738   

Due after one year through five years

     83,513         84,258   

Due after five years through ten years

     24,839         25,119   

Due after ten years

     7,115         7,115   
  

 

 

    

 

 

 
     144,037         145,230   

Mortgage-backed securities held to maturity

     3,020,548         3,030,617   
  

 

 

    

 

 

 
   $ 3,164,585         3,175,847   
  

 

 

    

 

 

 

 

–10–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of June 30, 2015 and December 31, 2014 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)  

June 30, 2015

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 1,750         (1     —           —     

Obligations of states and political subdivisions

     1,403         (7     1,527         (45

Mortgage-backed securities:

          

Government issued or guaranteed

     2,688,635         (39,970     6,231         (151

Privately issued

     15         —          53         (3

Collateralized debt obligations

     —           —          2,444         (416

Other debt securities

     13,142         (185     93,061         (18,058

Equity securities

     —           —          226         (199
  

 

 

    

 

 

   

 

 

    

 

 

 
     2,704,945         (40,163     103,542         (18,872
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     38,431         (360     2,289         (31

Mortgage-backed securities:

          

Government issued or guaranteed

     383,167         (2,693     249,870         (7,450

Privately issued

     —           —          127,482         (36,011
  

 

 

    

 

 

   

 

 

    

 

 

 
     421,598         (3,053     379,641         (43,492
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,126,543         (43,216     483,183         (62,364
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 6,505         (5     —           —     

Obligations of states and political subdivisions

     1,785         (52     121         (1

Mortgage-backed securities:

          

Government issued or guaranteed

     39,001         (186     5,555         (151

Privately issued

     —           —          65         (3

Collateralized debt obligations

     2,108         (696     5,512         (337

Other debt securities

     14,017         (556     92,661         (18,092

Equity securities

     2,138         (1,164     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     65,554         (2,659     103,914         (18,584
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     29,886         (184     268         (5

Mortgage-backed securities:

          

Government issued or guaranteed

     137,413         (361     446,780         (6,639

Privately issued

     —           —          127,512         (44,576
  

 

 

    

 

 

   

 

 

    

 

 

 
     167,299         (545     574,560         (51,220
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 232,853         (3,204     678,474         (69,804
  

 

 

    

 

 

   

 

 

    

 

 

 

 

–11–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 383 individual investment securities with aggregate gross unrealized losses of $106 million at June 30, 2015. Based on a review of each of the securities in the investment securities portfolio at June 30, 2015, the Company concluded that it expected to recover the amortized cost basis of its investment. As of June 30, 2015, 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 June 30, 2015, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $336 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:

 

     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Outstanding principal balance

   $ 2,631,165         3,070,268   

Carrying amount:

     

Commercial, financial, leasing, etc.

     191,721         247,820   

Commercial real estate

     775,816         961,828   

Residential real estate

     407,774         453,360   

Consumer

     844,068         933,537   
  

 

 

    

 

 

 
   $ 2,219,379         2,596,545   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $169 million at June 30, 2015 and $198 million at December 31, 2014, 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 six months ended June 30, 2015 and 2014 follows:

 

     Three months ended June 30  
     2015      2014  
     Purchased
impaired
     Other
acquired
     Purchased
impaired
     Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 71,422         357,895       $ 30,939         485,162   

Interest income

     (5,772      (40,024      (5,106      (43,452

Reclassifications from nonaccretable balance, net

     11,974         26,840         249         774   

Other (a)

     —           278         —           8,486   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 77,624         344,989       $ 26,082         450,970   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

–12–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Six months ended June 30  
     2015     2014  
     Purchased
impaired
    Other
acquired
    Purchased
impaired
    Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 76,518        397,379      $ 37,230        538,633   

Interest income

     (10,978     (81,301     (11,434     (96,085

Reclassifications from nonaccretable balance, net

     12,084        27,023        286        774   

Other (a)

     —          1,888        —          7,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 77,624        344,989      $ 26,082        450,970   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

A summary of current, past due and nonaccrual loans as of June 30, 2015 and December 31, 2014 follows:

 

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

June 30, 2015

           

Commercial, financial, leasing, etc.

   $ 19,852,368         36,637         4,777         1,628         5,273         210,345       $ 20,111,028   

Real estate:

              

Commercial

     22,487,721         156,567         17,079         17,919         52,115         167,520         22,898,921   

Residential builder and developer

     1,666,183         4,233         —           6,603         73,628         56,854         1,807,501   

Other commercial construction

     3,642,229         43,683         6,112         2,834         20,059         21,149         3,736,066   

Residential

     7,525,761         197,893         207,195         18,972         15,804         164,721         8,130,346   

Residential Alt-A

     234,859         11,152         —           —           —           68,185         314,196   

Consumer:

                 

Home equity lines and loans

     5,765,082         31,446         —           12,371         2,361         78,250         5,889,510   

Automobile

     2,134,000         29,906         —           —           —           15,156         2,179,062   

Other

     2,996,396         31,591         3,405         18,264         —           14,966         3,064,622   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,304,599         543,108         238,568         78,591         169,240         797,146       $ 68,131,252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

–13–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

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

December 31, 2014

           

Commercial, financial, leasing, etc.

   $ 19,228,265         37,246         1,805         6,231         10,300         177,445       $ 19,461,292   

Real estate:

              

Commercial

     22,208,491         118,704         22,170         14,662         51,312         141,600         22,556,939   

Residential builder and developer

     1,273,607         11,827         492         9,350         98,347         71,517         1,465,140   

Other commercial construction

     3,484,932         17,678         —           —           17,181         25,699         3,545,490   

Residential

     7,640,368         226,932         216,489         35,726         18,223         180,275         8,318,013   

Residential Alt-A

     249,810         11,774         —           —           —           77,704         339,288   

Consumer:

                    

Home equity lines and loans

     5,859,378         42,945         —           27,896         2,374         89,291         6,021,884   

Automobile

     1,931,138         30,500         —           133         —           17,578         1,979,349   

Other

     2,909,791         33,295         4,064         16,369         —           18,042         2,981,561   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 64,785,780         530,901         245,020         110,367         197,737         799,151       $ 66,668,956   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

One-to-four family residential mortgage loans originated for sale were $479 million and $435 million at June 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans held for sale were $320 million at June 30, 2015 and $308 million at December 31, 2014.

Changes in the allowance for credit losses for the three months ended June 30, 2015 were as follows:

 

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

Beginning balance

   $ 281,069        317,375        60,741        186,052        76,136       $ 921,373   

Provision for credit losses

     9,737        (3,652     1,624        21,016        1,275         30,000   

Net charge-offs

             

Charge-offs

     (7,728     (3,470     (3,309     (18,455     —           (32,962

Recoveries

     3,672        1,041        1,238        5,625        —           11,576   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (4,056     (2,429     (2,071     (12,830     —           (21,386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 286,750        311,294        60,294        194,238        77,411       $ 929,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

–14–


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 three months ended June 30, 2014 were as follows:

 

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

Beginning balance

   $ 276,835        324,805        77,062        162,134        75,932      $ 916,768   

Provision for credit losses

     25,556        (12,229     (1,957     18,676        (46     30,000   

Net charge-offs

            

Charge-offs

     (14,142     (2,814     (5,478     (19,404     —          (41,838

Recoveries

     4,002        1,492        2,777        4,465        —          12,736   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (10,140     (1,322     (2,701     (14,939     —          (29,102
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the allowance for credit losses for the six months ended June 30, 2015 were as follows:

 

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

Beginning balance

   $ 288,038        307,927        61,910        186,033        75,654       $ 919,562   

Provision for credit losses

     11,179        11,890        2,584        40,590        1,757         68,000   

Net charge-offs

             

Charge-offs

     (20,078     (10,149     (6,427     (43,784     —           (80,438

Recoveries

     7,611        1,626        2,227        11,399        —           22,863   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (12,467     (8,523     (4,200     (32,385     —           (57,575
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 286,750        311,294        60,294        194,238        77,411       $ 929,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

     Commercial,
Financial,
Leasing, etc.
    Real Estate                     
       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

     38,154        (12,113     2,271        32,817        871         62,000   

Net charge-offs

             

Charge-offs

     (28,951     (6,300     (12,931     (41,095     —           (89,277

Recoveries

     9,665        4,689        4,408        9,505        —           28,267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (19,286     (1,611     (8,523     (31,590     —           (61,010
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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.

 

–15–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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 loans 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 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 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.

 

–16–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The following tables provide information with respect to loans and leases that were considered impaired as of June 30, 2015 and December 31, 2014 and for the three-month and six-month periods ended June 30, 2015 and June 30, 2014:

 

     June 30, 2015      December 31, 2014  
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

     

Commercial, financial, leasing, etc.

   $ 122,574         147,028         31,098         132,340         165,146         31,779   

Real estate:

                 

Commercial

     105,064         120,905         18,390         83,955         96,209         14,121   

Residential builder and developer

     7,808         10,439         661         17,632         22,044         805   

Other commercial construction

     3,091         4,542         514         5,480         6,484         900   

Residential

     84,241         102,237         4,931         88,970         107,343         4,296   

Residential Alt-A

     94,752         107,894         10,000         101,137         114,565         11,000   

Consumer:

           

Home equity lines and loans

     21,235         22,219         3,531         19,771         20,806         6,213   

Automobile

     25,175         25,175         6,334         30,317         30,317         8,070   

Other

     19,256         19,256         5,458         18,973         18,973         5,459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     483,196         559,695         80,917         498,575         581,887         82,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

           

Commercial, financial, leasing, etc.

     116,982         138,635         —           73,978         81,493         —     

Real estate:

                 

Commercial

     72,094         79,541         —           66,777         78,943         —     

Residential builder and developer

     53,843         94,700         —           58,820         96,722         —     

Other commercial construction

     18,524         39,347         —           20,738         41,035         —     

Residential

     16,174         26,120         —           16,815         26,750         —     

Residential Alt-A

     23,535         40,517         —           26,752         46,964         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     301,152         418,860         —           263,880         371,907         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Commercial, financial, leasing, etc.

     239,556         285,663         31,098         206,318         246,639         31,779   

Real estate:

           

Commercial

     177,158         200,446         18,390         150,732         175,152         14,121   

Residential builder and developer

     61,651         105,139         661         76,452         118,766         805   

Other commercial construction

     21,615         43,889         514         26,218         47,519         900   

Residential

     100,415         128,357         4,931         105,785         134,093         4,296   

Residential Alt-A

     118,287         148,411         10,000         127,889         161,529         11,000   

Consumer:

                 

Home equity lines and loans

     21,235         22,219         3,531         19,771         20,806         6,213   

Automobile

     25,175         25,175         6,334         30,317         30,317         8,070   

Other

     19,256         19,256         5,458         18,973         18,973         5,459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 784,348         978,555         80,917         762,455         953,794         82,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

–17–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Three months ended
June 30, 2015
     Three months ended
June 30, 2014
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 221,952         502         502         150,625         220         220   

Real estate:

                 

Commercial

     153,105         1,004         1,004         207,633         869         869   

Residential builder and developer

     66,334         131         131         91,614         39         39   

Other commercial construction

     23,614         168         168         77,801         356         356   

Residential

     101,560         1,358         785         119,133         5,056         4,468   

Residential Alt-A

     120,286         1,650         697         134,895         1,733         660   

Consumer:

     

Home equity lines and loans

     20,221         224         65         18,762         200         72   

Automobile

     26,123         416         43         36,631         589         74   

Other

     19,058         185         30         18,309         166         49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 752,253         5,638         3,425         855,403         9,228         6,807   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended
June 30, 2015
     Six months ended
June 30, 2014
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 218,285         1,106         1,106         142,466         768         768   

Real estate:

     

Commercial

     153,088         2,106         2,106         196,529         1,795         1,795   

Residential builder and developer

     69,742         194         194         96,434         113         113   

Other commercial construction

     24,577         223         223         82,546         1,443         1,443   

Residential

     103,025         2,804         1,695         146,651         6,456         5,370   

Residential Alt-A

     122,970         3,260         1,344         137,273         3,359         1,219   

Consumer:

     

Home equity lines and loans

     19,952         425         113         17,219         321         101   

Automobile

     27,568         866         97         38,007         1,214         161   

Other

     18,960         359         63         18,005         340         101   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 758,167         11,343         6,941         875,130         15,809         11,071   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

–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)  

June 30, 2015

     

Pass

   $ 19,079,109         21,885,377         1,690,496         3,549,397   

Criticized accrual

     821,574         846,024         60,151         165,520   

Criticized nonaccrual

     210,345         167,520         56,854         21,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,111,028         22,898,921         1,807,501         3,736,066   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

     

Pass

   $ 18,695,440         21,837,022         1,347,778         3,347,522   

Criticized accrual

     588,407         578,317         45,845         172,269   

Criticized nonaccrual

     177,445         141,600         71,517         25,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,461,292         22,556,939         1,465,140         3,545,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 any first lien position prior to recovering amounts on a second lien position. 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 $59 million and $20 million, respectively, at June 30, 2015 and $63 million and $18 million, respectively, at

 

–19–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

December 31, 2014. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance totaled $23 million and $28 million, respectively, at June 30, 2015 and $27 million and $28 million, respectively, at December 31, 2014.

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)  

June 30, 2015

              

Individually evaluated for impairment

   $ 31,098         19,296         14,904         15,323       $ 80,621   

Collectively evaluated for impairment

     253,312         290,853         43,428         177,444         765,037   

Purchased impaired

     2,340         1,145         1,962         1,471         6,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 286,750         311,294         60,294         194,238         852,576   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 77,411   
              

 

 

 

Total

               $ 929,987   
              

 

 

 

December 31, 2014

        

Individually evaluated for impairment

   $ 31,779         15,490         14,703         19,742       $ 81,714   

Collectively evaluated for impairment

     251,607         291,244         45,061         165,140         753,052   

Purchased impaired

     4,652         1,193         2,146         1,151         9,142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 288,038         307,927         61,910         186,033         843,908   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 75,654   
              

 

 

 

Total

               $ 919,562   
              

 

 

 

 

–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)  

June 30, 2015

              

Individually evaluated for impairment

   $ 239,556         259,441         218,410         65,666       $ 783,073   

Collectively evaluated for impairment

     19,866,199         28,037,245         8,210,328         11,065,167         67,178,939   

Purchased impaired

     5,273         145,802         15,804         2,361         169,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,111,028         28,442,488         8,444,542         11,133,194       $ 68,131,252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

        

Individually evaluated for impairment

   $ 206,318         252,347         232,398         69,061       $ 760,124   

Collectively evaluated for impairment

     19,244,674         27,148,382         8,406,680         10,911,359         65,711,095   

Purchased impaired

     10,300         166,840         18,223         2,374         197,737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,461,292         27,567,569         8,657,301         10,982,794       $ 66,668,956   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and 2014:

 

            Recorded investment      Financial effects of
modification
 

Three months ended June 30, 2015

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

Commercial, financial, leasing, etc.

             

Principal deferral

     30       $ 16,018       $ 15,355       $ (663   $ —     

Other

     2         8,991         8,883         (108     —     

Combination of concession types

     2         15,889         17,864         1,975        (239

Real estate:

             

Commercial

             

Principal deferral

     15         38,983         37,585         (1,398     —     

Combination of concession types

     1         436         436         —          (53

Residential builder and developer

             

Principal deferral

     1         9,252         9,200         (52     —     

Residential

             

Principal deferral

     12         693         754         61        —     

Combination of concession types

     9         961         1,066         105        (144

Residential Alt-A

             

Principal deferral

     1         161         161         —          —     

Combination of concession types

     2         424         426         2        (26

Consumer:

             

Home equity lines and loans

             

Principal deferral

     1         1,198         1,198         —          —     

Combination of concession types

     14         1,356         1,356         —          (212

Automobile

             

Principal deferral

     63         615         615         —          —     

Interest rate reduction

     4         95         95         —          (7

Other

     13         21         21         —          —     

Combination of concession types

     9         138         138         —          (4

Other

             

Principal deferral

     27         770         770         —          —     

Other

     2         21         21         —          —     

Combination of concession types

     10         43         43         —          (7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     218       $ 96,065       $ 95,987       $ (78   $ (692
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

–22–


Table of Contents

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 June 30, 2014

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

Commercial, financial, leasing, etc.

             

Principal deferral

     21       $ 4,414       $ 4,351       $ (63   $ —     

Other

     1         19,593         19,593         —          —     

Combination of concession types

     3         9,795         9,727         (68     (10

Real estate:

             

Commercial

             

Principal deferral

     11         8,327         8,314         (13     —     

Interest rate reduction

     1         255         252         (3     (48

Combination of concession types

     1         63         61         (2     (9

Residential builder and developer

             

Principal deferral

     1         1,398         1,398         —          —     

Other commercial construction

             

Principal deferral

     2         6,407         6,318         (89     —     

Residential

             

Principal deferral

     3         142         166         24        —     

Combination of concession types

     8         923         991         68        (66

Residential Alt-A

             

Principal deferral

     3         662         698         36        —     

Combination of concession types

     6         1,006         1,029         23        (220

Consumer:

             

Home equity lines and loans

             

Interest rate reduction

     5         341         341         —          (76

Combination of concession types

     21         1,772         1,772         —          (204

Automobile

             

Principal deferral

     43         603         603         —          —     

Interest rate reduction

     3         60         60         —          (3

Other

     8         47         47         —          —     

Combination of concession types

     23         341         341         —          (36

Other

             

Principal deferral

     7         38         38         —          —     

Interest rate reduction

     3         291         291         —          (63

Combination of concession types

     19         906         906         —          (276
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     193       $ 57,384       $ 57,297       $ (87   $ (1,011
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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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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 six months ended June 30, 2015 and 2014:

 

           

Recorded investment

    

Financial effects of
modification

 

Six months ended June 30, 2015

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

Commercial, financial, leasing, etc.

             

Principal deferral

     51       $ 17,590       $ 16,912       $ (678   $ —     

Interest rate reduction

     1         99         99         —          (19

Other

     2         8,991         8,883         (108     —     

Combination of concession types

     5         25,044         24,853         (191     (239

Real estate:

             

Commercial

             

Principal deferral

     22         42,775         41,361         (1,414     —     

Combination of concession types

     5         2,082         2,073         (9     (105

Residential builder and developer

             

Principal deferral

     2         10,650         10,598         (52     —     

Residential

             

Principal deferral

     19         1,414         1,496         82        —     

Combination of concession types

     12         1,255         1,415         160        (178

Residential Alt-A

             

Principal deferral

     1         161         161         —          —     

Combination of concession types

     3         634         636         2        (30

Consumer:

             

Home equity lines and loans

             

Principal deferral

     2         1,219         1,219         —          —     

Combination of concession types

     19         1,552         1,552         —          (225

Automobile

             

Principal deferral

     98         918         918         —          —     

Interest rate reduction

     7         137         137         —          (10

Other

     23         41         41         —          —     

Combination of concession types

     17         222         222         —          (11

Other

             

Principal deferral

     49         1,066         1,066         —          —     

Other

     7         80         80         —          —     

Combination of concession types

     23         267         267         —          (32
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     368       $ 116,197       $ 113,989       $ (2,208   $ (849
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

–24–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

            Recorded investment      Financial effects of
modification
 

Six months ended June 30, 2014

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

Commercial, financial, leasing, etc.

             

Principal deferral

     51       $ 19,368       $ 19,199       $ (169   $ —     

Other

     1         19,593         19,593         —          —     

Combination of concession types

     5         9,836         9,766         (70     (14

Real estate:

             

Commercial

             

Principal deferral

     24         15,371         15,316         (55     —     

Interest rate reduction

     1         255         252         (3     (48

Combination of concession types

     2         409         462         53        (113

Residential builder and developer

             

Principal deferral

     1         1,398         1,398         —          —     

Other commercial construction

             

Principal deferral

     3         6,558         6,469         (89     —     

Residential

             

Principal deferral

     16         1,744         1,829         85        —     

Interest rate reduction

     1         98         104         6        (32

Other

     1         188         188         —          —     

Combination of concession types

     22         3,111         3,151         40        (348

Residential Alt-A

             

Principal deferral

     5         828         900         72        —     

Combination of concession types

     16         2,752         2,765         13        (281

Consumer:

             

Home equity lines and loans

             

Principal deferral

     3         280         280         —          —     

Interest rate reduction

     5         341         341         —          (76

Combination of concession types

     36         3,628         3,628         —          (376

Automobile

             

Principal deferral

     123         1,596         1,596         —          —     

Interest rate reduction

     3         60         60         —          (3

Other

     19         108         108         —          —     

Combination of concession types

     46         591         591         —          (62

Other

             

Principal deferral

     15         93         93         —          —     

Interest rate reduction

     3         291         291         —          (63

Other

     1         45         45         —          —     

Combination of concession types

     33         1,372         1,372         —          (464
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     436       $ 89,914       $ 89,797       $ (117   $ (1,880
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 June 30, 2015 and 2014 and for which there was a subsequent payment default during the six-month periods ended June 30, 2015 and 2014, respectively, were not material.

Effective January 1, 2015, the Company adopted amended accounting and disclosure guidance for reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amended guidance

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The adoption resulted in an insignificant increase in other real estate owned. The amount of foreclosed residential real estate property held by the Company was $43 million and $44 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, there were $158 million in loans secured by residential real estate that were in the process of foreclosure.

 

5. Borrowings

During February 2015, M&T Bank issued $1.5 billion of fixed rate senior notes pursuant to a Bank Note Program, of which $750 million have a 2.10% interest rate and mature in 2020 and $750 million have a 2.90% interest rate and mature in 2025.

M&T had $513 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at June 30, 2015 that 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.

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 April 15, 2015, M&T redeemed all of the issued and outstanding Capital Securities issued by M&T Capital Trust I, M&T Capital Trust II and M&T Capital Trust III, and the related Junior Subordinated Debentures held by those respective trusts. In the aggregate, $323 million of Junior Subordinated

 

–26–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings, continued

 

Debentures were redeemed. In February 2014, M&T redeemed all of the issued and outstanding 8.5% $350 million Capital 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 June 30, 2015 and December 31, 2014. The agreements reflect various repurchase dates in 2016 and 2017 and 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 consisting primarily of government guaranteed mortgage-backed securities of $1.5 billion at each of June 30, 2015 and December 31, 2014.

 

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 as of June 30, 2015 and December 31, 2014 is presented below:

 

     Shares
issued and
outstanding
     Carrying value  
     (dollars in thousands)  

Series A (a)

     

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

     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   

Series D (b)

     

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

     50,000       $ 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, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 719,175 at June 30, 2015 and 721,490 at December 31, 2014.
(b) Dividends, if declared, are 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.

 

–27–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

(c) Dividends, if declared, are 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.

In addition to the Series A 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 June 30, 2015 and December 31, 2014. 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 June 30  
     2015      2014      2015      2014  
     (in thousands)  

Service cost

   $ 5,832         5,160         174         152   

Interest cost on projected benefit obligation

     17,732         17,331         652         714   

Expected return on plan assets

     (23,476      (22,859      —           —     

Amortization of prior service credit

     (1,478      (1,626      (329      (329

Amortization of net actuarial loss

     11,237         3,897         28         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 9,847         1,903         525         537   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pension
benefits
     Other
postretirement
benefits
 
     Six months ended June 30  
     2015      2014      2015      2014  
     (in thousands)  

Service cost

   $ 11,832         10,260         374         302   

Interest cost on projected benefit obligation

     35,507         34,581         1,302         1,389   

Expected return on plan assets

     (47,051      (45,784      —           —     

Amortization of prior service credit

     (3,003      (3,276      (679      (679

Amortization of net actuarial loss

     22,412         7,247         53         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 19,697         3,028         1,050         1,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $13,346,000 and $12,673,000 for the three months ended June 30, 2015 and 2014, respectively, and $30,096,000 and $28,405,000 for the six months ended June 30, 2015 and 2014, respectively.

 

–28–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

    

Three months ended

June 30

    

Six months ended

June 30

 
     2015      2014      2015      2014  
     (in thousands, except per share)  

Income available to common shareholders:

           

Net income

   $ 286,688         284,336       $ 528,301         513,353   

Less: Preferred stock dividends (a)

     (20,317      (20,443      (40,635      (35,117
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common equity

     266,371         263,893         487,666         478,236   

Less: Income attributable to unvested stock-based compensation awards

     (2,900      (3,213      (5,371      (5,832
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 263,471         260,680       $ 482,295         472,404   

Weighted-average shares outstanding:

        

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

     133,818         132,473         133,680         132,139   

Less: Unvested stock-based compensation awards

     (1,462      (1,617      (1,477      (1,603
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding

     132,356         130,856         132,203         130,536   

Basic earnings per common share

   $ 1.99         1.99       $ 3.65         3.62   

 

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

 

–29–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

    

Three months ended

June 30

   

Six months ended

June 30

 
     2015     2014     2015     2014  
     (in thousands, except per share)  

Net income available to common equity

   $ 266,371        263,893      $ 487,666        478,236   

Less: Income attributable to unvested stock-based compensation awards

     (2,890     (3,198     (5,353     (5,807
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 263,481        260,695      $ 482,313        472,429   

Adjusted weighted-average shares outstanding:

        

Common and unvested stock-based compensation awards

     133,818        132,473        133,680        132,139   

Less: Unvested stock-based compensation awards

     (1,462     (1,617     (1,477     (1,603

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

     760        972        741        943   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted-average shares outstanding

     133,116        131,828        132,944        131,479   

Diluted earnings per common share

   $ 1.98        1.98      $ 3.63        3.59   

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 1.6 million and 1.7 million common shares during the three-month periods ended June 30, 2015 and 2014, respectively, and 2.1 million and 2.4 million common shares during the six-month periods ended June 30, 2015 and 2014, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

–30–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income

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

 

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

Balance – January 1, 2015

   $ 7,438         201,828        (503,027     (4,082   $ (297,843     116,849      $ (180,994

Other comprehensive income before reclassifications:

           

Unrealized holding gains, net

     5,670         (85,602     —          —          (79,932     31,617        (48,315

Foreign currency translation adjustment

     —           —          —          (779     (779     261        (518

Gains on cash flow hedges

     —           —          —          1,453        1,453        (568     885   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     5,670         (85,602     —          674        (79,258     31,310        (47,948
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

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

     —           1,589        —          —          1,589  (b)      (621     968   

Losses realized in net income

     —           108        —          —          108  (c)      (40     68   

Accretion of net gain on terminated cash flow hedges

     —           —          —          (63     (63 ) (d)      25        (38

Amortization of prior service credit

     —           —          (3,682     —          (3,682 ) (e)      1,640        (2,042

Amortization of actuarial losses

     —           —          22,465        —          22,465  (e)      (9,981     12,484   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     —           1,697        18,783        (63     20,417        (8,977     11,440   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     5,670         (83,905     18,783        611        (58,841     22,333        (36,508
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2015

   $ 13,108         117,923        (484,244     (3,471   $ (356,684     139,182      $ (217,502
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

–31–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

     Investment Securities               
     With
OTTI (a)
     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

     10,842         156,764         —          —          167,606        (65,774     101,832   

Foreign currency translation adjustment

     —           —           —          479        479        (166     313   

Unrealized losses on cash flow hedges

     —           —           —          (1,170     (1,170     459        (711
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     10,842         156,764         —          (691     166,915        (65,481     101,434   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

Accretion of unrealized holding losses on HTM securities

     1         1,702         —          —          1,703  (b)      (669     1,034   

Amortization of prior service credit

     —           —           (3,955     —          (3,955 ) (e)      1,552        (2,403

Amortization of actuarial losses

     —           —           7,247        —          7,247  (e)      (2,845     4,402   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     1         1,702         3,292        —          4,995        (1,962     3,033   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     10,843         158,466         3,292        (691     171,910        (67,443     104,467   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2014

   $ 48,098         176,916         (158,325     (576   $ 66,113        (25,805   $ 40,308   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Other-than-temporary impairment
(b) Included in interest income
(c) Included in loss on bank investment securities
(d) Included in interest expense
(e) Included in salaries and employee benefits expense

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

 

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

Balance – December 31, 2014

   $ 4,518         122,683        (305,589     (2,606   $ (180,994

Net gain (loss) during period

     3,471         (50,750     10,442        329        (36,508
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2015

   $ 7,989         71,933        (295,147     (2,277   $ (217,502
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 was not significant as of June 30, 2015.

The net effect of interest rate swap agreements was to increase net interest income by $11 million and $12 million for the three-month periods ended June 30, 2015 and 2014, respectively, and $22 million and $23 million for the six-month periods ended June 30, 2015 and 2014, respectively.

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)               

June 30, 2015

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         2.2         4.42     1.24
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2014

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         2.7         4.42     1.19
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

The use of cash flow hedges to manage the variability of cash flows associated with the then-forecasted issuance of long-term debt did not have a significant impact on the Company’s consolidated financial position or results of operations.

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 $17.6 billion at June 30, 2015 and December 31, 2014, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.6 billion and $1.3 billion at June 30, 2015 and December 31, 2014, respectively.

 

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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  
     June 30,
2015
     December 31,
2014
     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements (a)

   $ 63,501         73,251       $ —           —     

Commitments to sell real estate loans (a)

     12,150         728         579         4,217   
  

 

 

    

 

 

    

 

 

    

 

 

 
     75,651         73,979         579         4,217   

Derivatives not designated and qualifying as hedging instruments

           

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

     12,755         17,396         1,549         49   

Commitments to sell real estate loans (a)

     2,645         754         1,946         4,330   

Trading:

           

Interest rate contracts (b)

     202,052         215,614         158,670         173,513   

Foreign exchange and other option and futures contracts (b)

     16,424         31,112         13,826         29,950   
  

 

 

    

 

 

    

 

 

    

 

 

 
     233,876         264,876         175,991         207,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 309,527         338,855       $ 176,570         212,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.
(b) Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

 

     Amount of unrealized gain (loss) recognized  
     Three months ended
June 30, 2015
     Three months ended
June 30, 2014
 
     Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

           

Interest rate swap agreements:

           

Fixed rate long-term borrowings (a)

   $ (9,354      8,952       $ (1,675      1,358   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

           

Trading:

           

Interest rate contracts (b)

   $ 1,772          $ 1,384      

Foreign exchange and other option and futures contracts (b)

     (711         (786   
  

 

 

       

 

 

    

Total

   $ 1,061          $ 598      
  

 

 

       

 

 

    

 

     Amount of unrealized gain (loss) recognized  
     Six months ended
June 30, 2015
     Six months ended
June 30, 2014
 
     Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

           

Interest rate swap agreements:

           

Fixed rate long-term borrowings (a)

   $ (9,750      9,113       $ (9,835      9,278   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

           

Trading:

           

Interest rate contracts (b)

   $ 2,432          $ 1,082      

Foreign exchange and other option and futures contracts (b)

     (878         (5,816   
  

 

 

       

 

 

    

Total

   $ 1,554          $ (4,734   
  

 

 

       

 

 

    

 

(a) Reported as other revenues from operations.
(b) Reported as trading account and foreign exchange gains.

 

–35–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $29 million and $28 million at June 30, 2015 and December 31, 2014, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

The Company does not offset derivative asset and liability positions in its consolidated financial statements. The Company’s exposure to credit risk by entering into derivative contracts is mitigated through master netting agreements and collateral posting requirements. Master netting agreements covering interest rate and foreign exchange contracts with the same party include a right to set-off that becomes enforceable in the event of default, early termination or under other specific conditions.

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $124 million and $161 million at June 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $72 million and $103 million at June 30, 2015 and December 31, 2014, respectively. The Company was required to post collateral relating to those positions of $65 million and $90 million at June 30, 2015 and December 31, 2014, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings, the counterparties of the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on June 30, 2015 was $14 million, for which the Company had posted collateral of $8 million in the normal course of business. If the credit risk-related contingent features had been triggered on June 30, 2015, the maximum amount of additional collateral the Company would have been required to post to counterparties was $6 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $89 million and $104 million at June 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $37 million and $46 million at June 30, 2015 and December 31, 2014, respectively. Counterparties posted collateral relating to those positions of $37 million and $46 million at June 30, 2015 and December 31, 2014, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative instruments cleared through clearinghouses was a net liability position of $35 million at each of

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

June 30, 2015 and December 31, 2014. Collateral posted with clearinghouses was $70 million and $61 million at June 30, 2015 and December 31, 2014, respectively.

11. Variable interest entities and asset securitizations

During the three and six months ended June 30, 2015, the Company securitized approximately $23 million and $36 million, respectively, of one-to-four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with the Government National Mortgage Association (Ginnie Mae) and retained the resulting securities in its investment securities portfolio. In similar transactions for the three months and six months ended June 30, 2014, the Company securitized $46 million and $75 million, respectively, of one-to-four family residential real estate loans. Gains associated with those transactions were not significant.

In accordance with GAAP, the Company determined that it was the primary beneficiary of a residential mortgage loan securitization trust considering its role as servicer and its retained subordinated interests in the trust. As a result, the Company has included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. At June 30, 2015 and December 31, 2014, the carrying values of the loans in the securitization trust were $88 million and $98 million, respectively. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to M&T at June 30, 2015 and December 31, 2014 was $14 million and $15 million, respectively. Because the transaction was non-recourse, the Company’s maximum exposure to loss as a result of its association with the trust at June 30, 2015 is limited to realizing the carrying value of the loans less the amount of the mortgage-backed securities held by third parties.

As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Company’s consolidated financial statements. At June 30, 2015 and December 31, 2014, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet. The Company has recognized $24 million and $34 million, respectively, in other assets for its investment in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with Capital Securities described in note 5.

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.2 billion at June 30, 2015 and December 31, 2014. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Company’s maximum exposure to loss on its investments in such partnerships was $295 million, including $76 million of unfunded commitments, at June 30, 2015 and $243 million, including $56 million of unfunded commitments, at December 31, 2014. Contingent commitments to provide additional capital contributions to these partnerships were not material at June 30, 2015. The Company has not provided financial or

 

–37–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

11. Variable interest entities and asset securitizations, continued

 

other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as a limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements. As described in note 1, effective January 1, 2015 the Company retrospectively adopted for all periods presented amended accounting guidance on the accounting for investments in qualified affordable housing projects whereby the Company’s investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company amortized $11 million and $21 million of its investments in qualified affordable housing projects to income tax expense during the three months and six months ended June 30, 2015, respectively, and recognized $15 million and $29 million of tax credits and other tax benefits during those respective periods. Similarly, for the three months and six months ended June 30, 2014, the Company amortized $14 million and $26 million, respectively, of its investments in qualified affordable housing projects to income tax expense, and recognized $18 million and $35 million of tax credits and other tax benefits during those respective periods.

12. Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at June 30, 2015.

Pursuant to GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.

 

    Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

    Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

 

    Level 3 – Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. The following is a description of the valuation methodologies used for the Company’s assets and liabilities that are measured on a recurring basis at estimated fair value.

 

–38–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

Trading account assets and liabilities

Trading account assets and liabilities consist primarily of interest rate swap agreements and foreign exchange contracts with customers who require such services and offsetting positions with third parties to minimize the Company’s risk with respect to such transactions. The Company generally determines the fair value of its derivative trading account assets and liabilities using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. Mutual funds held in connection with deferred compensation arrangements have been classified as Level 1 valuations. Valuations of investments in municipal and other bonds can generally be obtained through reference to quoted prices in less active markets for the same or similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.

Investment securities available for sale

The majority of the Company’s available-for-sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Certain investments in mutual funds and equity securities are actively traded and, therefore, have been classified as Level 1 valuations.

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at June 30, 2015 and December 31, 2014. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR ranging from 4% to 10%, with a weighted-average of 7%, was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At June 30, 2015, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $28 million and $50 million, respectively, and at December 31, 2014 were $30 million and $50 million, respectively. Securities backed by trust preferred securities issued by financial institutions and other entities constituted substantially all of the available-for-sale investment securities classified as Level 3 valuations.

The Company ensures an appropriate control framework is in place over the valuation processes and techniques used for Level 3 fair value measurements. Internal pricing models used for significant valuation measurements have generally been subjected to validation procedures including review of mathematical constructs, valuation methodology and significant assumptions used.

Real estate loans held for sale

The Company utilizes commitments to sell real estate loans to hedge the exposure to changes in fair value of real estate loans held for sale. The carrying value of hedged real estate loans held for sale includes changes in estimated fair value during the hedge period. Typically, the Company attempts to hedge real estate loans held for sale from the date of close through the sale date. The fair value of hedged real estate loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans with similar characteristics and, accordingly, such loans have been classified as a Level 2 valuation.

 

–39–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

Commitments to originate real estate loans for sale and commitments to sell real estate loans

The Company enters into various commitments to originate real estate loans for sale and commitments to sell real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value on the consolidated balance sheet. The estimated fair values of such commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans to certain government- sponsored entities and other parties. The fair valuations of commitments to sell real estate loans generally result in a Level 2 classification. The estimated fair value of commitments to originate real estate loans for sale are adjusted to reflect the Company’s anticipated commitment expirations. The estimated commitment expirations are considered significant unobservable inputs contributing to the Level 3 classification of commitments to originate real estate loans for sale. Significant unobservable inputs used in the determination of estimated fair value of commitments to originate real estate loans for sale are included in the accompanying table of significant unobservable inputs to Level 3 measurements.

Interest rate swap agreements used for interest rate risk management

The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. The Company generally determines the fair value of its interest rate swap agreements using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap agreement assets and has considered its own credit risk in the valuation of its interest rate swap agreement liabilities.

The following tables present assets and liabilities at June 30, 2015 and December 31, 2014 measured at estimated fair value on a recurring basis:

 

     Fair value
measurements at
June 30,
2015
     Level 1 (a)      Level 2 (a)      Level 3  
     (in thousands)  

Trading account assets

   $ 277,009         49,052         227,957         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     198,718         —           198,718         —     

Obligations of states and political subdivisions

     7,504         —           7,504         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     10,771,892         —           10,771,892         —     

Privately issued

     88         —           —           88   

Collateralized debt obligations

     50,483         —           —           50,483   

Other debt securities

     121,954         —           121,954         —     

Equity securities

     100,238         75,427         24,811         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,250,877         75,427         11,124,879         50,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

     798,404         —           798,404         —     

Other assets (b)

     91,051         —           78,296         12,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 12,417,341         124,479         12,229,536         63,326   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

   $ 172,496         —           172,496         —     

Other liabilities (b)

     4,074         —           2,525         1,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 176,570         —           175,021         1,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

–40–


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

     Fair value
measurements at
December 31,
2014
     Level 1 (a)      Level 2 (a)      Level 3  
     (in thousands)  

Trading account assets

   $ 308,175         51,416         256,759         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     161,947         —           161,947         —     

Obligations of states and political subdivisions

     8,198         —           8,198         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     8,731,123         —           8,731,123         —     

Privately issued

     103         —           —           103   

Collateralized debt obligations

     50,316         —           —           50,316   

Other debt securities

     121,488         —           121,488         —     

Equity securities

     83,757         64,841         18,916