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 June 30, 2014

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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 July 31, 2014: 131,965,978 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2014

 

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1. Financial Statements.

  

CONSOLIDATED BALANCE SHEET—June 30, 2014 and December 31, 2013

     3   

CONSOLIDATED STATEMENT OF INCOME—Three and six months ended June 30, 2014 and 2013

     4   

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME—Three and six months ended June 30, 2014 and 2013

     5   

CONSOLIDATED STATEMENT OF CASH FLOWS—Six months ended June 30, 2014 and 2013

     6   

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY—Six months ended June 30, 2014 and 2013

     7   

NOTES TO FINANCIAL STATEMENTS

     8   

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

     57   

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     105   

Item 4. Controls and Procedures.

     105   

Part II. OTHER INFORMATION

  

Item 1. Legal Proceedings.

     105   

Item 1A. Risk Factors.

     106   

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

     107   

Item 3. Defaults Upon Senior Securities.

     107   

Item 4. Mine Safety Disclosures.

     107   

Item 5. Other Information.

     107   

Item 6. Exhibits.

     108   

SIGNATURES

     108   

EXHIBIT INDEX

     109   

 

-2-


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)

 

         June 30,     December 31,  

Dollars in thousands, except per share

   2014     2013  

Assets

 

Cash and due from banks

   $ 1,827,197        1,573,361   
 

Interest-bearing deposits at banks

     3,032,530        1,651,138   
 

Federal funds sold

     90,239        99,573   
 

Trading account

     313,325        376,131   
 

Investment securities (includes pledged securities that can be sold or repledged of $1,620,148 at June 30, 2014; $1,696,438 at December 31, 2013)

    
 

Available for sale (cost: $7,753,752 at June 30, 2014; $4,444,365 at December 31, 2013)

     8,008,779        4,531,786   
 

Held to maturity (fair value: $3,765,849 at June 30, 2014; $3,860,127 at December 31, 2013)

     3,760,665        3,966,130   
 

Other (fair value: $350,751 at June 30, 2014; $298,581 at December 31, 2013)

     350,751        298,581   
    

 

 

   

 

 

 
 

Total investment securities

     12,120,195        8,796,497   
    

 

 

   

 

 

 
 

Loans and leases

     64,980,824        64,325,783   
 

Unearned discount

     (233,131     (252,624
    

 

 

   

 

 

 
 

Loans and leases, net of unearned discount

     64,747,693        64,073,159   
 

Allowance for credit losses

     (917,666     (916,676
    

 

 

   

 

 

 
 

Loans and leases, net

     63,830,027        63,156,483   
    

 

 

   

 

 

 
 

Premises and equipment

     625,006        633,520   
 

Goodwill

     3,524,625        3,524,625   
 

Core deposit and other intangible assets

     49,555        68,851   
 

Accrued interest and other assets

     5,422,303        5,282,212   
    

 

 

   

 

 

 
 

Total assets

   $ 90,835,002        85,162,391   
    

 

 

   

 

 

 

Liabilities

 

Noninterest-bearing deposits

   $ 26,088,763        24,661,007   
 

NOW accounts

     2,007,336        1,989,441   
 

Savings deposits

     38,209,271        36,621,580   
 

Time deposits

     3,285,995        3,523,838   
 

Deposits at Cayman Islands office

     237,890        322,746   
    

 

 

   

 

 

 
 

Total deposits

     69,829,255        67,118,612   
    

 

 

   

 

 

 
 

Federal funds purchased and agreements to repurchase securities

     161,631        260,455   
 

Accrued interest and other liabilities

     1,283,430        1,368,922   
 

Long-term borrowings

     7,391,931        5,108,870   
    

 

 

   

 

 

 
 

Total liabilities

     78,666,247        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 June 30, 2014; 381,500 shares at December 31, 2013; Liquidation preference of $10,000 per share: 50,000 shares at June 30, 2014 and December 31, 2013

     1,231,500        881,500   
 

Common stock, $.50 par, 250,000,000 shares authorized, 131,911,359 shares issued at June 30, 2014; 130,516,364 shares issued at December 31, 2013

     65,956        65,258   
 

Common stock issuable, 41,635 shares at June 30, 2014; 47,231 shares at December 31, 2013

     2,600        2,915   
 

Additional paid-in capital

     3,347,314        3,232,014   
 

Retained earnings

     7,481,077        7,188,004   
 

Accumulated other comprehensive income (loss), net

     40,308        (64,159
    

 

 

   

 

 

 
 

Total shareholders’ equity

     12,168,755        11,305,532   
    

 

 

   

 

 

 
 

Total liabilities and shareholders’ equity

   $ 90,835,002        85,162,391   
    

 

 

   

 

 

 

 

-3-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended June 30     Six months ended June 30  

In thousands, except per share

   2014     2013     2014     2013  

Interest income

   Loans and leases, including fees    $ 645,029        705,395      $ 1,290,251        1,387,850   
   Investment securities         
  

Fully taxable

     85,210        41,293        159,109        86,053   
  

Exempt from federal taxes

     1,293        1,777        2,797        3,606   
   Deposits at banks      2,535        1,455        4,419        1,722   
   Other      223        287        666        951   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest income

     734,290        750,207        1,457,242        1,480,182   
     

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   NOW accounts      330        321        627        643   
   Savings deposits      11,181        13,790        22,782        27,827   
   Time deposits      3,855        7,484        7,795        15,680   
   Deposits at Cayman Islands office      181        200        389        588   
   Short-term borrowings      25        96        57        327   
   Long-term borrowings      49,604        50,729        100,045        101,480   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest expense

     65,176        72,620        131,695        146,545   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net interest income      669,114        677,587        1,325,547        1,333,637   
   Provision for credit losses      30,000        57,000        62,000        95,000   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net interest income after provision for credit losses      639,114        620,587        1,263,547        1,238,637   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other income

   Mortgage banking revenues      95,656        91,262        175,705        184,365   
   Service charges on deposit accounts      107,368        111,717        211,566        222,666   
   Trust income      129,893        124,728        251,145        246,331   
   Brokerage services income      17,487        17,258        33,987        32,969   
   Trading account and foreign exchange gains      8,042        9,224        14,489        18,151   
   Gain on bank investment securities      —          56,457        —          56,457   
   Total other-than-temporary impairment (“OTTI”) losses      —          —          —          (1,884
  

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

     —          —          —          (7,916
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net OTTI losses recognized in earnings

     —          —          —          (9,800
     

 

 

   

 

 

   

 

 

   

 

 

 
   Equity in earnings of Bayview Lending Group LLC      (4,055     (2,453     (8,509     (6,109
   Other revenues from operations      102,021        100,496        198,136        196,541   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other income

     456,412        508,689        876,519        941,571   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

   Salaries and employee benefits      339,713        323,136        711,039        679,687   
   Equipment and net occupancy      68,084        64,278        139,251        129,437   
   Printing, postage and supplies      9,180        10,298        20,136        20,997   
   Amortization of core deposit and other intangible assets      9,234        12,502        19,296        25,845   
   FDIC assessments      15,155        17,695        30,643        37,133   
   Other costs of operations      239,828        170,682        463,100        341,088   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other expense

     681,194        598,591        1,383,465        1,234,187   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Income before taxes      414,332        530,685        756,601        946,021   
   Income taxes      129,996        182,219        243,248        323,442   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net income    $ 284,336        348,466      $ 513,353        622,579   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net income available to common shareholders         
  

Basic

   $ 260,680        328,538      $ 472,404        583,597   
  

Diluted

     260,695        328,557        472,429        583,633   
   Net income per common share         
  

Basic

   $ 1.99        2.56      $ 3.62        4.56   
  

Diluted

     1.98        2.55        3.59        4.53   
   Cash dividends per common share    $ .70        .70      $ 1.40        1.40   
   Average common shares outstanding         
  

Basic

     130,856        128,252        130,536        127,962   
  

Diluted

     131,828        129,017        131,479        128,828   

 

-4-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended June 30     Six months ended June 30  

In thousands

   2014     2013     2014     2013  

Net income

   $ 284,336        348,466      $ 513,353        622,579   

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

        

Net unrealized gains (losses) on investment securities

     64,652        (6,722     102,866        3,357   

Unrealized losses on cash flow hedges

     (711     —          (711     —     

Foreign currency translation adjustment

     449        (114     313        (1,046

Defined benefit plans liability adjustment

     1,179        5,018        1,999        10,182   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     65,569        (1,818     104,467        12,493   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 349,905        346,648      $ 617,820        635,072   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

-5-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

         Six months ended June 30  

In thousands

   2014     2013  

Cash flows from operating activities

 

Net income

   $ 513,353        622,579   
 

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

    
 

Provision for credit losses

     62,000        95,000   
 

Depreciation and amortization of premises and equipment

     49,133        43,354   
 

Amortization of capitalized servicing rights

     34,868        30,653   
 

Amortization of core deposit and other intangible assets

     19,296        25,845   
 

Provision for deferred income taxes

     40,964        30,373   
 

Asset write-downs

     2,015        15,043   
 

Net gain on sales of assets

     (1,991     (59,134
 

Net change in accrued interest receivable, payable

     10,036        (1,131
 

Net change in other accrued income and expense

     (82,817     20,336   
 

Net change in loans originated for sale

     (192,521     (220,784
 

Net change in trading account assets and liabilities

     15,168        14,362   
    

 

 

   

 

 

 
 

Net cash provided by operating activities

     469,504        616,496   
    

 

 

   

 

 

 

Cash flows from investing activities

 

Proceeds from sales of investment securities

    
 

Available for sale

     16        1,081,496   
 

Other

     734        5,439   
 

Proceeds from maturities of investment securities

    
 

Available for sale

     375,372        652,074   
 

Held to maturity

     211,005        141,255   
 

Purchases of investment securities

    
 

Available for sale

     (3,609,758     (39,411
 

Held to maturity

     (10,745     (11,252
 

Other

     (52,904     (8,540
 

Net increase in loans and leases

     (566,803     (228,853
 

Net increase in interest-bearing deposits at banks

     (1,381,392     (2,425,409
 

Capital expenditures, net

     (37,747     (43,663
 

Net (increase) decrease in loan servicing advances

     (257,704     47,290   
 

Other, net

     16,990        38,072   
    

 

 

   

 

 

 
 

Net cash used by investing activities

     (5,312,936     (791,502
    

 

 

   

 

 

 

Cash flows from financing activities

 

Net increase in deposits

     2,712,470        54,101   
 

Net decrease in short-term borrowings

     (98,824     (766,742
 

Proceeds from long-term borrowings

     2,647,688        799,760   
 

Payments on long-term borrowings

     (360,345     (257,178
 

Proceeds from issuance of preferred stock

     346,500        —     
 

Dividends paid—common

     (185,134     (181,842
 

Dividends paid—preferred

     (29,348     (26,725
 

Other, net

     54,927        41,519   
    

 

 

   

 

 

 
 

Net cash provided (used) by financing activities

     5,087,934        (337,107
    

 

 

   

 

 

 
 

Net increase (decrease) in cash and cash equivalents

     244,502        (512,113
 

Cash and cash equivalents at beginning of period

     1,672,934        1,986,615   
    

 

 

   

 

 

 
 

Cash and cash equivalents at end of period

   $ 1,917,436        1,474,502   
    

 

 

   

 

 

 

Supplemental disclosure of cash flow information

 

Interest received during the period

   $ 1,420,720        1,459,142   
 

Interest paid during the period

     120,109        151,737   
 

Income taxes paid during the period

     198,028        226,406   
    

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

 

Securitization of residential mortgage loans allocated to

    
 

Available-for-sale investment securities

   $ 76,097        —     
 

Held to maturity investment securities

     —          917,045   
 

Capitalized servicing rights

     976        8,907   
 

Real estate acquired in settlement of loans

     18,677        15,502   

 

-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

    —          —          —          —          622,579       12,493        635,072   

Preferred stock cash dividends

    —          —          —          —          (26,725 )     —          (26,725

Amortization of preferred stock discount

    4,296        —          —          —          (4,296 )     —          —     

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

    —          93        —          (93     —          —          —     

Stock-based compensation plans:

             

Compensation expense, net

    —          153        —          21,056        —          —          21,209   

Exercises of stock options, net

    —          366        —          63,505        —          —          63,871   

Directors’ stock plan

    —          4        —          793        —          —          797   

Deferred compensation plans, net, including dividend equivalents

    —          5        (613     564        (66 )       (110

Other

    —          —          —          1,321        —          —          1,321   

Common stock cash dividends—$1.40 per share

    —          —          —          —          (181,698 )     —          (181,698
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—June 30, 2013

  $ 876,796        64,709        2,860        3,112,666        6,887,070        (227,771     10,716,330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2014

             

Balance—January 1, 2014

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

Total comprehensive income

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

Preferred stock cash dividends

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

Issuance of Series E preferred stock

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

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

    —          75        —          (75     —          —          —     

Stock-based compensation plans:

             

Compensation expense, net

    —          131        —          23,250        —          —          23,381   

Exercises of stock options, net

    —          442        —          84,002        —          —          84,444   

Stock purchase plan

    —          43        —          9,545        —          —          9,588   

Directors’ stock plan

    —          4        —          875        —          —          879   

Deferred compensation plans, net, including dividend equivalents

    —          3        (315     309        (58 )     —          (61

Other

    —          —          —          894        —          —          894   

Common stock cash dividends—$1.40 per share

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—June 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-7-


Table of Contents

NOTES TO FINANCIAL STATEMENTS

1. Significant accounting policies

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

2. Acquisitions

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

At June 30, 2014, Hudson City had $37.7 billion of assets, including $23.3 billion of loans and $8.2 billion of investment securities, and $32.9 billion of liabilities, including $20.5 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 incurred in 2013 associated with the pending Hudson City acquisition included in the consolidated statement of income is presented below. There were no merger-related expenses during the three months or six months ended June 30, 2014.

 

     Three months ended      Six months ended  
     June 30, 2013      June 30, 2013  
     (in thousands)  

Salaries and employee benefits

   $ 300       $ 836   

Equipment and net occupancy

     489         690   

Printing, postage and supplies

     998         1,825   

Other costs of operations

     5,845         9,013   
  

 

 

    

 

 

 
   $ 7,632       $ 12,364   
  

 

 

    

 

 

 

 

-9-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities

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

 

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

June 30, 2014

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 42,600         324         3       $ 42,921   

Obligations of states and political subdivisions

     9,999         302         59         10,242   

Mortgage-backed securities:

           

Government issued or guaranteed

     7,426,259         191,716         348         7,617,627   

Privately issued

     119         4         4         119   

Collateralized debt obligations

     32,548         24,100         448         56,200   

Other debt securities

     138,362         2,185         15,784         124,763   

Equity securities

     103,865         54,119         1,077         156,907   
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,753,752         272,750         17,723         8,008,779   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     154,733         3,289         88         157,934   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,387,213         67,816         14,881         3,440,148   

Privately issued

     210,388         —           50,952         159,436   

Other debt securities

     8,331         —           —           8,331   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,760,665         71,105         65,921         3,765,849   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     350,751         —           —           350,751   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,865,168         343,855         83,644       $ 12,125,379   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-10-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

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

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

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

 

     Three months ended     Six months ended  
     June 30, 2013     June 30, 2013  
     (in thousands)  

Beginning balance

   $ 187,114        197,809   

Additions for credit losses not previously recognized

     —          9,800   

Reductions for realized losses

     (186,320     (206,815
  

 

 

   

 

 

 

Ending balance

   $ 794        794   
  

 

 

   

 

 

 

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

 

-11-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

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

 

     Amortized
cost
     Estimated
fair value
 
     (in thousands)  

Debt securities available for sale:

     

Due in one year or less

   $ 7,513         7,592   

Due after one year through five years

     46,209         46,952   

Due after five years through ten years

     5,009         5,145   

Due after ten years

     164,778         174,437   
  

 

 

    

 

 

 
     223,509         234,126   

Mortgage-backed securities available for sale

     7,426,378         7,617,746   
  

 

 

    

 

 

 
   $ 7,649,887         7,851,872   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 21,159         21,326   

Due after one year through five years

     78,588         80,389   

Due after five years through ten years

     54,986         56,219   

Due after ten years

     8,331         8,331   
  

 

 

    

 

 

 
     163,064         166,265   

Mortgage-backed securities held to maturity

     3,597,601         3,599,584   
  

 

 

    

 

 

 
   $ 3,760,665         3,765,849   
  

 

 

    

 

 

 

 

-12-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

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

 

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

June 30, 2014

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 5,865         (3     —           —     

Obligations of states and political subdivisions

     1,832         (55     437         (4

Mortgage-backed securities:

          

Government issued or guaranteed

     42,896         (158     8,254         (190

Privately issued

     —           —          77         (4

Collateralized debt obligations

     2,633         (114     5,557         (334

Other debt securities

     157         (10     99,118         (15,774

Equity securities

     3,240         (1,077     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     56,623         (1,417     113,443         (16,306
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     8,329         (34     3,753         (54

Mortgage-backed securities:

          

Government issued or guaranteed

     140,724         (878     730,795         (14,003

Privately issued

     —           —          159,436         (50,952
  

 

 

    

 

 

   

 

 

    

 

 

 
     149,053         (912     893,984         (65,009
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 205,676         (2,329     1,007,427         (81,315
  

 

 

    

 

 

   

 

 

    

 

 

 

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
  

 

 

    

 

 

   

 

 

    

 

 

 

 

-13-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 289 individual investment securities with aggregate gross unrealized losses of $84 million at June 30, 2014. Based on a review of each of the securities in the investment securities portfolio at June 30, 2014, the Company concluded that it expected to recover the amortized cost basis of its investment. As of June 30, 2014, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At June 30, 2014, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $351 million of cost method investment securities.

4. Loans and leases and the allowance for credit losses

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

 

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

Outstanding principal balance

   $ 3,828,214         4,656,811   

Carrying amount:

     

Commercial, financial, leasing, etc.

     396,166         580,685   

Commercial real estate

     1,285,386         1,541,368   

Residential real estate

     515,791         576,473   

Consumer

     1,051,728         1,308,926   
  

 

 

    

 

 

 
   $ 3,249,071         4,007,452   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $283 million at June 30, 2014 and $331 million at December 31, 2013, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for acquired loans for the three months and six months ended June 30, 2014 and 2013 follows:

 

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

Balance at beginning of period

   $ 30,939        485,162      $ 33,728        577,609   

Interest income

     (5,106     (43,452     (9,747     (67,539

Reclassifications from nonaccretable balance, net

     249        774        31,168        111,702   

Other (a)

     —          8,486        —          321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

 

-14-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Six months ended June 30  
     2014     2013  
     Purchased
impaired
    Other
acquired
    Purchased
impaired
    Other
acquired
 
     (in thousands)  

Balance at beginning of period

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

Interest income

     (11,434     (96,085     (18,451     (129,286

Reclassifications from nonaccretable balance, net

     286        774        31,348        122,519   

Other (a)

     —          7,648        —          (9,412
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

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

June 30, 2014

           

Commercial, financial, leasing, etc.

   $ 18,831,026         56,292         3,910         5,769         16,702         192,193       $ 19,105,892   

Real estate:

              

Commercial

     21,335,953         142,904         9,862         36,554         82,554         188,951         21,796,778   

Residential builder and developer

     1,203,959         10,417         —           9,505         111,937         83,624         1,419,442   

Other commercial construction

     3,075,240         11,764         —           4,018         43,511         23,521         3,158,054   

Residential

     7,499,250         261,083         270,492         42,245         25,231         198,816         8,297,117   

Residential Alt-A

     258,899         22,064         —           —           —           78,686         359,649   

Consumer:

                 

Home equity lines and loans

     5,917,670         34,440         —           25,577         2,582         83,991         6,064,260   

Automobile

     1,621,311         23,629         —           218         —           16,075         1,661,233   

Other

     2,821,175         34,370         4,752         10,694         —           14,277         2,885,268   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 62,564,483         596,963         289,016         134,580         282,517         880,134       $ 64,747,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-15-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

December 31, 2013

  

Commercial, financial, leasing, etc.

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

Real estate:

              

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential Alt-A

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

Consumer:

                    

Home equity lines and loans

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

Automobile

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

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

One-to-four family residential mortgage loans originated for sale were $419 million and $401 million at June 30, 2014 and December 31, 2013, respectively. Commercial mortgage loans held for sale were $205 million at June 30, 2014 and $68 million at December 31, 2013.

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

 

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

            

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-16-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

Beginning balance

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

Provision for credit losses

     55,647        (10,913     (1,438     13,707        (3     57,000   

Net charge-offs

            

Charge-offs

     (46,312     (4,204     (5,092     (21,018     —          (76,626

Recoveries

     1,681        11,365        1,719        4,809        —          19,574   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (44,631     7,161        (3,373     (16,209     —          (57,052
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

             

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

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

Beginning balance

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

Provision for credit losses

     73,527        (11,225     3,598        28,543        557         95,000   

Net charge-offs

             

Charge-offs

     (55,856     (13,792     (13,263     (42,663     —           (125,574

Recoveries

     4,437        12,180        6,169        8,993        —           31,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (51,419     (1,612     (7,094     (33,670     —           (93,795
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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.

 

-17-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan-by-loan analysis of larger balance commercial and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to 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 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.

 

-18-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

With an allowance recorded:

     

Commercial, financial, leasing, etc.

   $ 165,446         189,110         39,874         90,293         112,092         24,614   

Real estate:

           

Commercial

     95,543         112,623         16,330         113,570         132,325         19,520   

Residential builder and developer

     28,048         36,634         1,694         33,311         55,122         4,379   

Other commercial construction

     71,379         74,401         4,883         86,260         90,515         4,022   

Residential

     90,895         109,723         4,103         96,508         114,521         7,146   

Residential Alt-A

     108,426         123,349         12,000         111,911         124,528         14,000   

Consumer:

           

Home equity lines and loans

     19,358         20,424         5,877         13,672         14,796         3,312   

Automobile

     35,426         35,426         9,248         40,441         40,441         11,074   

Other

     18,561         18,561         4,831         17,660         17,660         4,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     633,082         720,251         98,840         603,626         702,000         92,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

           

Commercial, financial, leasing, etc.

     52,913         55,167         —           28,093         33,095         —     

Real estate:

           

Commercial

     102,890         124,701         —           65,271         84,333         —     

Residential builder and developer

     66,149         99,746         —           72,366         104,768         —     

Other commercial construction

     9,453         14,306         —           7,369         11,493         —     

Residential

     19,681         29,512         —           84,144         95,358         —     

Residential Alt-A

     24,523         44,784         —           28,357         52,211         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     275,609         368,216         —           285,600         381,258         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Commercial, financial, leasing, etc.

     218,359         244,277         39,874         118,386         145,187         24,614   

Real estate:

           

Commercial

     198,433         237,324         16,330         178,841         216,658         19,520   

Residential builder and developer

     94,197         136,380         1,694         105,677         159,890         4,379   

Other commercial construction

     80,832         88,707         4,883         93,629         102,008         4,022   

Residential

     110,576         139,235         4,103         180,652         209,879         7,146   

Residential Alt-A

     132,949         168,133         12,000         140,268         176,739         14,000   

Consumer:

           

Home equity lines and loans

     19,358         20,424         5,877         13,672         14,796         3,312   

Automobile

     35,426         35,426         9,248         40,441         40,441         11,074   

Other

     18,561         18,561         4,831         17,660         17,660         4,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 908,691         1,088,467         98,840         889,226         1,083,258         92,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-19-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

Commercial, financial, leasing, etc.

   $ 150,625         220         220         183,544         3,408         3,408   

Real estate:

     

Commercial

     207,633         869         869         201,236         409         409   

Residential builder and developer

     91,614         39         39         162,567         518         384   

Other commercial construction

     77,801         356         356         97,975         2,479         2,479   

Residential

     119,133         5,056         4,468         185,751         1,934         1,401   

Residential Alt-A

     134,895         1,733         660         151,977         1,670         516   

Consumer:

     

Home equity lines and loans

     18,762         200         72         12,619         165         39   

Automobile

     36,631         589         74         44,641         740         131   

Other

     18,309         166         49         15,564         156         49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 855,403         9,228         6,807         1,055,874         11,479         8,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Commercial, financial, leasing, etc.

   $ 142,466         768         768         172,637         5,842         5,842   

Real estate:

     

Commercial

     196,529         1,795         1,795         197,546         712         712   

Residential builder and developer

     96,434         113         113         173,535         658         449   

Other commercial construction

     82,546         1,443         1,443         98,160         3,114         3,114   

Residential

     146,651         6,456         5,370         186,582         3,404         2,323   

Residential Alt-A

     137,273         3,359         1,219         154,461         3,410         1,107   

Consumer:

     

Home equity lines and loans

     17,219         321         101         12,544         332         78   

Automobile

     38,007         1,214         161         46,134         1,516         277   

Other

     18,005         340         101         15,261         307         103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 875,130         15,809         11,071         1,056,860         19,295         14,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-20-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

June 30, 2014

     

Pass

   $ 18,287,252         21,012,039         1,277,387         3,079,596   

Criticized accrual

     626,447         595,788         58,431         54,937   

Criticized nonaccrual

     192,193         188,951         83,624         23,521   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,105,892         21,796,778         1,419,442         3,158,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

-21-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

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

 

    

Commercial,

Financial,

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

June 30, 2014

              

Individually evaluated for impairment

   $ 39,874         22,576         16,084         19,956       $ 98,490   

Collectively evaluated for impairment

     247,542         287,975         54,604         145,199         735,320   

Purchased impaired

     4,835         703         1,716         716         7,970   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 292,251         311,254         72,404         165,871         841,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

           75,886   
              

 

 

 

Total

         $ 917,666   
              

 

 

 

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   
              

 

 

 

 

-22-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

    

Commercial,

Financial,

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

June 30, 2014

              

Individually evaluated for impairment

   $ 218,359         371,950         242,967         73,345       $ 906,621   

Collectively evaluated for impairment

     18,870,831         25,764,322         8,388,568         10,534,834         63,558,555   

Purchased impaired

     16,702         238,002         25,231         2,582         282,517   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,105,892         26,374,274         8,656,766         10,610,761       $ 64,747,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

-23-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

            Recorded investment      Financial effects of
modification
 

Three months ended June 30, 2014

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

Commercial, financial, leasing, etc.

        

Principal deferral

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

Other

     1         19,593         19,593         —          —     

Combination of concession types

     3         9,795         9,727         (68     (10

Real estate:

        

Commercial

        

Principal deferral

     11         8,327         8,314         (13     —     

Interest rate reduction

     1         255         252         (3     (48

Combination of concession types

     1         63         61         (2     (9

Residential builder and developer

        

Principal deferral

     1         1,398         1,398         —          —     

Other commercial construction

        

Principal deferral

     2         6,407         6,318         (89     —     

Residential

        

Principal deferral

     3         142         166         24        —     

Combination of concession types

     8         923         991         68        (66

Residential Alt-A

        

Principal deferral

     3         662         698         36        —     

Combination of concession types

     6         1,006         1,029         23        (220

Consumer:

        

Home equity lines and loans

        

Interest rate reduction

     5         341         341         —          (76

Combination of concession types

     21         1,772         1,772         —          (204

Automobile

        

Principal deferral

     43         603         603         —          —     

Interest rate reduction

     3         60         60         —          (3

Other

     8         47         47         —          —     

Combination of concession types

     23         341         341         —          (36

Other

        

Principal deferral

     7         38         38         —          —     

Interest rate reduction

     3         291         291         —          (63

Combination of concession types

     19         906         906         —          (276
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

            Recorded investment      Financial effects of
modification
 

Three months ended June 30, 2013

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

Commercial, financial, leasing, etc.

        

Principal deferral

     15       $ 4,870       $ 4,822       $ (48   $ —     

Other

     1         1,460         1,657         197        —     

Combination of concession types

     2         1,490         980         (510     —     

Real estate:

        

Commercial

        

Principal deferral

     5         15,549         15,530         (19     —     

Residential builder and developer

        

Principal deferral

     7         17,496         16,722         (774     —     

Other

     1         4,039         3,888         (151     —     

Combination of concession types

     2         13,879         13,823         (56     (535

Other commercial construction

        

Principal deferral

     2         364         363         (1     —     

Residential

        

Principal deferral

     8         1,216         1,358         142        —     

Combination of concession types

     18         69,210         65,890         (3,320     (186

Residential Alt-A

        

Principal deferral

     1         99         102         3        —     

Combination of concession types

     8         1,187         1,294         107        (278

Consumer:

        

Home equity lines and loans

        

Principal deferral

     2         101         103         2        —     

Interest rate reduction

     1         99         99         —          (8

Other

     1         106         106         —          —     

Combination of concession types

     8         406         406         —          (64

Automobile

        

Principal deferral

     117         1,629         1,629         —          —     

Interest rate reduction

     7         104         104         —          (10

Other

     28         73         73         —          —     

Combination of concession types

     62         1,044         1,044         —          (87

Other

        

Principal deferral

     14         185         185         —          —     

Interest rate reduction

     1         12         12         —          (2

Combination of concession types

     30         707         707         —          (234
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     341       $ 135,325       $ 130,897       $ (4,428   $ (1,404
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

            Recorded investment      Financial effects of
modification
 

Six months ended June 30, 2014

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

Commercial, financial, leasing, etc.

        

Principal deferral

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

Other

     1         19,593         19,593         —          —     

Combination of concession types

     5         9,836         9,766         (70     (14

Real estate:

        

Commercial

        

Principal deferral

     24         15,371         15,316         (55     —     

Interest rate reduction

     1         255         252         (3     (48

Combination of concession types

     2         409         462         53        (113

Residential builder and developer

        

Principal deferral

     1         1,398         1,398         —          —     

Other commercial construction

        

Principal deferral

     3         6,558         6,469         (89     —     

Residential

        

Principal deferral

     16         1,744         1,829         85        —     

Interest rate reduction

     1         98         104         6        (32

Other

     1         188         188         —          —     

Combination of concession types

     22         3,111         3,151         40        (348

Residential Alt-A

        

Principal deferral

     5         828         900         72        —     

Combination of concession types

     16         2,752         2,765         13        (281

Consumer:

        

Home equity lines and loans

        

Principal deferral

     3         280         280         —          —     

Interest rate reduction

     5         341         341         —          (76

Combination of concession types

     36         3,628         3,628         —          (376

Automobile

        

Principal deferral

     123         1,596         1,596         —          —     

Interest rate reduction

     3         60         60         —          (3

Other

     19         108         108         —          —     

Combination of concession types

     46         591         591         —          (62

Other

        

Principal deferral

     15         93         93         —          —     

Interest rate reduction

     3         291         291         —          (63

Other

     1         45         45         —          —     

Combination of concession types

     33         1,372         1,372         —          (464
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

            Recorded investment      Financial effects of
modification
 

Six months ended June 30, 2013

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

Commercial, financial, leasing, etc.

        

Principal deferral

     39       $ 6,876       $ 6,804       $ (72   $ —     

Other

     2         48,660         48,857         197        —     

Combination of concession types

     3         1,832         1,322         (510     —     

Real estate:

        

Commercial

        

Principal deferral

     13         34,027         33,893         (134     —     

Combination of concession types

     2         582         581         (1     (56

Residential builder and developer

        

Principal deferral

     15         18,853         18,062         (791     —     

Other

     1         4,039         3,888         (151     —     

Combination of concession types

     3         15,580         15,514         (66     (535

Other commercial construction

        

Principal deferral

     2         364         363         (1     —     

Residential

        

Principal deferral

     15         1,782         1,965         183        —     

Other

     1         195         195         —          —     

Combination of concession types

     38         71,659         68,426         (3,233     (557

Residential Alt-A

        

Principal deferral

     1         99         102         3        —     

Combination of concession types

     13         2,094         2,219         125        (388

Consumer:

        

Home equity lines and loans

        

Principal deferral

     4         180         182         2        —     

Interest rate reduction

     1         99         99         —          (8

Other

     1         106         106         —          —     

Combination of concession types

     10         617         617         —          (97

Automobile

        

Principal deferral

     238         3,215         3,215         —          —     

Interest rate reduction

     9         140         140         —          (15

Other

     45         232         232         —          —     

Combination of concession types

     123         1,597         1,597         —          (129

Other

        

Principal deferral

     20         230         230         —          —     

Interest rate reduction

     1         12         12         —          (2

Other

     1         12         12         —          —     

Combination of concession types

     72         1,924         1,924         —          (501
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     673       $ 215,006       $ 210,557       $ (4,449   $ (2,288
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended June 30, 2014 and 2013 and for which there was a subsequent payment default during the six-month periods ended June 30, 2014 and 2013, were not material.

 

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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 June 30, 2014 which are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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

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

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

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

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

 

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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
June 30, 2014
     Carrying
value
December 31, 2013
 
            (dollars in thousands)  

Series A (a)

        

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

     230,000       $ 230,000       $ 230,000   

Series C (a)

        

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

     151,500         151,500         151,500   

Series D (b)

        

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

     50,000         500,000         500,000   

Series E (c)

        

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

     350,000         350,000         —     

 

(a) Dividends, if declared, were paid quarterly at a rate of 5% per year through November 14, 2013 and are paid at 6.375% thereafter. M&T has agreed to not redeem the preferred shares until on or after November 15, 2018. Warrants to purchase M&T common stock were issued in connection with the Series A and C preferred stock (Series A – 1,218,522 common shares at $73.86 per share; Series C – 407,542 common shares at $55.76 per share). In March 2013, the Series C warrants were exercised in a “cashless” exercise, resulting in the issuance of 186,589 common shares. During the six months ended June 30, 2014, 379,376 of the Series A warrants were exercised in “cashless” exercises, resulting in the issuance of 149,834 common shares. Remaining outstanding Series A warrants were 770,019 at June 30, 2014.
(b) Dividends, if declared, will be paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.
(c)

Dividends, if declared, will be paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month London Interbank Offered Rate 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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

  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 June 30, 2014 and December 31, 2013. The obligation under that warrant was assumed by M&T in an acquisition.

7. Pension plans and other postretirement benefits

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

 

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

Service cost

   $ 5,160        6,130        152        171   

Interest cost on projected benefit obligation

     17,331        14,939        714        670   

Expected return on plan assets

     (22,859     (21,802     —          —     

Amortization of prior service cost

     (1,626     (1,628     (329     (329

Amortization of net actuarial loss

     3,897        10,138        —          80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,903        7,777        537        592   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Pension
benefits
    Other
postretirement
benefits
 
     Six months ended June 30  
     2014     2013     2014     2013  
     (in thousands)  

Service cost

   $ 10,260        12,180        302        371   

Interest cost on projected benefit obligation

     34,581        30,065        1,389        1,345   

Expected return on plan assets

     (45,784     (43,677     —          —     

Amortization of prior service cost

     (3,276     (3,278     (679     (679

Amortization of net actuarial loss

     7,247        20,538        —          180   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 3,028        15,828        1,012        1,217   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $12,673,000 and $12,563,000 for the three months ended June 30, 2014 and 2013, respectively, and $28,405,000 and $28,318,000 for the six months ended June 30, 2014 and 2013, respectively.

 

-30-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

    

Three months ended

June 30

   

Six months ended

June 30

 
     2014     2013     2014     2013  
     (in thousands, except per share)  

Income available to common shareholders:

  

Net income

   $ 284,336        348,466      $ 513,353        622,579   

Less: Preferred stock dividends (a)

     (20,443     (13,362     (35,117     (26,725

Amortization of preferred stock discount (a)

     —          (2,193     —          (4,340
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common equity

     263,893        332,911        478,236        591,514   

Less: Income attributable to unvested stock-based compensation awards

     (3,213     (4,373     (5,832     (7,917
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 260,680        328,538      $ 472,404        583,597   

Weighted-average shares outstanding:

      

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

     132,473        129,964        132,139        129,708   

Less: Unvested stock-based compensation awards

     (1,617     (1,712     (1,603     (1,746
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding

     130,856        128,252        130,536        127,962   

Basic earnings per common share

   $ 1.99        2.56      $ 3.62        4.56   

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

    

Three months ended

June 30

   

Six months ended

June 30

 
     2014     2013     2014     2013  
     (in thousands, except per share)  

Net income available to common equity

   $ 263,893        332,911      $ 478,236        591,514   

Less: Income attributable to unvested stock-based compensation awards

     (3,198     (4,354     (5,807     (7,881
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 260,695        328,557      $ 472,429        583,633   

Adjusted weighted-average shares outstanding:

        

Common and unvested stock-based compensation awards

     132,473        129,964        132,139        129,708   

Less: Unvested stock-based compensation awards

     (1,617     (1,712     (1,603     (1,746

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

     972        765        943        866   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted-average shares outstanding

     131,828        129,017        131,479        128,828   

Diluted earnings per common share

   $ 1.98        2.55      $ 3.59        4.53   

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

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 1.7 million and 4.5 million common shares during the three-month periods ended June 30, 2014 and 2013, respectively, and 2.4 million and 4.6 million common shares during the six-month periods ended June 30, 2014 and 2013, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

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

Balance—January 1, 2014

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

Other comprehensive income before reclassifications: Unrealized holding gains, net

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

Foreign currency translation adjustment

     —           —           —          479        479        (166     313   

Unrealized losses on cash flow hedges

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

                

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

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

Amortization of prior service credit

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

Amortization of actuarial losses

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—June 30, 2014

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-33-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

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

     55,473        (95,167     —          —          (39,694     15,557        (24,137

Foreign currency translation adjustment

     —          —          —          (1,644     (1,644     598        (1,046
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     55,473        (95,167     —          (1,644     (41,338     16,155        (25,183
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

              

Accretion of unrealized holding losses on HTM securities

     109        2,262        —          —          2,371 (a)      (931     1,440   

OTTI charges recognized in net income

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

Losses (gains) realized in net income

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

Amortization of prior service credit

     —          —          (3,957     —          (3,957 )(d)      1,553        (2,404

Amortization of actuarial losses

     —          —          20,718        —          20,718 (d)      (8,132     12,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     51,126        (5,867     16,761        —          62,020        (24,344     37,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     106,599        (101,034     16,761        (1,644     20,682        (8,189     12,493   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance—June 30, 2013

   $ 14,764        51,165        (438,829     (2,075   $ (374,975     147,204      $ (227,771
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

     Investment securities      Defined
benefit
plans
    Other     Total  
     With OTTI      All other         

Balance—December 31, 2013

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

Net gain (loss) during period

     6,587         96,279         1,999        (398     104,467   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance—June 30, 2014

   $ 29,219         107,573         (96,183     (301   $ 40,308   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

-34-


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 June 30, 2014.

The net effect of interest rate swap agreements was to increase net interest income by $12 million and $10 million for the three-month periods ended June 30, 2014 and 2013, respectively, and $23 million and $19 million for the six-month periods ended June 30, 2014 and 2013, respectively.

At June 30, 2014, interest rate swap agreements were used as fair value hedges for approximately $1.4 billion of outstanding fixed rate long-term borrowings. Also at June 30, 2014, the Company had entered into forward-starting interest rate swap agreements used to hedge the variability in the interest payments anticipated to be made upon the future issuance of $300 million of senior notes. These forward-starting interest rate swap agreements were terminated upon the issuance of such notes in July 2014. Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

 

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

June 30, 2014

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         3.2         4.42     1.18

Cash flow hedges:

          

Interest payments on forecasted issuance of long-term borrowings (b)

     300,000         5.1         1.82     0.23
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,700,000         3.5         3.96     1.02
  

 

 

    

 

 

    

 

 

   

 

 

 

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.
(b) Under the terms of this agreement, the Company was to receive settlement amounts at a variable rate and pay at a fixed 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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

contracts entered into for trading purposes had notional values of $17.6 billion and $17.4 billion at June 30, 2014 and December 31, 2013, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $866 million and $1.4 billion at June 30, 2014 and December 31, 2013, respectively.

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

 

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

Derivatives designated and qualifying as hedging instruments

        

Fair value hedges:

        

Interest rate swap agreements (a)

   $ 93,040         102,875       $ —           —     

Commitments to sell real estate loans (a)

     1,032         6,957         6,412         487   
  

 

 

    

 

 

    

 

 

    

 

 

 
     94,072         109,832         6,412         487   

Cash flow hedges:

        

Interest rate swap agreements (a)

     —           —           1,170         —     

Derivatives not designated and qualifying as hedging instruments

        

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

     22,215         7,616         192         3,675   

Commitments to sell real estate loans (a)

     1,431         6,120         6,883         230   

Trading:

           

Interest rate contracts (b)

     234,436         274,864         194,393         234,455   

Foreign exchange and other option and futures contracts (b)

     7,784         15,831         7,766         15,342   
  

 

 

    

 

 

    

 

 

    

 

 

 
     265,866         304,431         209,234         253,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 359,938         414,263       $ 216,816         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.

 

-36-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

     Amount of unrealized gain (loss) recognized  
     Three months ended
June 30, 2014
     Three months ended
June 30, 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)

   $ (1,675     1,358       $ (20,138     18,853   
  

 

 

   

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedging instruments

         

Trading:

         

Interest rate contracts (b)

   $ 1,384         $ 2,228     

Foreign exchange and other option and futures contracts (b)

     (786        (1,225  
  

 

 

      

 

 

   

Total

   $ 598         $ 1,003     
  

 

 

      

 

 

   

 

     Amount of unrealized gain (loss) recognized  
     Six months ended
June 30, 2014
     Six months ended
June 30, 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)

   $ (9,835     9,278       $ (29,011     27,753   
  

 

 

   

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedging instruments

         

Trading:

         

Interest rate contracts (b)

   $ 1,082         $ 3,197     

Foreign exchange and other option and futures contracts (b)

     (5,816        (1,608  
  

 

 

      

 

 

   

Total

   $ (4,734      $ 1,589     
  

 

 

      

 

 

   

 

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

 

-37-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans for sale 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 $31 million and $23 million at June 30, 2014 and December 31, 2013, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

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

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $177 million and $194 million at June 30, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $107 million at each of June 30, 2014 and December 31, 2013. The Company was required to post collateral relating to those positions of $92 million and $95 million at June 30, 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, the counterparties of the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on June 30, 2014 was $28 million for which the Company had posted collateral of $18 million in the normal course of business. If the credit risk-related contingent features had been triggered on June 30, 2014, the maximum amount of additional collateral the Company would have been required to post to counterparties was $10 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $133 million and $183 million at June 30, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $63 million and $95 million at June 30, 2014 and December 31, 2013, respectively. Counterparties posted collateral relating to those positions of $63 million and $93 million at June 30, 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.

 

-38-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

11. Variable interest entities and asset securitizations

In the second quarter of 2013, the Company securitized approximately $923 million of one-to-four family residential mortgage loans in guaranteed mortgage securitizations with Ginnie Mae. Approximately $296 million of such loans were formerly held in the Company’s loan portfolio, whereas the remaining $627 million of the loans were newly originated. The Company retained $917 million of the resulting securities and recognized gains of $7 million relating to loans previously held for investment, which have been recorded in other revenues from operations, and gains of $10 million on newly originated loans, which have been reflected in mortgage banking revenues. The Company expects no material credit-related losses on the retained securities as a result of the guarantees by Ginnie Mae. At June 30, 2013 the Company had $1.0 billion of loans in its loan portfolio guaranteed by the Federal Housing Administration that the Company securitized with Ginnie Mae in the third quarter of 2013. The Company retained the substantial majority of the resulting securities in its investment portfolio. In similar transactions for the six months ended June 30, 2014, the Company securitized $75 million of one-to-four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with Ginnie Mae and retained the resulting securities in its investment portfolio. Pre-tax gains on such transactions were not material.

In accordance with GAAP, the Company determined that it was the primary beneficiary of a residential mortgage loan securitization trust considering its role as servicer and its retained subordinated interests in the trust. As a result, the Company has included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. At June 30, 2014 and December 31, 2013, the carrying values of the loans in the securitization trust were $110 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 each of June 30, 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 June 30, 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 June 30, 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 June