Form 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 March 31, 2014

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One M & T Plaza

Buffalo, New York

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

(716) 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 the 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 April 30, 2014: 131,488,635 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2014

 

Table of Contents of Information Required in Report

   Page  
Part I. FINANCIAL INFORMATION   

Item 1.

  

Financial Statements.

  
  

CONSOLIDATED BALANCE SHEET - March 31, 2014 and December 31, 2013

     3   
  

CONSOLIDATED STATEMENT OF INCOME - Three months ended March 31, 2014 and 2013

     4   
  

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME – Three months ended March 31, 2014 and 2013

     5   
  

CONSOLIDATED STATEMENT OF CASH FLOWS - Three months ended March 31, 2014 and 2013

     6   
  

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Three months ended March 31, 2014 and 2013

     7   
  

NOTES TO FINANCIAL STATEMENTS

     8   

Item 2.

  

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

     51   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk.

     90   

Item 4.

  

Controls and Procedures.

     90   
Part II. OTHER INFORMATION   

Item 1.

  

Legal Proceedings.

     90   

Item 1A.

  

Risk Factors.

     91   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds.

     92   

Item 3.

  

Defaults Upon Senior Securities.

     92   

Item 4.

  

Mine Safety Disclosures.

     92   

Item 5.

  

Other Information.

     92   

Item 6.

  

Exhibits.

     93   
SIGNATURES      94   
EXHIBIT INDEX      94   

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)

 

          March 31,     December 31,  

Dollars in thousands, except per share

   2014     2013  

Assets

  

Cash and due from banks

   $ 1,671,052        1,573,361   
  

Interest-bearing deposits at banks

     3,299,185        1,651,138   
  

Federal funds sold

     92,066        99,573   
  

Trading account

     314,807        376,131   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,657,883 at March 31, 2014; $1,696,438 at December 31, 2013)

    
  

Available for sale (cost: $6,042,063 at March 31, 2014; $4,444,365 at December 31, 2013)

     6,191,571        4,531,786   
  

Held to maturity (fair value: $3,814,766 at March 31, 2014; $3,860,127 at December 31, 2013)

     3,873,985        3,966,130   
  

Other (fair value: $298,693 at March 31, 2014; $298,581 at December 31, 2013)

     298,693        298,581   
     

 

 

   

 

 

 
  

Total investment securities

     10,364,249        8,796,497   
     

 

 

   

 

 

 
  

Loans and leases

     64,378,511        64,325,783   
  

Unearned discount

     (243,433     (252,624
     

 

 

   

 

 

 
  

Loans and leases, net of unearned discount

     64,135,078        64,073,159   
  

Allowance for credit losses

     (916,768     (916,676
     

 

 

   

 

 

 
  

Loans and leases, net

     63,218,310        63,156,483   
     

 

 

   

 

 

 
  

Premises and equipment

     627,966        633,520   
  

Goodwill

     3,524,625        3,524,625   
  

Core deposit and other intangible assets

     58,789        68,851   
  

Accrued interest and other assets

     5,359,311        5,282,212   
     

 

 

   

 

 

 
  

Total assets

   $ 88,530,360        85,162,391   
     

 

 

   

 

 

 

Liabilities

  

Noninterest-bearing deposits

   $ 25,244,200        24,661,007   
  

NOW accounts

     1,917,763        1,989,441   
  

Savings deposits

     37,887,008        36,621,580   
  

Time deposits

     3,402,515        3,523,838   
  

Deposits at Cayman Islands office

     247,880        322,746   
     

 

 

   

 

 

 
  

Total deposits

     68,699,366        67,118,612   
     

 

 

   

 

 

 
  

Federal funds purchased and agreements to repurchase securities

     230,209        260,455   
  

Accrued interest and other liabilities

     1,462,725        1,368,922   
  

Long-term borrowings

     6,251,197        5,108,870   
     

 

 

   

 

 

 
  

Total liabilities

     76,643,497        73,856,859   
     

 

 

   

 

 

 

Shareholders’ equity

  

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

     1,231,500        881,500   
  

Common stock, $.50 par, 250,000,000 shares authorized, 131,388,585 shares issued at March 31, 2014; 130,516,364 shares issued at December 31, 2013

     65,694        65,258   
  

Common stock issuable, 42,100 shares at March 31, 2014; 47,231 shares at December 31, 2013

     2,616        2,915   
  

Additional paid-in capital

     3,302,402        3,232,014   
  

Retained earnings

     7,309,912        7,188,004   
  

Accumulated other comprehensive income (loss), net

     (25,261     (64,159
     

 

 

   

 

 

 
  

Total shareholders’ equity

     11,886,863        11,305,532   
     

 

 

   

 

 

 
  

Total liabilities and shareholders’ equity

   $ 88,530,360        85,162,391   
     

 

 

   

 

 

 

 

- 3 -


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended March 31  

In thousands, except per share

   2014     2013  

Interest income

  

Loans and leases, including fees

   $ 645,222        682,455   
  

Deposits at banks

     1,884        267   
  

Federal funds sold

     16        17   
  

Agreements to resell securities

     —          9   
  

Trading account

     427        638   
  

Investment securities

    
  

Fully taxable

     73,899        44,760   
  

Exempt from federal taxes

     1,504        1,829   
     

 

 

   

 

 

 
  

Total interest income

     722,952        729,975   
     

 

 

   

 

 

 

Interest expense

  

NOW accounts

     297        322   
  

Savings deposits

     11,601        14,037   
  

Time deposits

     3,940        8,196   
  

Deposits at Cayman Islands office

     208        388   
  

Short-term borrowings

     32        231   
  

Long-term borrowings

     50,441        50,751   
     

 

 

   

 

 

 
  

Total interest expense

     66,519        73,925   
     

 

 

   

 

 

 
  

Net interest income

     656,433        656,050   
  

Provision for credit losses

     32,000        38,000   
     

 

 

   

 

 

 
  

Net interest income after provision for credit losses

     624,433        618,050   
     

 

 

   

 

 

 

Other income

  

Mortgage banking revenues

     80,049        93,103   
  

Service charges on deposit accounts

     104,198        110,949   
  

Trust income

     121,252        121,603   
  

Brokerage services income

     16,500        15,711   
  

Trading account and foreign exchange gains

     6,447        8,927   
  

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

     —          (1,884
  

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

     —          (7,916
     

 

 

   

 

 

 
  

Net OTTI losses recognized in earnings

     —          (9,800
     

 

 

   

 

 

 
  

Equity in earnings of Bayview Lending Group LLC

     (4,454     (3,656
  

Other revenues from operations

     96,115        96,045   
     

 

 

   

 

 

 
  

Total other income

     420,107        432,882   
     

 

 

   

 

 

 

Other expense

  

Salaries and employee benefits

     371,326        356,551   
  

Equipment and net occupancy

     71,167        65,159   
  

Printing, postage and supplies

     10,956        10,699   
  

Amortization of core deposit and other intangible assets

     10,062        13,343   
  

FDIC assessments

     15,488        19,438   
  

Other costs of operations

     223,272        170,406   
     

 

 

   

 

 

 
  

Total other expense

     702,271        635,596   
     

 

 

   

 

 

 
  

Income before taxes

     342,269        415,336   
  

Income taxes

     113,252        141,223   
     

 

 

   

 

 

 
  

Net income

   $ 229,017        274,113   
     

 

 

   

 

 

 
  

Net income available to common shareholders

    
  

Basic

   $ 211,720        255,079   
  

Diluted

     211,731        255,096   
  

Net income per common share

    
  

Basic

   $ 1.63        2.00   
  

Diluted

     1.61        1.98   
  

Cash dividends per common share

   $ .70        .70   
  

Average common shares outstanding

    
  

Basic

     130,212        127,669   
  

Diluted

     131,126        128,636   

 

- 4 -


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended March 31  

In thousands

   2014     2013  

Net income

   $ 229,017        274,113   

Other comprehensive income, net of tax and reclassification adjustments:

    

Net unrealized gains on investment securities

     38,214        10,079   

Foreign currency translation adjustment

     (136     (932

Defined benefit plans liability adjustment

     820        5,164   
  

 

 

   

 

 

 

Total other comprehensive income

     38,898        14,311   
  

 

 

   

 

 

 

Total comprehensive income

   $ 267,915        288,424   
  

 

 

   

 

 

 

 

- 5 -


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Three months ended March 31  

In thousands

   2014     2013  

Cash flows from operating activities

  

Net income

   $ 229,017        274,113   
  

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

    
  

Provision for credit losses

     32,000        38,000   
  

Depreciation and amortization of premises and equipment

     24,708        22,027   
  

Amortization of capitalized servicing rights

     17,792        15,208   
  

Amortization of core deposit and other intangible assets

     10,062        13,343   
  

Provision for deferred income taxes

     42,256        19,253   
  

Asset write-downs

     1,117        13,558   
  

Net gain on sales of assets

     (852     (2,676
  

Net change in accrued interest receivable, payable

     (3,185     (2,872
  

Net change in other accrued income and expense

     57,884        80,645   
  

Net change in loans originated for sale

     122,406        205,643   
  

Net change in trading account assets and liabilities

     27,893        22,156   
     

 

 

   

 

 

 
  

Net cash provided by operating activities

     561,098        698,398   
     

 

 

   

 

 

 

Cash flows from investing activities

  

Proceeds from sales of investment securities

    
  

Other

     146        2,032   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     166,324        353,305   
  

Held to maturity

     92,305        79,164   
  

Purchases of investment securities

    
  

Available for sale

     (1,709,847     (14,597
  

Held to maturity

     (3,238     (6,010
  

Other

     (258     (274
  

Net (increase) decrease in loans and leases

     (220,551     404,142   
  

Net increase in interest-bearing deposits at banks

     (1,648,047     (1,174,825
  

Capital expenditures, net

     (16,725     (16,671
  

Net increase in loan servicing advances

     (122,910     (9,054
  

Other, net

     21,763        11,015   
     

 

 

   

 

 

 
  

Net cash used by investing activities

     (3,441,038     (371,773
     

 

 

   

 

 

 

Cash flows from financing activities

  

Net increase (decrease) in deposits

     1,581,705        (519,555
  

Net decrease in short-term borrowings

     (30,246     (699,889
  

Proceeds from long-term borrowings

     1,498,688        799,760   
  

Payments on long-term borrowings

     (352,245     (3,460
  

Proceeds from issuance of preferred stock

     346,500        —     
  

Dividends paid - common

     (92,406     (90,788
  

Dividends paid - preferred

     (6,080     (4,769
  

Other, net

     24,208        31,528   
     

 

 

   

 

 

 
  

Net cash provided (used) by financing activities

     2,970,124        (487,173
     

 

 

   

 

 

 
  

Net increase (decrease) in cash and cash equivalents

     90,184        (160,548
  

Cash and cash equivalents at beginning of period

     1,672,934        1,986,615   
     

 

 

   

 

 

 
  

Cash and cash equivalents at end of period

   $ 1,763,118        1,826,067   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

  

Interest received during the period

Interest paid during the period

Income taxes paid during the period

   $

 

 

695,653

61,841

4,789

  

  

  

   

 

 

718,296

72,106

9,545

  

  

  

     

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

  

Securitization of residential mortgage loans allocated to

Available-for-sale investment securities

Capitalized servicing rights

   $

 

29,785

372

  

  

   

 

—  

—  

  

  

  

Real estate acquired in settlement of loans

     8,886        8,244   

 

- 6 -


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share

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

2013

             

Balance - January 1, 2013

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

Total comprehensive income

    —          —          —          —          274,113        14,311        288,424   

Preferred stock cash dividends

    —          —          —          —          (13,363     —          (13,363

Amortization of preferred stock discount

    2,127        —          —          —          (2,127     —          —     

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

    —          93        —          (93     —          —          —     

Stock-based compensation plans:

             

Compensation expense, net

    —          160        —          12,911        —          —          13,071   

Exercises of stock options, net

    —          126        —          21,444        —          —          21,570   

Directors’ stock plan

    —          4        —          772        —          —          776   

Deferred compensation plans, net, including dividend equivalents

    —          5        (644     563        (32     —          (108

Other

    —          —          —          666        —          —          666   

Common stock cash dividends - $.70 per share

    —          —          —          —          (90,672     —          (90,672
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2013

  $ 874,627        64,476        2,829        3,061,783        6,645,195        (225,953     10,422,957   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          —          229,017        38,898        267,915   

Preferred stock cash dividends

    —          —          —          —          (14,674     —          (14,674

Issuance of Series E preferred stock

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

Stock-based compensation plans:

             

Compensation expense, net

    —          123        —          13,999        —          —          14,122   

Exercises of stock options, net

    —          266        —          49,228        —          —          49,494   

Stock purchase plan

    —          43        —          9,545        —          —          9,588   

Directors’ stock plan

    —          2        —          439        —          —          441   

Deferred compensation plans, net, including dividend equivalents

    —          2        (299     265        (29     —          (61

Other

    —          —          —          412        —          —          412   

Common stock cash dividends - $.70 per share

    —          —          —          —          (92,406     —          (92,406
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2014

  $ 1,231,500        65,694        2,616        3,302,402        7,309,912        (25,261     11,886,863   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 7 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS

1. Significant accounting policies

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

2. Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City will 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 March 31, 2014 total consideration to be paid was valued at approximately $5.2 billion.

At March 31, 2014, Hudson City had $38.2 billion of assets, including $23.8 billion of loans and $8.5 billion of investment securities, and $33.4 billion of liabilities, including $21.1 billion of deposits. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals.

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

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

 

- 8 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

A summary of merger-related expenses in the first quarter of 2013 associated with the pending Hudson City acquisition included in the consolidated statement of income is presented below. There were no merger-related expenses during the three-month period ended March 31, 2014.

 

     Three months ended
March 31, 2013
 
     (in thousands)  

Salaries and employee benefits

   $ 536   

Equipment and net occupancy

     201   

Printing, postage and supplies

     827   

Other cost of operations

     3,168   
  

 

 

 
   $ 4,732   
  

 

 

 

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)  

March 31, 2014

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 42,415         291         59       $ 42,647   

Obligations of states and political subdivisions

     10,148         306         71         10,383   

Mortgage-backed securities:

           

Government issued or guaranteed

     5,722,948         85,193         7,050         5,801,091   

Privately issued

     235         466         5         696   

Collateralized debt obligations

     38,451         23,623         306         61,768   

Other debt securities

     138,197         1,859         17,807         122,249   

Equity securities

     89,669         63,431         363         152,737   
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,042,063         175,169         25,661         6,191,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     162,894         3,280         194         165,980   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,486,786         26,847         37,718         3,475,915   

Privately issued

     215,649         —           51,434         164,215   

Other debt securities

     8,656         —           —           8,656   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,873,985         30,127         89,346         3,814,766   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     298,693         —           —           298,693   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,214,741         205,296         115,007       $ 10,305,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 9 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

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

December 31, 2013

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 37,396         382         2       $ 37,776   

Obligations of states and political subdivisions

     10,484         333         6         10,811   

Mortgage-backed securities:

           

Government issued or guaranteed

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

Privately issued

     1,468         387         5         1,850   

Collateralized debt obligations

     42,274         21,666         857         63,083   

Other debt securities

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

Equity securities

     91,480         41,842         227         133,095   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     169,684         3,744         135         173,293   

Mortgage-backed securities:

           

Government issued or guaranteed

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

Privately issued

     219,628         —           60,623         159,005   

Other debt securities

     8,913         —           —           8,913   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     298,581         —           —           298,581   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

There were no gross realized gains or losses from sales of investment securities for the quarters ended March 31, 2014 and 2013. The Company recognized $10 million of pre-tax other-than-temporary impairment (“OTTI”) losses during the quarter ended March 31, 2013 related to privately issued mortgage-backed securities. The impairment charges were recognized in light of deterioration of real estate values and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The OTTI losses represented management’s estimate of credit losses inherent in the debt securities considering projected cash flows using assumptions for delinquency rates, loss severities, and other estimates of future collateral performance. There were no OTTI losses during the first quarter of 2014.

Changes in credit losses associated with debt securities for which OTTI losses have been recognized in earnings for the three months ended March 31, 2013 follows:

 

     Three months ended
March 31, 2013
 
     (in thousands)  

Beginning balance

   $ 197,809   

Additions for credit losses not previously recognized

     9,800   

Reductions for realized losses

     (20,495
  

 

 

 

Ending balance

   $ 187,114   
  

 

 

 

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

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

At March 31, 2014, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:

 

     Amortized
cost
     Estimated
fair value
 
     (in thousands)  

Debt securities available for sale:

     

Due in one year or less

   $ 9,830         9,957   

Due after one year through five years

     43,459         44,086   

Due after five years through ten years

     5,328         5,442   

Due after ten years

     170,594         177,562   
  

 

 

    

 

 

 
     229,211         237,047   

Mortgage-backed securities available for sale

     5,723,183         5,801,787   
  

 

 

    

 

 

 
   $ 5,952,394         6,038,834   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 17,944         18,049   

Due after one year through five years

     74,928         76,540   

Due after five years through ten years

     70,022         71,391   

Due after ten years

     8,656         8,656   
  

 

 

    

 

 

 
     171,550         174,636   

Mortgage-backed securities held to maturity

     3,702,435         3,640,130   
  

 

 

    

 

 

 
   $ 3,873,985         3,814,766   
  

 

 

    

 

 

 

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

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

 

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

March 31, 2014

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 29,346         (59     —           —     

Obligations of states and political subdivisions

     1,930         (68     439         (3

Mortgage-backed securities:

          

Government issued or guaranteed

     1,725,859         (6,919     5,215         (131

Privately issued

     —           —          91         (5

Collateralized debt obligations

     —           —          6,097         (306

Other debt securities

     927         (10     105,418         (17,797

Equity securities

     2,307         (363     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,760,369         (7,419     117,260         (18,242
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     17,490         (155     2,658         (39
          

Mortgage-backed securities:

          

Government issued or guaranteed

     1,715,149         (37,718     —           —     

Privately issued

     —           —          164,215         (51,434
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,732,639         (37,873     166,873         (51,473
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,493,008         (45,292     284,133         (69,715
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2013

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 745         (2     —           —     

Obligations of states and political subdivisions

     —           —          558         (6

Mortgage-backed securities:

          

Government issued or guaranteed

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

Privately issued

     —           —          98         (5

Collateralized debt obligations

     —           —          6,257         (857

Other debt securities

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

Equity securities

     159         (227     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

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

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     13,517         (120     1,558         (15

Mortgage-backed securities:

          

Government issued or guaranteed

     2,629,950         (65,149     —           —     

Privately issued

     —           —          159,005         (60,623
  

 

 

    

 

 

   

 

 

    

 

 

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

 

 

    

 

 

   

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

 

 

- 12 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 392 individual investment securities with aggregate gross unrealized losses of $115 million at March 31, 2014. Based on a review of each of the securities in the investment securities portfolio at March 31, 2014, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 2014, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At March 31, 2014, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $299 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 were as follows:

 

     March 31,
2014
     December 31,
2013
 
     (in thousands)  

Outstanding principal balance

   $ 4,302,336         4,656,811   

Carrying amount:

     

Commercial, financial, leasing, etc.

     474,612         580,685   

Commercial real estate

     1,412,397         1,541,368   

Residential real estate

     551,698         576,473   

Consumer

     1,258,875         1,308,926   
  

 

 

    

 

 

 
   $ 3,697,582         4,007,452   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $303 million at March 31, 2014 and $331 million at December 31, 2013, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for acquired loans for the three months ended March 31, 2014 and 2013 follows:

 

     Three months ended March 31, 2014  
     Purchased
impaired
    Other
acquired
    Total  
     (in thousands)  

Balance at beginning of period

   $ 37,230        538,633        575,863   

Interest income

     (6,328     (52,633     (58,961

Reclassifications from nonaccretable balance, net

     37        —          37   

Other (a)

     —          (838     (838
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 30,939        485,162        516,101   
  

 

 

   

 

 

   

 

 

 

 

- 13 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Three months ended March 31, 2013  
     Purchased
impaired
    Other
acquired
    Total  
     (in thousands)  

Balance at beginning of period

   $ 42,252        638,272        680,524   

Interest income

     (8,704     (61,747     (70,451

Reclassifications from nonaccretable balance, net

     180        10,817        10,997   

Other (a)

     —          (9,733     (9,733
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 33,728        577,609        611,337   
  

 

 

   

 

 

   

 

 

 

 

(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 March 31, 2014 and December 31, 2013 were as 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)

 

March 31, 2014

                    

Commercial, financial, leasing, etc.

   $ 18,686,680         43,019         8,245         4,295         15,560         138,271         18,896,070   

Real estate:

                    

Commercial

     21,309,518         158,281         7,870         33,560         91,312         175,984         21,776,525   

Residential builder and developer

     1,073,532         3,613         —           8,812         122,757         89,563         1,298,277   

Other commercial construction

     2,915,804         41,861         —           2,381         44,175         25,063         3,029,284   

Residential

     7,530,046         254,376         285,478         45,733         26,986         259,678         8,402,297   

Residential Alt-A

     272,463         20,815         —           —           —           78,520         371,798   

Consumer:

                    

Home equity lines and loans

     5,914,788         36,440         —           26,039         2,598         82,555         6,062,420   

Automobile

     1,454,199         20,441         —           176         —           16,351         1,491,167   

Other

     2,744,821         32,087         5,424         —           —           24,908         2,807,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,901,851         610,933         307,017         120,996         303,388         890,893         64,135,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 14 -


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, 2013

                    

Commercial, financial, leasing, etc.

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

Real estate:

              

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential Alt-A

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

Consumer:

                    

Home equity lines and loans

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

Automobile

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

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

One-to-four family residential mortgage loans held for sale were $292 million and $401 million at March 31, 2014 and December 31, 2013, respectively. Commercial mortgage loans held for sale were $38 million at March 31, 2014 and $68 million at December 31, 2013.

Changes in the allowance for credit losses for the three months ended March 31, 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

     12,598        116        4,228        14,141        917         32,000   

Net charge-offs

             

Charge-offs

     (14,809     (3,486     (7,453     (21,691     —           (47,439

Recoveries

     5,663        3,197        1,631        5,040        —           15,531   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (9,146     (289     (5,822     (16,651     —           (31,908
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Changes in the allowance for credit losses for the three months ended March 31, 2013 were as follows:

 

    

Commercial,
Financial,

Leasing, etc.

    Real Estate                     
       Commercial     Residential     Consumer     Unallocated      Total  
     (in thousands)  

Beginning balance

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

Provision for credit losses

     17,880        (312     5,036        14,836        560         38,000   

Net charge-offs

             

Charge-offs

     (9,544     (9,588     (8,171     (21,645     —           (48,948

Recoveries

     2,756        815        4,450        4,184        —           12,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (6,788     (8,773     (3,721     (17,461     —           (36,743
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 257,851        328,016        90,122        176,793        74,335         927,117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

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

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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 March 31, 2014 and December 31, 2013 and for the three month periods ended March 31, 2014 and 2013.

 

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

With an allowance recorded:

           

Commercial, financial, leasing, etc.

   $ 104,878         130,132         21,578         90,293         112,092         24,614   

Real estate:

           

Commercial

     102,898         120,165         15,811         113,570         132,325         19,520   

Residential builder and developer

     31,314         45,625         4,746         33,311         55,122         4,379   

Other commercial construction

     77,054         81,296         5,933         86,260         90,515         4,022   

Residential

     93,029         112,025         5,262         96,508         114,521         7,146   

Residential Alt-A

     109,986         124,319         13,000         111,911         124,528         14,000   

Consumer:

           

Home equity lines and loans

     17,522         18,592         5,225         13,672         14,796         3,312   

Automobile

     38,068         38,068         10,120         40,441         40,441         11,074   

Other

     17,832         17,832         4,780         17,660         17,660         4,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     592,581         688,054         86,455         603,626         702,000         92,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

           

Commercial, financial, leasing, etc.

     40,542         42,948         —           28,093         33,095         —     

Real estate:

           

Commercial

     83,194         104,359         —           65,271         84,333         —     

Residential builder and developer

     68,487         101,354         —           72,366         104,768         —     

Other commercial construction

     5,801         9,400         —           7,369         11,493         —     

Residential

     84,328         94,408         —           84,144         95,358         —     

Residential Alt-A

     28,047         51,001         —           28,357         52,211         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     310,399         403,470         —           285,600         381,258         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Commercial, financial, leasing, etc.

     145,420         173,080         21,578         118,386         145,187         24,614   

Real estate:

           

Commercial

     186,092         224,524         15,811         178,841         216,658         19,520   

Residential builder and developer

     99,801         146,979         4,746         105,677         159,890         4,379   

Other commercial construction

     82,855         90,696         5,933         93,629         102,008         4,022   

Residential

     177,357         206,433         5,262         180,652         209,879         7,146   

Residential Alt-A

     138,033         175,320         13,000         140,268         176,739         14,000   

Consumer:

           

Home equity lines and loans

     17,522         18,592         5,225         13,672         14,796         3,312   

Automobile

     38,068         38,068         10,120         40,441         40,441         11,074   

Other

     17,832         17,832         4,780         17,660         17,660         4,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 902,980         1,091,524         86,455         889,226         1,083,258         92,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 17 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

     Three months ended
March 31, 2014
     Three months ended
March 31, 2013
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 134,306         548         548         167,793         2,434         2,434   

Real estate:

                 

Commercial

     185,425         926         926         194,446         303         303   

Residential builder and developer

     101,253         74         74         183,853         140         65   

Other commercial construction

     87,292         1,087         1,087         98,318         635         635   

Residential

     174,168         1,400         902         188,075         1,470         922   

Residential Alt-A

     139,651         1,626         559         156,971         1,740         591   

Consumer:

                 

Home equity lines and loans

     15,676         121         29         12,454         167         39   

Automobile

     39,383         625         87         47,606         776         146   

Other

     17,700         174         52         14,930         151         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 894,854         6,581         4,264         1,064,446         7,816         5,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

- 18 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

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

March 31, 2014

     

Pass

   $ 18,022,241         21,053,068         1,151,202         2,946,152   

Criticized accrual

     735,558         547,473         57,512         58,069   

Criticized nonaccrual

     138,271         175,984         89,563         25,063   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,896,070         21,776,525         1,298,277         3,029,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

     

Pass

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

Criticized accrual

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

Criticized nonaccrual

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

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

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

The 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.

 

- 19 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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)  

March 31, 2014

              

Individually evaluated for impairment

   $ 21,578         26,157         18,243         20,125       $ 86,103   

Collectively evaluated for impairment

     249,499         298,048         56,797         140,409         744,753   

Purchased impaired

     5,758         600         2,022         1,600         9,980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 276,835         324,805         77,062         162,134         840,836   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 75,932   
              

 

 

 

Total

               $ 916,768   
              

 

 

 

December 31, 2013

        

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

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

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 75,015   
              

 

 

 

Total

               $ 916,676   
              

 

 

 

The recorded investment in loans and leases 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)         

March 31, 2014

              

Individually evaluated for impairment

   $ 145,420         367,183         314,829         73,422       $ 900,854   

Collectively evaluated for impairment

     18,735,090         25,478,659         8,432,280         10,284,807         62,930,836   

Purchased impaired

     15,560         258,244         26,986         2,598         303,388   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,896,070         26,104,086         8,774,095         10,360,827       $ 64,135,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the normal course of business, the Company modifies loans to maximize recovery efforts. If the borrower is experiencing financial difficulty and a concession is granted, the Company considers such modifications as troubled debt restructurings and classifies those loans as either nonaccrual loans or renegotiated

 

- 20 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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.

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2014 and 2013:

 

            Recorded investment      Financial effects of
modification
 

Three months ended March 31, 2014

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

Commercial, financial, leasing, etc.

        

Principal deferral

     30       $ 14,954       $ 14,848       $ (106   $ —     

Combination of concession types

     2         41         39         (2     (4

Real estate:

        

Commercial

        

Principal deferral

     13         7,044         7,002         (42     —     

Combination of concession types

     1         346         401         55        (104

Other commercial construction

        

Principal deferral

     1         151         151         —          —     

Residential

        

Principal deferral

     13         1,602         1,663         61        —     

Interest rate reduction

     1         98         104         6        (32

Other

     1         188         188         —          —     

Combination of concession types

     14         2,188         2,160         (28     (282

Residential Alt-A

        

Principal deferral

     2         166         202         36        —     

Combination of concession types

     10         1,746         1,736         (10     (61

Consumer:

        

Home equity lines and loans

        

Principal deferral

     3         280         280         —          —     

Combination of concession types

     15         1,856         1,856         —          (172

Automobile

        

Principal deferral

     80         993         993         —          —     

Other

     11         61         61         —          —     

Combination of concession types

     23         250         250         —          (26

Other

        

Principal deferral

     8         55         55         —          —     

Other

     1         45         45         —          —     

Combination of concession types

     14         466         466         —          (188
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     243       $ 32,530       $ 32,500       $ (30   $ (869
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

- 21 -


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 March 31, 2013

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

Commercial, financial, leasing, etc.

        

Principal deferral

     24       $ 2,006       $ 1,982       $ (24   $ —     

Other

     1         47,200         47,200         —          —     

Combination of concession types

     1         342         342         —          —     

Real estate:

        

Commercial

        

Principal deferral

     8         18,478         18,363         (115     —     

Combination of concession types

     2         582         581         (1     (56

Residential builder and developer

        

Principal deferral

     8         1,357         1,340         (17     —     

Combination of concession types

     1         1,701         1,691         (10     —     

Residential

        

Principal deferral

     7         566         607         41        —     

Other

     1         195         195         —          —     

Combination of concession types

     20         2,449         2,536         87        (371

Residential Alt-A

        

Combination of concession types

     5         907         925         18        (110

Consumer:

        

Home equity lines and loans

        

Principal deferral

     2         79         79         —          —     

Combination of concession types

     2         211         211         —          (33

Automobile

        

Principal deferral

     121         1,586         1,586         —          —     

Interest rate reduction

     2         36         36         —          (5

Other

     17         159         159         —          —     

Combination of concession types

     61         553         553         —          (42

Other

        

Principal deferral

     6         45         45         —          —     

Other

     1         12         12         —          —     

Combination of concession types

     42         1,217         1,217         —          (267
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     332       $ 79,681       $ 79,660       $ (21   $ (884
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 March 31, 2014 and 2013 and for which there was a subsequent payment default during the three-month periods ended March 31, 2014 and 2013, respectively, were not material.

 

- 22 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings

M&T had $834 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2014 that are held by various trusts and were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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

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

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

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

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

 

- 23 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity

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

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

 

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

Series A (a)

        

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

     230,000       $ 230,000       $ 230,000   

Series C (a)

        

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

     151,500         151,500         151,500   

Series D (b)

        

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

     50,000         500,000         500,000   

Series E (c)

        

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

     350,000         350,000         —     

 

(a) Dividends, if declared, were paid quarterly at a rate of 5% per year through November 14, 2013 and are paid at 6.375% thereafter. M&T has agreed to not redeem the preferred shares until on or after November 15, 2018. Warrants to purchase M&T common stock were issued in connection with the Series A and C preferred stock (Series A – 1,218,522 common shares at $73.86 per share; Series C – 407,542 common shares at $55.76 per share). In March 2013, the Series C warrants were exercised in a “cashless” exercise, resulting in the issuance of 186,589 common shares. During 2013, 69,127 of the Series A warrants were exercised in “cashless” exercises, resulting in the issuance of 25,427 common shares. Remaining outstanding Series A warrants that expire in 2018 were 1,149,395 at March 31, 2014.
(b) Dividends, if declared, will be paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.

 

- 24 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

(c) Dividends, if declared, will be paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month London Interbank Offered Rate 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 and Series C warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at March 31, 2014 and December 31, 2013. The obligation under that warrant was assumed by M&T in an acquisition.

7. Pension plans and other postretirement benefits

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

 

     Pension
benefits
    Other
postretirement
benefits
 
     Three months ended March 31  
     2014     2013     2014     2013  
     (in thousands)  

Service cost

   $ 5,100        6,050        150        200   

Interest cost on projected benefit obligation

     17,250        15,126        675        675   

Expected return on plan assets

     (22,925     (21,875     —          —     

Amortization of prior service credit

     (1,650     (1,650     (350     (350

Amortization of net actuarial loss

     3,350        10,400        —          100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,125        8,051        475        625   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $15,732,000 and $15,755,000 for the three months ended March 31, 2014 and 2013, respectively.

 

- 25 -


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

March 31

 
     2014     2013  
    

(in thousands,

except per share)

 

Income available to common shareholders:

    

Net income

   $ 229,017        274,113   

Less: Preferred stock dividends (a)

     (14,674     (13,363

Amortization of preferred stock discount (a)

     —          (2,147
  

 

 

   

 

 

 

Net income available to common equity

     214,343        258,603   

Less: Income attributable to unvested stock-based compensation awards

     (2,623     (3,524
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 211,720        255,079   

Weighted-average shares outstanding:

    

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

     131,800        129,449   

Less: Unvested stock-based compensation awards

     (1,588     (1,780
  

 

 

   

 

 

 

Weighted-average shares outstanding

     130,212        127,669   

Basic earnings per common share

   $ 1.63        2.00   

 

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

 

- 26 -


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
March 31
 
     2014     2013  
    

(in thousands,

except per share)

 

Net income available to common equity

   $ 214,343        258,603   

Less: Income attributable to unvested stock-based compensation awards

     (2,612     (3,507
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 211,731        255,096   

Adjusted weighted-average shares outstanding:

    

Common and unvested stock-based compensation awards

     131,800        129,449   

Less: Unvested stock-based compensation awards

     (1,588     (1,780

Plus: Incremental shares from assumed conversion of stock-based compensation awards

     914        967   
  

 

 

   

 

 

 

Adjusted weighted-average shares outstanding

     131,126        128,636   

Diluted earnings per common share

   $ 1.61        1.98   

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 3.0 million and 4.7 million common shares during the three-month periods ended March 31, 2014 and 2013, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

- 27 -


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
     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

     19,968         42,119         —          —          62,087        (24,374     37,713   

Foreign currency translation adjustment

     —           —           —          (234     (234     98        (136
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     19,968         42,119         —          (234     61,853        (24,276     37,577   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

                

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

     2         823         —          —          825 (a)      (324     501   

Amortization of prior service credit

     —           —           (2,000     —          (2,000 )(c)      785        (1,215

Amortization of actuarial losses

     —           —           3,350        —          3,350        (1,315     2,035   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     2         823         1,350        —          2,175        (854     1,321   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     19,970         42,942         1,350        (234     64,028        (25,130     38,898   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2014

   $ 57,225         61,392         (160,267     (119   $ (41,769     16,508      $ (25,261
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 28 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

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

Balance – January 1, 2013

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

Other comprehensive income before reclassifications:

              

Unrealized holding gains (losses), net

     24,540        (18,959     —          —          5,581        (2,181     3,400   

Foreign currency translation adjustment

     —          —          —          (1,452     (1,452     520        (932
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     24,540        (18,959     —          (1,452     4,129        (1,661     2,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

              

Accretion of unrealized holding losses on HTM securities

     49        1,146        —          —          1,195 (a)      (469     726   

OTTI charges recognized in net income

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

Amortization of prior service credit

     —          —          (2,000     —          (2,000 )(c)      785        (1,215

Amortization of actuarial losses

     —          —          10,500        —          10,500 (c)      (4,121     6,379   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     9,849        1,146        8,500        —          19,495        (7,652     11,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     34,389        (17,813     8,500        (1,452     23,624        (9,313     14,311   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2013

   $ (57,446     134,386        (447,090     (1,883   $ (372,033     146,080      $ (225,953
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Included in interest income
(b) Included in OTTI losses recognized in earnings
(c) Included in salaries and employee benefits expense

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

 

                   Defined              
     Investment securities      benefit              
     With OTTI      All other      plans     Other     Total  

Balance – December 31, 2013

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

Net gain (loss) during period

     12,132         26,082         820        (136     38,898   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance – March 31, 2014

   $ 34,764         37,376         (97,362     (39     (25,261
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

- 29 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts is not significant as of March 31, 2014.

The net effect of interest rate swap agreements was to increase net interest income by $11 million and $10 million for the three months ended March 31, 2014 and 2013, 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:

 

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

March 31, 2014

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         3.4         4.42     1.19
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         3.7         4.42     1.20
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

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

Derivative financial instruments used for trading 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 purposes had notional values of $17.1 billion and $17.4 billion at March 31, 2014 and December 31, 2013, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $1.0 billion and $1.4 billion at March 31, 2014 and December 31, 2013, respectively.

 

- 30 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

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

 

     Asset derivatives      Liability derivatives  
     Fair value      Fair value  
     March 31,
2014
     December 31,
2013
     March 31,
2014
     December 31,
2013
 
  

 

 

          
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

        

Fair value hedges:

        

Interest rate swap agreements (a)

   $ 94,716         102,875       $ —           —     

Commitments to sell real estate loans (a)

     1,303         6,957         1,160         487   
  

 

 

    

 

 

    

 

 

    

 

 

 
     96,019         109,832         1,160         487   

Derivatives not designated and qualifying as hedging instruments

        

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

     13,878         7,616         1,289         3,675   

Commitments to sell real estate loans (a)

     2,807         6,120         1,895         230   

Trading:

           

Interest rate contracts (b)

     246,284         274,864         207,179         234,455   

Foreign exchange and other option and futures contracts (b)

     8,963         15,831         9,187         15,342   
  

 

 

    

 

 

    

 

 

    

 

 

 
     271,932         304,431         219,550         253,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 367,951         414,263       $ 220,710         254,189   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

- 31 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

     Amount of unrealized gain (loss) recognized  
     Three months ended
March 31, 2014
     Three months ended
March 31, 2013
 
     Derivative     Hedged item      Derivative     Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

         

Interest rate swap agreements:

         

Fixed rate long-term borrowings (a)

   $ (8,160     7,920       $ (8,873     8,900   
  

 

 

   

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedging instruments

         

Trading:

         

Interest rate contracts (b)

   $ (302      $ 968     

Foreign exchange and other option and futures contracts (b)

     (5,030        (381  
  

 

 

      

 

 

   

Total

   $ (5,332      $ 587     
  

 

 

      

 

 

   

 

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

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 $23 million at each of March 31, 2014 and December 31, 2013. 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 $175 million and $194 million at March 31, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $101 million and $107 million at March 31, 2014 and December 31, 2013, respectively. The Company was required to post collateral relating to those positions of $93 million and $95 million, at March 31, 2014 and December 31, 2013, 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,

 

- 32 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

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 March 31, 2014 was $32 million for which the Company had posted collateral of $22 million in the normal course of business. If the credit-risk-related contingent features had been triggered on March 31, 2014, the maximum amount of additional collateral the Company would have been required to post with counterparties was $10 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to an enforceable master netting arrangement, was $167 million and $183 million at March 31, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $94 million and $95 million at March 31, 2014 and December 31, 2013, respectively. Counterparties posted collateral relating to those positions of $92 million and $93 million at March 31, 2014 and December 31, 2013, 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.

11. Variable interest entities and asset securitizations

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 March 31, 2014 and December 31, 2013, the carrying values of the loans in the securitization trust were $117 million and $121 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 March 31, 2014 and December 31, 2013 was $18 million. Because the transaction was non-recourse, the Company’s maximum exposure to loss as a result of its association with the trust at March 31, 2014 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 March 31, 2014 and December 31, 2013, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet. The Company has recognized $34 million 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 preferred capital securities described in note 5.

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.3 billion at March 31, 2014 and December 31, 2013. 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

 

- 33 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

11. Variable interest entities and asset securitizations, continued

 

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 of its investments in such partnerships was $250 million, including $57 million of unfunded commitments, at March 31, 2014 and $236 million, including $45 million of unfunded commitments, at December 31, 2013. The Company has not provided financial or 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 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.

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 March 31, 2014.

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.

 

- 34 -


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 with 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.

The Company sold substantially all of its privately issued mortgage-backed securities classified as available for sale during the second quarter of 2013. In prior periods, the Company generally used model-based techniques to value such securities because the Company was significantly restricted in the level of market observable assumptions that could be relied upon. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs, the Company classified the valuation of privately issued mortgage-backed securities as Level 3.

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 March 31, 2014 and December 31, 2013. 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 11% 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 March 31, 2014, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $38 million and $62 million, respectively, and at December 31, 2013 were $42 million and $63 million, respectively. Privately issued mortgage-backed securities and securities backed by trust preferred securities issued by financial institutions and other entities constituted 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 testing of mathematical constructs, review of valuation methodology and significant assumptions used.

 

- 35 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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.

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.

 

- 36 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The following tables present assets and liabilities at March 31, 2014 and December 31, 2013 measured at estimated fair value on a recurring basis:

 

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

Trading account assets

   $ 314,807         49,473         265,334         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     42,647         —           42,647         —     

Obligations of states and political subdivisions

     10,383         —           10,383         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     5,801,091         —           5,801,091         —     

Privately issued

     696         —           —           696   

Collateralized debt obligations

     61,768         —           —           61,768   

Other debt securities

     122,249         —           122,249         —     

Equity securities

     152,737         80,580         72,157         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,191,571         80,580         6,048,527         62,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

     330,004         —           330,004         —     

Other assets (b)

     112,704         —           98,826         13,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 6,949,086         130,053         6,742,691         76,342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

   $ 216,366         —           216,366         —     

Other liabilities (b)

     4,344         —           3,055         1,289   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 220,710         —           219,421         1,289   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 37 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

     Fair value
measurements at
December 31,
2013
     Level 1 (a)      Level 2 (a)      Level 3  
     (in thousands)  

Trading account assets

   $ 376,131         51,386         324,745         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     37,776         —           37,776         —     

Obligations of states and political subdivisions

     10,811         —           10,811         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     4,165,086         —           4,165,086         —     

Privately issued

     1,850         —           —           1,850   

Collateralized debt obligations

     63,083         —           —           63,083   

Other debt securities

     120,085         —           120,085         —     

Equity securities

     133,095         82,450         50,645         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,531,786         82,450         4,384,403         64,933   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

     468,650         —           468,650         —     

Other assets (b)

     123,568         —           115,952         7,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 5,500,135         133,836         5,293,750         72,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

   $ 249,797         —           249,797         —     

Other liabilities (b)

     4,392         —           717         3,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 254,189         —           250,514         3,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2014 and the year ended December 31, 2013.
(b) Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3).

 

- 38 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2014 were as follows:

 

     Investment securities available for sale        
     Privately issued
mortgage-backed
securities
    Collateralized
debt
obligations
    Other assets
and other
liabilities
 
     (in thousands)  

Balance – January 1, 2014

   $ 1,850      $ 63,083      $ 3,941   

Total gains (losses) realized/unrealized:

      

Included in earnings

     —          —          22,383 (b) 

Included in other comprehensive income

     67 (e)      4,646 (e)      —     

Settlements

     (1,221     (5,961     —     

Transfers in and/or out of Level 3 (c)

     —          —          (13,735 )(d) 
  

 

 

   

 

 

   

 

 

 

Balance – March 31, 2014

   $ 696      $ 61,768      $ 12,589   
  

 

 

   

 

 

   

 

 

 

Changes in unrealized gains included in earnings related to assets still held at March 31, 2014

   $ —        $ —        $ 15,050 (b) 
  

 

 

   

 

 

   

 

 

 

 

- 39 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2013 were as follows:

 

     Investment securities available for
sale
       
     Privately issued
mortgage-backed
securities
    Collateralized
debt
obligations
    Other assets
and other
liabilities
 
     (in thousands)  

Balance – January 1, 2013

   $ 1,023,886      $ 61,869      $ 47,859   

Total gains (losses) realized/unrealized:

      

Included in earnings

     (9,800 )(a)      —          43,312 (b) 

Included in other comprehensive income

     26,381 (e)      740 (e)      —     

Settlements

     (47,220     (891     —     

Transfers in and/or out of Level 3 (c)

     —          —          (55,052 )(d) 
  

 

 

   

 

 

   

 

 

 

Balance – March 31, 2013

   $ 993,247      $ 61,718      $ 36,119   
  

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings related to assets still held at March 31, 2013

   $ (9,800 )(a)    $ —        $ 31,398 (b) 
  

 

 

   

 

 

   

 

 

 

 

(a) Reported as an other-than-temporary impairment loss in the consolidated statement of income.
(b) Reported as mortgage banking revenues in the consolidated statement of income and includes the fair value of commitment issuances and expirations.
(c) The Company’s policy for transfers between fair value levels is to recognize the transfer as of the actual date of the event or change in circumstances that caused the transfer.
(d) Transfers out of Level 3 consist of interest rate locks transferred to closed loans.
(e) Reported as net unrealized gains on investment securities in the consolidated statement of comprehensive income.

 

- 40 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The more significant of those assets follow.

Loans

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 20% to 75% at March 31, 2014. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $161 million at March 31, 2014 ($100 million and $61 million of which were classified as Level 2 and Level 3, respectively), $222 million at December 31, 2013 ($173 million and $49 million of which were classified as Level 2 and Level 3, respectively) and $227 million at March 31, 2013 ($158 million and $69 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on March 31, 2014 and 2013 were decreases of $15 million for each of the three month periods ended March 31, 2014 and 2013.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $11 million and $19 million at March 31, 2014 and March 31, 2013 respectively. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three months ended March 31, 2014 or 2013.

 

- 41 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

Significant unobservable inputs to Level 3 measurements

The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at March 31, 2014 and December 31, 2013:

 

     Fair value at
March 31, 2014
    

Valuation

technique

   Unobservable
input/assumptions
   Range
(weighted-
average)
 

Recurring fair value measurements

           

Privately issued mortgage–backed securities

   $ 696       Two independent pricing quotes           

Collateralized debt obligations

     61,768       Discounted cash flow    Probability
of default
     16%-54% (37 %) 
         Loss
severity
     100%   

Net other assets (liabilities) (a)

     12,589       Discounted cash flow    Commitment
expirations
     0%-90% (17 %) 

 

     Fair value at
December 31,
2013
    

Valuation

technique

   Unobservable
input/assumptions
   Range
(weighted-
average)
 

Recurring fair value measurements

           

Privately issued mortgage–backed securities

   $ 1,850       Two independent pricing quotes           

Collateralized debt obligations

     63,083       Discounted cash flow    Probability
of default
     17%-55% (39 %) 
         Loss
severity
     100%   

Net other assets (liabilities) (a)

     3,941       Discounted cash flow    Commitment
expirations
     0%-90% (20 %) 

 

(a) Other Level 3 assets (liabilities) consist of commitments to originate real estate loans.

Sensitivity of fair value measurements to changes in unobservable inputs

An increase (decrease) in the probability of default and loss severity for mortgage-backed securities and collateralized debt obligations would generally result in a lower (higher) fair value measurement.

An increase (decrease) in the estimate of expirations for commitments to originate real estate loans would generally result in a lower (higher) fair value measurement. Estimated commitment expirations are derived considering loan type, changes in interest rates and remaining length of time until closing.

 

- 42 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

Disclosures of fair value of financial instruments

With the exception of marketable securities, certain off-balance sheet financial instruments and one-to-four family residential mortgage loans originated for sale, the Company’s financial instruments are not readily marketable and market prices do not exist. The Company, in attempting to comply with the provisions of GAAP that require disclosures of fair value of financial instruments, has not attempted to market its financial instruments to potential buyers, if any exist. Since negotiated prices in illiquid markets depend greatly upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. Additional information about the assumptions and calculations utilized follows.

The carrying amounts and estimated fair value for financial instrument assets (liabilities) are presented in the following table:

 

     March 31, 2014  
     Carrying
amount
    Estimated
fair value
    Level 1      Level 2     Level 3  
     (in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 1,763,118      $ 1,763,118      $ 1,689,900       $ 73,218      $ —     

Interest-bearing deposits at banks

     3,299,185        3,299,185        —           3,299,185        —     

Trading account assets

     314,807        314,807        49,473         265,334        —     

Investment securities

     10,364,249        10,305,030        80,580         9,997,771        226,679   

Loans and leases:

           

Commercial loans and leases

     18,896,070        18,584,218        —           —          18,584,218   

Commercial real estate loans

     26,104,086        25,970,001        —           38,305        25,931,696   

Residential real estate loans

     8,774,095        8,733,704        —           5,285,649        3,448,055   

Consumer loans

     10,360,827        10,271,804        —           —          10,271,804   

Allowance for credit losses

     (916,768     —          —           —          —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and leases, net

     63,218,310        63,559,727        —           5,323,954        58,235,773   

Accrued interest receivable

     242,009        242,009        —           242,009        —     

Financial liabilities:

           

Noninterest-bearing deposits

   $ (25,244,200   $ (25,244,200   $ —         $ (25,244,200   $ —     

Savings deposits and NOW accounts

     (39,804,771     (39,804,771     —           (39,804,771     —     

Time deposits

     (3,402,515     (3,420,917     —           (3,420,917     —     

Deposits at Cayman Islands office

     (247,880     (247,880     —           (247,880     —     

Short-term borrowings

     (230,209     (230,209     —           (230,209     —     

Long-term borrowings

     (6,251,197     (6,388,067     —           (6,388,067     —     

Accrued interest payable

     (59,685     (59,685     —           (59,685     —     

Trading account liabilities

     (216,366     (216,366     —           (216,366     —     

Other financial instruments:

           

Commitments to originate real estate loans for sale

   $ 12,589      $ 12,589      $ —         $ —        $ 12,589   

Commitments to sell real estate loans

     1,055        1,055        —           1,055        —     

Other credit-related commitments

     (114,641     (114,641     —           —          (114,641

Interest rate swap agreements used for interest rate risk management

     94,716        94,716        —           94,716        —     

 

- 43 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

     December 31, 2013  
     Carrying
amount
    Estimated
fair value
    Level 1      Level 2     Level 3  
     (in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 1,672,934      $ 1,672,934      $ 1,596,877       $ 76,057      $ —     

Interest-bearing deposits at banks

     1,651,138        1,651,138        —           1,651,138        —     

Trading account assets

     376,131        376,131        51,386         324,745        —     

Investment securities

     8,796,497        8,690,494        82,450         8,384,106        223,938   

Loans and leases:

           

Commercial loans and leases

     18,705,216        18,457,288        —           —          18,457,288   

Commercial real estate loans

     26,148,208        26,018,195        —           67,505        25,950,690   

Residential real estate loans

     8,928,221        8,867,872        —           5,432,207        3,435,665   

Consumer loans

     10,291,514        10,201,087        —           —          10,201,087   

Allowance for credit losses

     (916,676     —          —           —          —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and leases, net

     63,156,483        63,544,442        —           5,499,712        58,044,730   

Accrued interest receivable

     222,558        222,558        —           222,558        —     

Financial liabilities:

           

Noninterest-bearing deposits

   $ (24,661,007   $ (24,661,007   $ —         $ (24,661,007   $ —     

Savings deposits and NOW accounts

     (38,611,021     (38,611,021     —           (38,611,021     —     

Time deposits

     (3,523,838     (3,542,789     —           (3,542,789     —     

Deposits at Cayman Islands office

     (322,746     (322,746     —           (322,746     —     

Short-term borrowings

     (260,455     (260,455     —           (260,455     —     

Long-term borrowings

     (5,108,870     (5,244,902     —           (5,244,902     —     

Accrued interest payable

     (43,419     (43,419     —           (43,419     —     

Trading account liabilities

     (249,797     (249,797     —           (249,797     —     

Other financial instruments:

           

Commitments to originate real estate loans for sale

   $ 3,941      $ 3,941      $ —         $ —        $ 3,941   

Commitments to sell real estate loans

     12,360        12,360        —           12,360        —     

Other credit-related commitments

     (118,886     (118,886     —           —          (118,886

Interest rate swap agreements used for interest rate risk management

     102,875        102,875        —           102,875        —     

The following assumptions, methods and calculations were used in determining the estimated fair value of financial instruments not measured at fair value in the consolidated balance sheet.

Cash and cash equivalents, interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable

Due to the nature of cash and cash equivalents and the near maturity of interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable, the Company estimated that the carrying amount of such instruments approximated estimated fair value.

Investment securities

Estimated fair values of investments in readily marketable securities were generally based on quoted market prices. Investment securities that were not readily marketable were assigned amounts based on estimates provided by outside parties or modeling techniques that relied upon discounted calculations of projected cash flows or, in the case of other investment securities, which include capital stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York, at an amount equal to the carrying amount.

Loans and leases

In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses.

 

- 44 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans and leases would seek.

Deposits

Pursuant to GAAP, the estimated fair value ascribed to noninterest-bearing deposits, savings deposits and NOW accounts must be established at carrying value because of the customers’ ability to withdraw funds immediately. Time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to time deposits were based on discounted cash flow calculations using prevailing market interest rates based on the Company’s pricing at the respective date for deposits with comparable remaining terms to maturity.

The Company believes that deposit accounts have a value greater than that prescribed by GAAP. The Company feels, however, that the value associated with these deposits is greatly influenced by characteristics of the buyer, such as the ability to reduce the costs of servicing the deposits and deposit attrition which often occurs following an acquisition.

Long-term borrowings

The amounts assigned to long-term borrowings were based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for borrowings of similar terms and credit risk.

Other commitments and contingencies

As described in note 13, in the normal course of business, various commitments and contingent liabilities are outstanding, such as loan commitments, credit guarantees and letters of credit. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide for relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments, credit guarantees and letters of credit are competitive with other financial institutions operating in markets served by the Company. The Company believes that the carrying amounts, which are included in other liabilities, are reasonable estimates of the fair value of these financial instruments.

The Company does not believe that the estimated information presented herein is representative of the earnings power or value of the Company. The preceding analysis, which is inherently limited in depicting fair value, also does not consider any value associated with existing customer relationships nor the ability of the Company to create value through loan origination, deposit gathering or fee generating activities.

Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

 

- 45 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

13. Commitments and contingencies

In the normal course of business, various commitments and contingent liabilities are outstanding. The following table presents the Company’s significant commitments. Certain of these commitments are not included in the Company’s consolidated balance sheet.

 

     March 31,
2014
     December 31,
2013
 
     (in thousands)  

Commitments to extend credit

     

Home equity lines of credit

   $ 6,260,931         6,218,823   

Commercial real estate loans to be sold

     151,989         62,386   

Other commercial real estate and construction

     4,055,951         3,919,545   

Residential real estate loans to be sold

     521,869         469,869   

Other residential real estate

     368,055         384,617   

Commercial and other

     10,781,231         10,419,545   

Standby letters of credit

     3,531,586         3,600,528   

Commercial letters of credit

     39,197         53,284   

Financial guarantees and indemnification contracts

     2,842,506         2,457,633   

Commitments to sell real estate loans

     845,549         854,656   

Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, whereas commercial letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and a third party. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.

Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in financial guarantees and indemnification contracts are loan principal amounts sold with recourse in conjunction with the Company’s involvement in the Fannie Mae Delegated Underwriting and Servicing program. The Company’s maximum credit risk for recourse associated with loans sold under this program totaled approximately $2.3 billion at each of March 31, 2014 and December 31, 2013.

Since many loan commitments, standby letters of credit, and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows.

 

- 46 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

13. Commitments and contingencies, continued

 

The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the fair value of real estate loans held for sale. Such commitments are considered derivatives and along with commitments to originate real estate loans to be held for sale are generally recorded in the consolidated balance sheet at estimated fair market value.

The Company has an agreement with the Baltimore Ravens of the National Football League whereby the Company obtained the naming rights to a football stadium in Baltimore, Maryland. Under the agreement, the Company is obligated to pay $6 million per year from 2014 through 2017.

The Company also has commitments under long-term operating leases.

The Company reinsures credit life and accident and health insurance purchased by consumer loan customers. The Company also enters into reinsurance contracts with third party insurance companies who insure against the risk of a mortgage borrower’s payment default in connection with certain mortgage loans originated by the Company. When providing reinsurance coverage, the Company receives a premium in exchange for accepting a portion of the insurer’s risk of loss. The outstanding loan principal balances reinsured by the Company were approximately $14 million at March 31, 2014. Assets of subsidiaries providing reinsurance that are available to satisfy claims totaled approximately $35 million at March 31, 2014. The amounts noted above are not necessarily indicative of losses which may ultimately be incurred. Such losses are expected to be substantially less because most loans are repaid by borrowers in accordance with the original loan terms. Management believes that any reinsurance losses that may be payable by the Company will not be material to the Company’s consolidated financial position.

The Company is contractually obligated to repurchase previously sold residential real estate loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan documentation. When required to do so, the Company may reimburse loan purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues by an estimate for losses related to its obligations to loan purchasers. The amount of those charges is based on the volume of loans sold, the level of reimbursement requests received from loan purchasers and estimates of losses that may be associated with previously sold loans. At March 31, 2014, management believes that any further liability arising out of the Company’s obligation to loan purchasers is not material to the Company’s consolidated financial position.

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. On an on-going basis the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in