10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2012

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on October 31, 2012: 128,005,934 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2012

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1. Financial Statements.

  

CONSOLIDATED BALANCE SHEET - September 30, 2012 and December 31, 2011

     3   

CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2012 and 2011

     4   

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME – Three and nine months ended September  30, 2012 and 2011

     5   

CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2012 and 2011

     6   

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY – Nine months ended September  30, 2012 and 2011

     7   

NOTES TO FINANCIAL STATEMENTS

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     60   

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     109   

Item 4. Controls and Procedures.

     109   

Part II. OTHER INFORMATION

  

Item 1. Legal Proceedings.

     109   

Item 1A. Risk Factors.

     109   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     110   

Item 3. Defaults Upon Senior Securities.

     110   

Item 4. Mine Safety Disclosures.

     110   

Item 5. Other Information.

     110   

Item 6. Exhibits.

     111   

SIGNATURES

     111   

EXHIBIT INDEX

     112   

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

     September 30,     December 31,  

Dollars in thousands, except per share

   2012     2011  

Assets

    

Cash and due from banks

   $ 1,622,928        1,449,547   

Interest-bearing deposits at banks

     411,994        154,960   

Federal funds sold

     —          2,850   

Trading account

     526,844        561,834   

Investment securities (includes pledged securities that can be sold or repledged of $1,826,216 at September 30, 2012; $1,826,011 at December 31, 2011)

    

Available for sale (cost: $5,091,116 at September 30, 2012; $6,312,423 at December 31, 2011)

     5,183,878        6,228,560   

Held to maturity (fair value: $1,074,771 at September 30, 2012; $1,012,562 at December 31, 2011)

     1,121,325        1,077,708   

Other (fair value: $318,801 at September 30, 2012; $366,886 at December 31, 2011)

     318,801        366,886   
  

 

 

   

 

 

 

Total investment securities

     6,624,004        7,673,154   
  

 

 

   

 

 

 

Loans and leases

     64,335,438        60,377,875   

Unearned discount

     (223,483     (281,870
  

 

 

   

 

 

 

Loans and leases, net of unearned discount

     64,111,955        60,096,005   

Allowance for credit losses

     (921,223     (908,290
  

 

 

   

 

 

 

Loans and leases, net

     63,190,732        59,187,715   
  

 

 

   

 

 

 

Premises and equipment

     589,035        581,435   

Goodwill

     3,524,625        3,524,625   

Core deposit and other intangible assets

     129,628        176,394   

Accrued interest and other assets

     4,465,443        4,611,773   
  

 

 

   

 

 

 

Total assets

   $ 81,085,233        77,924,287   
  

 

 

   

 

 

 

Liabilities

    

Noninterest-bearing deposits

   $ 22,968,401        20,017,883   

NOW accounts

     1,499,915        1,912,226   

Savings deposits

     33,163,780        31,001,083   

Time deposits

     4,972,409        6,107,530   

Deposits at Cayman Islands office

     1,402,753        355,927   
  

 

 

   

 

 

 

Total deposits

     64,007,258        59,394,649   
  

 

 

   

 

 

 

Federal funds purchased and agreements to repurchase securities

     592,154        732,059   

Other short-term borrowings

     —          50,023   

Accrued interest and other liabilities

     1,570,758        1,790,121   

Long-term borrowings

     4,969,536        6,686,226   
  

 

 

   

 

 

 

Total liabilities

     71,139,706        68,653,078   
  

 

 

   

 

 

 

Shareholders’ equity

    

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 381,500 shares at September 30, 2012 and December 31, 2011; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2012 and December 31, 2011

     870,416        864,585   

Common stock, $.50 par, 250,000,000 shares authorized, 127,403,420 shares issued at September 30, 2012; 125,683,398 shares issued at December 31, 2011

     63,702        62,842   

Common stock issuable, 57,316 shares at September 30, 2012; 68,220 shares at December 31, 2011

     3,451        4,072   

Additional paid-in capital

     2,951,248        2,828,986   

Retained earnings

     6,286,785        5,867,165   

Accumulated other comprehensive income (loss), net

     (230,075     (356,441
  

 

 

   

 

 

 

Total shareholders’ equity

     9,945,527        9,271,209   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 81,085,233        77,924,287   
  

 

 

   

 

 

 

 

- 3 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended September 30     Nine months ended September 30  

In thousands, except per share

   2012     2011     2012     2011  

Interest income

  

Loans and leases, including fees

   $ 687,466        655,581      $ 2,010,529        1,873,860   
  

Deposits at banks

     139        1,164        1,119        1,679   
  

Federal funds sold

     6        23        17        51   
  

Agreements to resell securities

     —          4        —          132   
  

Trading account

     214        312        849        982   
  

Investment securities

        
  

Fully taxable

     54,959        60,880        177,647        192,369   
  

Exempt from federal taxes

     2,067        2,387        6,171        7,014   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest income

     744,851        720,351        2,196,332        2,076,087   
     

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

  

NOW accounts

     327        354        1,034        830   
  

Savings deposits

     16,510        22,664        51,633        62,660   
  

Time deposits

     10,843        17,684        36,706        56,065   
  

Deposits at Cayman Islands office

     336        188        781        775   
  

Short-term borrowings

     365        222        1,016        861   
  

Long-term borrowings

     53,748        62,520        174,068        183,171   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest expense

     82,129        103,632        265,238        304,362   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net interest income

     662,722        616,719        1,931,094        1,771,725   
  

Provision for credit losses

     46,000        58,000        155,000        196,000   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net interest income after provision for credit losses

     616,722        558,719        1,776,094        1,575,725   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other income

  

Mortgage banking revenues

     106,812        38,141        232,518        125,448   
  

Service charges on deposit accounts

     114,463        121,577        334,334        351,024   
  

Trust income

     115,709        113,652        354,937        218,565   
  

Brokerage services income

     14,114        13,907        44,187        43,129   
  

Trading account and foreign exchange gains

     8,469        4,176        25,278        19,253   
  

Gain on bank investment securities

     372        89        9        150,186   
  

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

     (2,134     (7,649     (26,246     (50,374
  

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

     (3,538     (1,993     (7,085     (1,839
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net OTTI losses recognized in earnings

     (5,672     (9,642     (33,331     (52,213
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Equity in earnings of Bayview Lending Group LLC

     (5,183     (6,911     (16,570     (18,812
  

Other revenues from operations

     96,649        93,393        272,744        347,878   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other income

     445,733        368,382        1,214,106        1,184,458   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

  

Salaries and employee benefits

     321,746        325,197        991,530        891,465   
  

Equipment and net occupancy

     64,248        68,101        194,667        184,434   
  

Printing, postage and supplies

     8,272        10,593        31,512        29,518   
  

Amortization of core deposit and other intangible assets

     14,085        17,401        46,766        44,455   
  

FDIC assessments

     23,801        26,701        77,712        72,404   
  

Other costs of operations

     183,875        214,026        540,927        516,209   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other expense

     616,027        662,019        1,883,114        1,738,485   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Income before taxes

     446,428        265,082        1,107,086        1,021,698   
  

Income taxes

     152,966        81,974        373,781        309,959   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net income

   $ 293,462        183,108      $ 733,305        711,739   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net income available to common shareholders

        
  

Basic

   $ 273,885        164,668      $ 676,821        651,941   
  

Diluted

     273,896        164,671        676,842        651,966   
  

Net income per common share

        
  

Basic

   $ 2.18        1.32      $ 5.39        5.34   
  

Diluted

     2.17        1.32        5.37        5.32   
  

Cash dividends per common share

   $ .70        .70      $ 2.10        2.10   
  

Average common shares outstanding

        
  

Basic

     125,819        124,575        125,510        122,005   
  

Diluted

     126,292        124,860        125,936        122,521   

 

- 4 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended September 30     Nine months ended September 30  

In thousands

   2012      2011     2012     2011  

Net income

   $ 293,462         183,108      $ 733,305        711,739   

Other comprehensive income, net of tax and reclassification adjustments:

         

Net unrealized gains on investment securities

     42,560         34,862        111,931        6,970   

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

     —           (70     (112     (211

Foreign currency translation adjustment

     482         (699     351        (503

Defined benefit plans liability adjustment

     4,732         2,143        14,196        6,431   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     47,774         36,236        126,366        12,687   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 341,236         219,344      $ 859,671        724,426   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

- 5 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Nine months ended September 30  

In thousands

        2012     2011  

Cash flows from

operating activities

  

Net income

   $ 733,305        711,739   
  

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

    
  

Provision for credit losses

     155,000        196,000   
  

Depreciation and amortization of premises and equipment

     63,344        60,220   
  

Amortization of capitalized servicing rights

     44,678        39,895   
  

Amortization of core deposit and other intangible assets

     46,766        44,455   
  

Provision for deferred income taxes

     108,699        14,530   
  

Asset write-downs

     46,505        64,153   
  

Net gain on sales of assets

     (5,070     (183,861
  

Net change in accrued interest receivable, payable

     (10,712     (6,206
  

Net change in other accrued income and expense

     (204,876     (21,427
  

Net change in loans originated for sale

     (528,606     316,623   
  

Net change in trading account assets and liabilities

     24,743        49,376   
  

 

 
  

Net cash provided by operating activities

     473,776        1,285,497   

 

 

Cash flows from

investing activities

  

Proceeds from sales of investment securities

    
  

Available for sale

     49,430        1,909,427   
  

Other

     61,648        106,925   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     1,155,603        1,007,612   
  

Held to maturity

     237,933        180,475   
  

Purchases of investment securities

    
  

Available for sale

     (26,115     (2,569,168
  

Held to maturity

     (282,704     (19,386
  

Other

     (13,563     (30,438
  

Net increase in loans and leases

     (3,572,339     (522,571
  

Net (increase) decrease in interest-bearing deposits at banks

     (257,034     480,708   
  

Net decrease in agreements to resell securities

     —          15,000   
  

Other investments, net

     (7,447     (9,856
  

Capital expenditures, net

     (65,947     (38,030
  

Acquisitions, net of cash acquired

Banks and bank holding companies

     —          178,940   
  

Purchase of Wilmington Trust Corporation preferred stock

     —          (330,000
  

Proceeds from sales of real estate acquired in settlement of loans

     80,762        181,310   
  

Other, net

     (86,649     73,739   
  

 

 
  

Net cash (used) provided by investing activities

     (2,726,422     614,687   

 

 

Cash flows from

financing activities

  

Net increase in deposits

     4,624,134        825,434   
  

Net decrease in short-term borrowings

     (189,906     (400,752
  

Payments on long-term borrowings

     (1,727,313     (1,750,195
  

Proceeds from issuance of preferred stock

     —          495,000   
  

Redemption of preferred stock

     —          (370,000
  

Dividends paid - common

     (267,481     (261,589
  

Dividends paid - preferred

     (31,494     (24,815
  

Other, net

     15,237        7,035   
  

 

 
  

Net cash provided (used) by financing activities

     2,423,177        (1,479,882
  

 

 
  

Net increase in cash and cash equivalents

     170,531        420,302   
  

Cash and cash equivalents at beginning of period

     1,452,397        933,755   
  

 

 
  

Cash and cash equivalents at end of period

   $ 1,622,928        1,354,057   

 

 

Supplemental

disclosure of cash

flow information

  

Interest received during the period

   $ 2,187,027        2,087,083   
  

Interest paid during the period

     280,983        320,758   
  

Income taxes paid during the period

     272,502        308,057   

 

 
Supplemental schedule of noncash investing and financing activities   

Real estate acquired in settlement of loans

   $ 36,881        51,046   
  

Acquisitions:

    
  

Fair value of:

    
  

Assets acquired (noncash)

     —          10,666,102   
  

Liabilities assumed

     —          10,044,555   
  

Common stock issued

     —          405,557   
  

Retirement of Wilmington Trust Corporation preferred stock

     —          330,000   

 

- 6 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

                                  Accumulated              
                                  other              
                Common     Additional           comprehensive              
    Preferred     Common     stock     paid-in     Retained     income     Treasury        

In thousands, except per share

  stock     stock     issuable     capital     earnings     (loss), net     stock     Total  

2011

               

Balance—January 1, 2011

  $ 740,657        60,198        4,189        2,398,615        5,426,701        (205,220     (67,445     8,357,695   

Total comprehensive income

    —          —          —          —          711,739        12,687        —          724,426   

Acquisition of Wilmington Trust Corporation—common stock issued

    —          2,348        —          403,209        —          —          —          405,557   

Partial redemption of Series A preferred stock

    (370,000     —          —          —          —          —          —          (370,000

Conversion of Series B preferred stock into 433,144 shares of common stock

    (26,500     192        —          21,754        —          —          4,554        —     

Issuance of Series D preferred stock

    500,000        —          —          (5,000     —          —          —          495,000   

Preferred stock cash dividends

    —          —          —          —          (34,125     —          —          (34,125

Amortization of preferred stock discount

    18,560        —          —          —          (18,560     —          —          —     

Stock-based compensation plans:

               

Compensation expense, net

    —          36        —          650        —          —          31,666        32,352   

Exercises of stock options, net

    —          29        —          (6,691     —          —          30,106        23,444   

Directors’ stock plan

    —          2        —          414        —          —          612        1,028   

Deferred compensation plans, net, including dividend equivalents

    —          —          (123     (203     (141     —          507        40   

Other

    —          —          —          1,395        —          —          —          1,395   

Common stock cash dividends—$2.10 per share

    —          —          —          —          (261,686     —          —          (261,686

 

 

Balance—September 30, 2011

  $ 862,717        62,805        4,066        2,814,143        5,823,928        (192,533     —          9,375,126   

 

 

2012

               

Balance—January 1, 2012

  $ 864,585        62,842        4,072        2,828,986        5,867,165        (356,441     —          9,271,209   

Total comprehensive income

    —          —          —          —          733,305        126,366        —          859,671   

Preferred stock cash dividends

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

Amortization of preferred stock discount

    5,831        —          —          —          (5,831     —          —          —     

Stock-based compensation plans:

               

Compensation expense, net

    —          228        —          37,655        —          —          —          37,883   

Exercises of stock options, net

    —          545        —          71,939        —          —          —          72,484   

Stock purchase plan

    —          75        —          10,026        —          —          —          10,101   

Directors’ stock plan

    —          7        —          1,114        —          —          —          1,121   

Deferred compensation plans, net, including dividend equivalents

    —          5        (621     576        (120     —          —          (160

Other

    —          —          —          952        —          —          —          952   

Common stock cash dividends—$2.10 per share

    —          —          —          —          (267,646     —          —          (267,646

 

 

Balance—September 30, 2012

  $ 870,416        63,702        3,451        2,951,248        6,286,785        (230,075     —          9,945,527   

 

 

 

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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 2011 Annual Report. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

2. Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City will be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration 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).

At September 30, 2012, Hudson City had $41.9 billion of assets, including $27.8 billion of loans and $12.5 billion of investment securities, and $37.2 billion of liabilities, including $24.0 billion of deposits. After the merger is completed, M&T expects to repay approximately $13 billion of Hudson City’s long-term borrowings by liquidating its comparably-sized investment securities portfolio. The merger is subject to a number of conditions, including regulatory approvals and approval by common shareholders of M&T and Hudson City, and is expected to be completed by mid-year 2013.

On May 16, 2011, M&T acquired all of the outstanding common stock of Wilmington Trust Corporation (“Wilmington Trust”), headquartered in Wilmington, Delaware, in a stock-for-stock transaction. Wilmington Trust operated 55 banking offices in Delaware and Pennsylvania at the date of acquisition. The results of operations acquired in the Wilmington Trust transaction have been included in the Company’s financial results since May 16, 2011. Wilmington Trust shareholders received .051372 shares of M&T common stock in exchange for each share of Wilmington Trust common stock, resulting in M&T issuing a total of 4,694,486 common shares with an acquisition date fair value of $406 million.

The Wilmington Trust transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Assets acquired totaled approximately $10.8 billion, including $6.4 billion of loans and leases (including approximately $3.2 billion of commercial real estate loans, $1.4 billion of commercial loans and leases, $1.1 billion of consumer loans and $680 million of residential real estate loans). Liabilities assumed aggregated $10.0 billion, including $8.9 billion of deposits. The common stock issued in the transaction added $406 million to M&T’s common shareholders’ equity. Immediately prior to the closing of the Wilmington Trust transaction, M&T redeemed the $330 million of preferred stock issued by Wilmington Trust as part of the Troubled Asset Relief Program – Capital Purchase Program (“TARP”) of the U.S. Department of Treasury (“U.S. Treasury”). In connection with the acquisition, the Company recorded $112 million of core deposit and other intangible assets. The core deposit and other intangible assets are generally being amortized over periods of 5 to 7 years using an accelerated method. There was no goodwill recorded as a result of the transaction, however, a non-taxable gain of $65 million was realized, which represented the excess of the fair value of

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

assets acquired less liabilities assumed over consideration exchanged. The acquisition of Wilmington Trust added to M&T’s market-leading position in the Mid-Atlantic region by giving M&T the leading deposit market share in Delaware.

The consideration paid for Wilmington Trust’s common equity and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date were as follows:

 

     (in thousands)  

Purchase price:

  

Value of:

  

Common shares issued (4,694,486 shares)

   $ 405,557   

Preferred stock purchased from U.S. Treasury

     330,000   
  

 

 

 

Total purchase price

     735,557   
  

 

 

 

Identifiable assets:

  

Cash and due from banks

     178,940   

Interest-bearing deposits at banks

     2,606,265   

Other short-term investments

     57,817   

Investment securities

     510,390   

Loans and leases

     6,410,430   

Core deposit and other intangibles

     112,094   

Other assets

     969,106   
  

 

 

 

Total identifiable assets

     10,845,042   
  

 

 

 

Liabilities:

  

Deposits

     8,864,161   

Short-term borrowings

     147,752   

Long-term borrowings

     600,830   

Other liabilities

     431,812   
  

 

 

 

Total liabilities

     10,044,555   
  

 

 

 

Net gain resulting from acquisition

   $ 64,930   
  

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

The following table presents certain pro forma information as if Wilmington Trust had been included in the Company’s results of operations for the nine months ended September 30, 2011 rather than since the acquisition date on May 16, 2011. These results combine the historical results of Wilmington Trust into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place as indicated. In particular, no adjustments have been made to eliminate the amount of Wilmington Trust’s provision for credit losses of $41 million or the impact of other-than-temporary impairment losses of $5 million recognized by Wilmington Trust during the first quarter of 2011 that may not have been necessary had the acquired loans and investment securities been recorded at fair value as of the beginning of 2011. Additionally, the Company expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts that follow:

 

    

Pro forma

Nine months ended

 
     September 30, 2011  
     (in thousands)  

Total revenues (a)

   $ 3,190,437   

Net income

     663,048   

 

(a) Represents net interest income plus other income.

In connection with the acquisition, the Company incurred merger-related expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with the conversion of systems and/or integration of operations; costs related to termination of existing contractual arrangements of Wilmington Trust to purchase various services; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; severance for former employees; travel costs; and printing, postage, supplies and other costs of completing the transactions and commencing operations in new markets and offices.

A summary of merger-related expenses included in the consolidated statement of income follows:

 

     Three months ended      Nine months ended  
     September 30,
2012
     September 30,
2011
     September 30,
2012
     September 30,
2011
 
     (in thousands)  

Salaries and employee benefits

   $ —           285       $ 4,997         15,597   

Equipment and net occupancy

     —           119         15         223   

Printing, postage and supplies

     —           723         —           1,188   

Other costs of operations

     —           24,876         4,867         50,286   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —           26,003       $ 9,879         67,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities

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

 

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

September 30, 2012

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 55,288         1,057         —         $ 56,345   

Obligations of states and political subdivisions

     33,402         588         10         33,980   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,502,237         246,190         175         3,748,252   

Privately issued residential

     1,198,896         4,929         148,757         1,055,068   

Privately issued commercial

     10,837         —           269         10,568   

Collateralized debt obligations

     43,294         15,147         1,240         57,201   

Other debt securities

     136,418         2,146         29,159         109,405   

Equity securities

     110,744         9,636         7,321         113,059   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,091,116         279,693         186,931         5,183,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     192,621         8,848         29         201,440   

Mortgage-backed securities:

           

Government issued or guaranteed

     669,169         37,259         —           706,428   

Privately issued

     248,441         334         92,966         155,809   

Other debt securities

     11,094         —           —           11,094   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,121,325         46,441         92,995         1,074,771   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     318,801         —           —           318,801   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,531,242         326,134         279,926       $ 6,577,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 69,468         1,255         —         $ 70,723   

Obligations of states and political subdivisions

     39,518         771         20         40,269   

Mortgage-backed securities:

           

Government issued or guaranteed

     4,344,116         177,392         275         4,521,233   

Privately issued residential

     1,369,371         6,373         239,488         1,136,256   

Privately issued commercial

     17,679         —           2,650         15,029   

Collateralized debt obligations

     43,834         11,154         2,488         52,500   

Other debt securities

     216,700         4,588         44,443         176,845   

Equity securities

     211,737         8,468         4,500         215,705   
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,312,423         210,001         293,864         6,228,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     188,680         9,141         28         197,793   

Mortgage-backed securities:

           

Government issued or guaranteed

     608,533         24,881         —           633,414   

Privately issued

     268,642         —           99,140         169,502   

Other debt securities

     11,853         —           —           11,853   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,077,708         34,022         99,168         1,012,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     366,886         —           —           366,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,757,017         244,023         393,032       $ 7,608,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

Gross realized gains on investment securities were $90 thousand and $150 million for the three-month and nine-month periods ended September 30, 2011, respectively. Gross realized gains were not significant in 2012. Gross realized losses on investment securities were not significant during the three-month and nine-month periods ended September 30, 2012 and 2011. During the second quarter of 2011, the Company sold residential mortgage-backed securities guaranteed by the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) having an aggregate amortized cost of approximately $1.0 billion which resulted in a gain of $66 million (pre-tax). The Company also sold trust preferred securities and collateralized debt obligations during the second quarter of 2011 having an aggregate amortized cost of $136 million and $100 million, respectively, which resulted in gains of $25 million (pre-tax) and $20 million (pre-tax), respectively. During the first quarter of 2011, the Company sold residential mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac having an aggregate amortized cost of approximately $484 million which resulted in a gain of $39 million (pre-tax).

The Company recognized pre-tax other-than-temporary impairment losses of $6 million and $33 million during the three months and nine months ended September 30, 2012, respectively, and $10 million and $52 million during the three months and nine months ended September 30, 2011, respectively, related to privately issued mortgage-backed securities. The impairment charges were recognized in light of deterioration of real estate values and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The other-than-temporary losses represent management’s estimate of credit losses inherent in the debt securities considering projected cash flows using assumptions of delinquency rates, loss severities, and other estimates for future collateral performance.

The following table displays changes in credit losses associated with debt securities for which other-than-temporary impairment losses have been previously recognized in earnings for the three months and nine months ended September 30, 2012 and 2011:

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

     Three months ended
September 30
 
     2012     2011  
     (in thousands)  

Beginning balance

   $ 264,197        298,141   

Additions for credit losses not previously recognized

     5,672        9,642   

Reductions for increases in cash flows

     —          (90

Reductions for realized losses

     (67,926     (23,127
  

 

 

   

 

 

 

Ending balance

   $ 201,943        284,566   
  

 

 

   

 

 

 
     Nine months ended
September 30
 
     2012     2011  
     (in thousands)  

Beginning balance

   $ 285,399        327,912   

Additions for credit losses not previously recognized

     33,331        52,213   

Reductions for increases in cash flows

     —          (5,110

Reductions for realized losses

     (116,787     (90,449
  

 

 

   

 

 

 

Ending balance

   $ 201,943        284,566   
  

 

 

   

 

 

 

At September 30, 2012, 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

   $ 33,460         33,496   

Due after one year through five years

     42,405         43,791   

Due after five years through ten years

     8,611         9,409   

Due after ten years

     183,926         170,235   
  

 

 

    

 

 

 
     268,402         256,931   

Mortgage-backed securities available for sale

     4,711,970         4,813,888   
  

 

 

    

 

 

 
   $ 4,980,372         5,070,819   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 36,459         36,660   

Due after one year through five years

     45,054         47,410   

Due after five years through ten years

     110,731         116,979   

Due after ten years

     11,471         11,485   
  

 

 

    

 

 

 
     203,715         212,534   

Mortgage-backed securities held to maturity

     917,610         862,237   
  

 

 

    

 

 

 
   $ 1,121,325         1,074,771   
  

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of September 30, 2012 and December 31, 2011 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  
            Unrealized            Unrealized  
     Fair value      losses     Fair value      losses  
            (in thousands)         

September 30, 2012

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ 979         (6     685         (4

Mortgage-backed securities:

          

Government issued or guaranteed

     5,838         (28     9,319         (147

Privately issued residential

     81,620         (454     828,916         (148,303

Privately issued commercial

     —           —          9,744         (269

Collateralized debt obligations

     3,136         (30     5,842         (1,210

Other debt securities

     —           —          93,266         (29,159

Equity securities

     5,486         (3,820     1,580         (3,501
  

 

 

    

 

 

   

 

 

    

 

 

 
     97,059         (4,338     949,352         (182,593
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     2,839         (6     2,522         (23

Privately issued mortgage-backed securities

     —           —          155,189         (92,966
  

 

 

    

 

 

   

 

 

    

 

 

 
     2,839         (6     157,711         (92,989
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 99,898         (4,344     1,107,063         (275,582
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2011

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ —           —          1,228         (20

Mortgage-backed securities:

          

Government issued or guaranteed

     38,492         (190     6,017         (85

Privately issued residential

     297,133         (14,188     751,077         (225,300

Privately issued commercial

     —           —          15,029         (2,650

Collateralized debt obligations

     2,871         (335     4,863         (2,153

Other debt securities

     72,637         (9,883     73,635         (34,560

Equity securities

     9,883         (4,500     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     421,016         (29,096     851,849         (264,768
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     3,084         (4     1,430         (24

Privately issued mortgage-backed securities

     1,883         (592     167,139         (98,548
  

 

 

    

 

 

   

 

 

    

 

 

 
     4,967         (596     168,569         (98,572
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 425,983         (29,692     1,020,418         (363,340
  

 

 

    

 

 

   

 

 

    

 

 

 

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 250 individual investment securities with aggregate gross unrealized losses of $280 million at September 30, 2012. Approximately $242 million of the unrealized losses pertained to privately issued mortgage-backed securities with a cost basis of $1.3 billion. The Company also had $30 million of unrealized losses on available-for-sale trust preferred securities issued by financial institutions and securities backed by trust preferred securities having a cost basis of $133 million. Based on a review of each of the securities in the investment securities portfolio at September 30, 2012, with the exception of the aforementioned securities for which other-than-temporary impairment losses were recognized, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 30, 2012, 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 September 30, 2012, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $319 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 that is included in the consolidated balance sheet is as follows:

 

     September 30,      December 31,  
     2012      2011  
     (in thousands)  

Outstanding principal balance

   $ 7,338,476         9,203,366   

Carrying amount:

     

Commercial, financial, leasing, etc.

     977,430         1,331,198   

Commercial real estate

     2,962,899         3,879,518   

Residential real estate

     742,977         915,371   

Consumer

     1,700,161         2,033,700   
  

 

 

    

 

 

 
   $ 6,383,467         8,159,787   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $528 million at September 30, 2012 and $653 million at December 31, 2011, representing less than 1% of the Company’s assets as of each date.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Interest income on acquired loans that were recorded at fair value at the acquisition date was $87 million and $259 million for the three months and nine months ended September 30, 2012 and $97 million and $207 million for the three months and nine months ended September 30, 2011, respectively. At December 31, 2010 and September 30, 2011, the accretable yield on acquired loans was $457 million and $944 million, respectively. A summary of changes in the accretable yield for acquired loans for the three months and nine months ended September 30, 2012 follows:

 

     Three months ended September 30, 2012  
     Purchased     Other        
     impaired     acquired     Total  
     (in thousands)  

Balance at beginning of period

   $ 55,599        733,161        788,760   

Interest income

     (12,436     (74,936     (87,372

Reclassifications from (to) nonaccretable balance, net

     542        —          542   

Other (a)

     —          1,382        1,382   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 43,705        659,607        703,312   
  

 

 

   

 

 

   

 

 

 
     Nine months ended September 30, 2012  
     Purchased     Other        
     impaired     acquired     Total  
     (in thousands)  

Balance at beginning of period

   $ 30,805        807,960        838,765   

Interest income

     (29,721     (228,908     (258,629

Reclassifications from (to) nonaccretable balance, net

     42,621        98,165        140,786   

Other (a)

     —          (17,610     (17,610
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 43,705        659,607        703,312   
  

 

 

   

 

 

   

 

 

 

 

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

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

A summary of current, past due and nonaccrual loans as of September 30, 2012 and December 31, 2011 were as follows:

 

            30-89
Days

past due
     90 Days or
more past
due and accruing
     Purchased
impaired

(b)
     Nonaccrual      Total  
   Current         Non-
acquired
     Acquired
(a)
          
                   (in thousands)                       

September 30, 2012

                    

Commercial, financial, leasing, etc.

   $ 16,496,862         50,980         2,574         14,919         17,434         121,806         16,704,575   

Real estate:

                    

Commercial

     20,926,702         142,780         12,479         54,329         151,685         172,246         21,460,221   

Residential builder and developer

     781,007         26,920         5,009         23,870         244,017         225,529         1,306,352   

Other commercial construction

     2,056,594         36,738         8,077         6,388         69,337         26,709         2,203,843   

Residential

     9,534,751         270,560         276,314         41,577         41,297         182,217         10,346,716   

Residential Alt-A

     340,568         25,203         —           —           —           95,733         461,504   

Consumer:

                    

Home equity lines and loans

     6,300,811         44,791         —           17,799         4,231         56,300         6,423,932   

Automobile

     2,429,579         40,813         —           345         —           25,537         2,496,274   

Other

     2,647,950         34,270         4,967         2,197         —           19,154         2,708,538   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,514,824         673,055         309,420         161,424         528,001         925,231         64,111,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Commercial, financial, leasing, etc.

   $ 15,493,803         37,112         7,601         8,560         23,762         163,598         15,734,436   

Real estate:

                    

Commercial

     19,658,761         172,641         9,983         54,148         192,804         171,111         20,259,448   

Residential builder and developer

     845,680         49,353         13,603         21,116         297,005         281,576         1,508,333   

Other commercial construction

     2,393,304         41,049         968         23,582         78,105         106,325         2,643,333   

Residential

     6,626,182         256,017         250,472         37,982         56,741         172,681         7,400,075   

Residential Alt-A

     383,834         34,077         —           —           —           105,179         523,090   

Consumer:

                    

Home equity lines and loans

     6,570,675         43,516         —           15,409         4,635         47,150         6,681,385   

Automobile

     2,644,330         48,342         —           601         —           26,835         2,720,108   

Other

     2,551,225         43,547         5,249         2,340         310         23,126         2,625,797   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,167,794         725,654         287,876         163,738         653,362         1,097,581         60,096,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

- 17 -


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 September 30, 2012 were as follows:

 

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

Beginning balance

   $ 244,728        341,521        93,269        164,352        73,158         917,028   

Provision for credit losses

     439        9,891        8,247        26,962        461         46,000   

Net charge-offs

             

Charge-offs

     (8,874     (7,982     (8,687     (24,553     —           (50,096

Recoveries

     1,174        1,421        1,139        4,557        —           8,291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (7,700     (6,561     (7,548     (19,996     —           (41,805
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 237,467        344,851        93,968        171,318        73,619         921,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in the allowance for credit losses for the three months ended September 30, 2011 were as follows:

 

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

Beginning balance

   $ 209,879        401,111        87,341        137,309        71,949        907,589   

Provision for credit losses

     23,145        (545     8,264        27,231        (95     58,000   

Net charge-offs

            

Charge-offs

     (12,073     (13,712     (12,135     (28,576     —          (66,496

Recoveries

     2,613        839        1,750        4,230        —          9,432   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (9,460     (12,873     (10,385     (24,346     —          (57,064
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 223,564        387,693        85,220        140,194        71,854        908,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the allowance for credit losses for the nine months ended September 30, 2012 were as follows:

 

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

Beginning balance

   $ 234,022        367,637        91,915        143,121        71,595         908,290   

Provision for credit losses

     29,663        4,322        30,064        88,927        2,024         155,000   

Net charge-offs

             

Charge-offs

     (32,989     (31,578     (32,812     (77,155     —           (174,534

Recoveries

     6,771        4,470        4,801        16,425        —           32,467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (26,218     (27,108     (28,011     (60,730     —           (142,067
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 237,467        344,851        93,968        171,318        73,619         921,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

- 18 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Changes in the allowance for credit losses for the nine months ended September 30, 2011 were as follows:

 

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

Beginning balance

   $ 212,579        400,562        86,351        133,067        70,382         902,941   

Provision for credit losses

     44,957        36,965        37,759        74,847        1,472         196,000   

Net charge-offs

             

Charge-offs

     (41,023     (54,206     (44,174     (81,837     —           (221,240

Recoveries

     7,051        4,372        5,284        14,117        —           30,824   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (33,972     (49,834     (38,890     (67,720     —           (190,416
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 223,564        387,693        85,220        140,194        71,854         908,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any portfolio segment.

 

- 19 -


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 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 all commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also monitored by the Company’s loan review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes at anytime. Except for consumer and residential mortgage 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.

The following tables provide information with respect to loans and leases that were considered impaired as of September 30, 2012 and December 31, 2011 and for the three months and nine months ended September 30, 2012 and September 30, 2011.

 

- 20 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

     September 30, 2012      December 31, 2011  
     Recorded
investment
     Unpaid
principal

balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

                 

Commercial, financial, leasing, etc.

   $ 106,448         126,156         29,911         118,538         145,510         48,674   

Real estate:

                 

Commercial

     107,669         135,663         18,734         102,886         128,456         17,651   

Residential builder and developer

     134,298         260,010         34,228         159,293         280,869         52,562   

Other commercial construction

     74,306         77,938         7,749         20,234         24,639         3,836   

Residential

     103,184         121,141         5,027         101,882         119,498         4,420   

Residential Alt-A

     131,043         143,670         19,000         150,396         162,978         25,000   

Consumer:

                 

Home equity lines and loans

     12,362         13,635         2,187         9,385         10,670         2,306   

Automobile

     50,886         50,886         15,012         53,710         53,710         11,468   

Other

     13,387         13,387         5,254         8,401         8,401         2,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     733,583         942,486         137,102         724,725         934,731         168,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     23,641         32,211         —           53,104         60,778         —     

Real estate:

                 

Commercial

     70,667         92,453         —           71,636         91,118         —     

Residential builder and developer

     95,202         117,478         —           133,156         177,277         —     

Other commercial construction

     12,153         12,727         —           86,652         89,862         —     

Residential

     22,752         31,352         —           19,686         25,625         —     

Residential Alt-A

     34,533         63,703         —           34,356         60,942         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     258,948         349,924         —           398,590         505,602         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     130,089         158,367         29,911         171,642         206,288         48,674   

Real estate:

                 

Commercial

     178,336         228,116         18,734         174,522         219,574         17,651   

Residential builder and developer

     229,500         377,488         34,228         292,449         458,146         52,562   

Other commercial construction

     86,459         90,665         7,749         106,886         114,501         3,836   

Residential

     125,936         152,493         5,027         121,568         145,123         4,420   

Residential Alt-A

     165,576         207,373         19,000         184,752         223,920         25,000   

Consumer:

                 

Home equity lines and loans

     12,362         13,635         2,187         9,385         10,670         2,306   

Automobile

     50,886         50,886         15,012         53,710         53,710         11,468   

Other

     13,387         13,387         5,254         8,401         8,401         2,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 992,531         1,292,410         137,102         1,123,315         1,440,333         168,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 21 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Three months ended
September 30, 2012
     Three months ended
September 30, 2011
 
            Interest income
recognized
            Interest income
recognized
 
     Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 141,166         1,507         1,507         152,368         1,172         1,166   

Real estate:

                 

Commercial

     180,009         531         531         195,832         810         808   

Residential builder and developer

     237,847         476         370         338,897         422         98   

Other commercial construction

     84,604         9         9         96,482         62         51   

Residential

     131,114         1,269         765         98,885         1,183         630   

Residential Alt-A

     167,780         1,836         593         192,609         1,872         494   

Consumer:

                 

Home equity lines and loans

     11,949         172         48         11,814         174         26   

Automobile

     51,138         863         185         56,071         957         262   

Other

     11,996         121         52         5,579         75         32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,017,603         6,784         4,060         1,148,537         6,727         3,567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine months ended
September 30, 2012
     Nine months ended
September 30, 2011
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 155,627         2,659         2,659         163,005         2,844         2,820   

Real estate:

                 

Commercial

     179,524         2,087         2,087         191,818         1,705         1,630   

Residential builder and developer

     260,858         1,202         801         321,386         1,261         338   

Other commercial construction

     100,242         5,019         5,019         102,978         759         522   

Residential

     128,646         3,926         2,453         92,918         3,209         1,770   

Residential Alt-A

     174,390         5,432         1,666         199,066         5,858         1,455   

Consumer:

                 

Home equity lines and loans

     11,024         502         136         11,989         523         74   

Automobile

     52,249         2,632         553         57,704         2,925         850   

Other

     10,097         320         138         4,124         187         51   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,072,657         23,779         15,512         1,144,988         19,271         9,510   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 22 -


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 as of September 30, 2012 and December 31, 2011.

 

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

September 30, 2012

           

Pass

   $ 15,823,813         20,373,273         976,233         1,966,097   

Criticized accrual

     758,956         914,702         104,590         211,037   

Criticized nonaccrual

     121,806         172,246         225,529         26,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,704,575         21,460,221         1,306,352         2,203,843   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Pass

   $ 14,869,636         19,089,252         1,085,970         2,254,609   

Criticized accrual

     701,202         999,085         140,787         282,399   

Criticized nonaccrual

     163,598         171,111         281,576         106,325   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,734,436         20,259,448         1,508,333         2,643,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 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 M&T’s Credit Department. In arriving at such forecasts, M&T 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. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values.

 

- 23 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

At September 30, 2012 and December 31, 2011, the allocation of the allowance for credit losses summarized on the basis of the Company’s impairment methodology was as follows:

 

    

Commercial,

Financial,

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

September 30, 2012

              

Individually evaluated for impairment

   $ 29,738         59,794         23,953         22,453       $ 135,938   

Collectively evaluated for impairment

     207,556         283,547         66,724         148,479         706,306   

Purchased impaired

     173         1,510         3,291         386         5,360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 237,467         344,851         93,968         171,318         847,604   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 73,619   
              

 

 

 

Total

               $ 921,223   
              

 

 

 

December 31, 2011

              

Individually evaluated for impairment

   $ 48,517         71,784         29,420         15,858       $ 165,579   

Collectively evaluated for impairment

     185,048         291,271         60,742         126,613         663,674   

Purchased impaired

     457         4,582         1,753         650         7,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 234,022         367,637         91,915         143,121         836,695   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 71,595   
              

 

 

 

Total

               $ 908,290   
              

 

 

 

 

- 24 -


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 as of September 30, 2012 and December 31, 2011 was as follows:

 

    

Commercial,

Financial,

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

September 30, 2012

              

Individually evaluated for impairment

   $ 129,916         488,493         290,023         76,676       $ 985,108   

Collectively evaluated for impairment

     16,557,225         24,016,884         10,476,900         11,547,837         62,598,846   

Purchased impaired

     17,434         465,039         41,297         4,231         528,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,704,575         24,970,416         10,808,220         11,628,744       $ 64,111,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Individually evaluated for impairment

   $ 171,442         561,615         306,320         71,496       $ 1,110,873   

Collectively evaluated for impairment

     15,539,232         23,281,585         7,560,104         11,950,849         58,331,770   

Purchased impaired

     23,762         567,914         56,741         4,945         653,362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,734,436         24,411,114         7,923,165         12,027,290       $ 60,096,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

- 25 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended September 30, 2012 and 2011:

 

            Recorded investment      Financial effects of
modification
 

Three months ended September 30, 2012

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

Commercial, financial, leasing, etc.

             

Principal deferral

     21       $ 7,823       $ 7,653       $ (170   $ —     

Combination of concession types

     2         327         322         (5     (39

Real estate:

             

Commercial

             

Principal deferral

     8         5,951         6,238         287        —     

Combination of concession types

     1         214         214         —          (49

Residential builder and developer

             

Principal deferral

     11         17,383         16,275         (1,108     —     

Combination of concession types

     1         2,486         2,486         —          —     

Other commercial construction

             

Principal deferral

     2         5,429         4,702         (727