10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2015

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One M & T Plaza

Buffalo, New York

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

(716) 842-5445

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 30, 2015: 132,970,139 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2015

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements.

  
  

CONSOLIDATED BALANCE SHEET - March 31, 2015 and December 31, 2014

     3   
  

CONSOLIDATED STATEMENT OF INCOME - Three months ended March 31, 2015 and 2014

     4   
  

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three months ended March 31, 2015 and 2014

     5   
  

CONSOLIDATED STATEMENT OF CASH FLOWS - Three months ended March 31, 2015 and 2014

     6   
  

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Three months ended March  31, 2015 and 2014

     7   
  

NOTES TO FINANCIAL STATEMENTS

     8   

Item 2.

  

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

     50   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk.

     91   

Item 4.

  

Controls and Procedures.

     91   

Part II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings.

     91   

Item 1A.

  

Risk Factors.

     92   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds.

     93   

Item 3.

  

Defaults Upon Senior Securities.

     93   

Item 4.

  

Mine Safety Disclosures.

     93   

Item 5.

  

Other Information.

     93   

Item 6.

  

Exhibits.

     94   

SIGNATURES

     95   

EXHIBIT INDEX

     95   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share

   March 31,
2015
    December 31,
2014
 

Assets

  

Cash and due from banks

   $ 1,269,816        1,289,965   
  

Interest-bearing deposits at banks

     6,291,491        6,470,867   
  

Federal funds sold

     97,037        83,392   
  

Trading account

     363,085        308,175   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,611,069 at March 31, 2015; $1,631,267 at December 31, 2014)

    
  

Available for sale (cost: $10,425,720 at March 31, 2015; $8,919,324 at December 31, 2014)

     10,703,500        9,156,932   
  

Held to maturity (fair value: $3,411,834 at March 31, 2015; $3,538,282 at December 31, 2014)

     3,360,812        3,507,868   
  

Other (fair value: $328,958 at March 31, 2015; $328,742 at December 31, 2014)

     328,958        328,742   
     

 

 

   

 

 

 

Total investment securities

  14,393,270      12,993,542   
     

 

 

   

 

 

 

Loans and leases

  67,328,490      66,899,369   

Unearned discount

  (229,448   (230,413
     

 

 

   

 

 

 

Loans and leases, net of unearned discount

  67,099,042      66,668,956   

Allowance for credit losses

  (921,373   (919,562
     

 

 

   

 

 

 

Loans and leases, net

  66,177,669      65,749,394   
     

 

 

   

 

 

 

Premises and equipment

  602,096      612,984   

Goodwill

  3,524,625      3,524,625   

Core deposit and other intangible assets

  28,234      35,027   

Accrued interest and other assets

  5,630,460      5,617,564   
     

 

 

   

 

 

 

Total assets

$ 98,377,783      96,685,535   
     

 

 

   

 

 

 

Liabilities

Noninterest-bearing deposits

$ 27,181,120      26,947,880   

NOW accounts

  2,149,537      2,307,815   

Savings deposits

  41,138,792      41,085,803   

Time deposits

  2,946,126      3,063,973   

Deposits at Cayman Islands office

  178,545      176,582   
     

 

 

   

 

 

 

Total deposits

  73,594,120      73,582,053   
     

 

 

   

 

 

 

Federal funds purchased and agreements to repurchase securities

  193,495      192,676   

Accrued interest and other liabilities

  1,552,724      1,567,951   

Long-term borrowings

  10,509,143      9,006,959   
     

 

 

   

 

 

 

Total liabilities

  85,849,482      84,349,639   
     

 

 

   

 

 

 

Shareholders’ equity

 

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at March 31, 2015 and at December 31, 2014; Liquidation preference of $10,000 per share: 50,000 shares at March 31, 2015 and December 31, 2014

  1,231,500      1,231,500   

Common stock, $.50 par, 250,000,000 shares authorized, 132,909,718 shares issued at March 31, 2015; 132,312,931 shares issued at December 31, 2014

  66,455      66,157   

Common stock issuable, 36,360 shares at March 31, 2015; 41,330 shares at December 31, 2014

  2,310      2,608   

Additional paid-in capital

  3,445,707      3,409,506   

Retained earnings

  7,934,820      7,807,119   

Accumulated other comprehensive income (loss), net

  (152,491   (180,994
     

 

 

   

 

 

 

Total shareholders’ equity

  12,528,301      12,335,896   
     

 

 

   

 

 

 

Total liabilities and shareholders’ equity

$ 98,377,783      96,685,535   
     

 

 

   

 

 

 

 

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Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended March 31  

In thousands, except per share

   2015     2014  

Interest income

  

Loans and leases, including fees

   $ 647,179        645,222   
  

Deposits at banks

     3,118        1,884   
  

Federal funds sold

     24        16   
  

Trading account

     491        427   
  

Investment securities

    
  

Fully taxable

     85,957        73,899   
  

Exempt from federal taxes

     1,318        1,504   
     

 

 

   

 

 

 

Total interest income

  738,087      722,952  
     

 

 

   

 

 

 

Interest expense

NOW accounts

  311      297   

Savings deposits

  10,219      11,601   

Time deposits

  3,740      3,940   

Deposits at Cayman Islands office

  147      208   

Short-term borrowings

  34      32   

Long-term borrowings

  64,048      50,441   
     

 

 

   

 

 

 

Total interest expense

  78,499      66,519  
     

 

 

   

 

 

 

Net interest income

  659,588      656,433   

Provision for credit losses

  38,000      32,000   
     

 

 

   

 

 

 

Net interest income after provision for credit losses

  621,588      624,433  
     

 

 

   

 

 

 

Other income

Mortgage banking revenues

  101,601      80,049   

Service charges on deposit accounts

  102,344      104,198   

Trust income

  123,734      121,252   

Brokerage services income

  15,461      16,500   

Trading account and foreign exchange gains

  6,231      6,447   

Loss on bank investment securities

  (98   —     

Equity in earnings of Bayview Lending Group LLC

  (4,191   (4,454

Other revenues from operations

  95,121      96,115   
     

 

 

   

 

 

 

Total other income

  440,203      420,107  
     

 

 

   

 

 

 

Other expense

Salaries and employee benefits

  389,893      371,326   

Equipment and net occupancy

  66,470      71,167   

Printing, postage and supplies

  9,590      10,956   

Amortization of core deposit and other intangible assets

  6,793      10,062   

FDIC assessments

  10,660      15,488   

Other costs of operations

  202,969      211,235  
     

 

 

   

 

 

 

Total other expense

  686,375      690,234  
     

 

 

   

 

 

 

Income before taxes

  375,416      354,306   

Income taxes

  133,803      125,289  
     

 

 

   

 

 

 

Net income

$ 241,613      229,017  
     

 

 

   

 

 

 

Net income available to common shareholders

Basic

$ 218,830      211,720   

Diluted

  218,837      211,731   

Net income per common share

Basic

$ 1.66      1.63   

Diluted

  1.65      1.61   

Cash dividends per common share

$ .70      .70   

Average common shares outstanding

Basic

  132,049      130,212   

Diluted

  132,769      131,126   

 

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Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended March 31  

In thousands

   2015     2014  

Net income

   $ 241,613      $ 229,017   

Other comprehensive income, net of tax and reclassification adjustments:

    

Net unrealized gains on investment securities

     25,339        38,214   

Cash flow hedges adjustments

     871        —     

Foreign currency translation adjustment

     (2,384     (136

Defined benefit plans liability adjustment

     4,677        820   
  

 

 

   

 

 

 

Total other comprehensive income

  28,503      38,898   
  

 

 

   

 

 

 

Total comprehensive income

$ 270,116    $ 267,915   
  

 

 

   

 

 

 

 

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Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Three months ended March 31  

In thousands

   2015     2014  

Cash flows from operating activities

  

Net income

   $ 241,613        229,017   
  

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

    
  

Provision for credit losses

     38,000        32,000   
  

Depreciation and amortization of premises and equipment

     24,178        24,708   
  

Amortization of capitalized servicing rights

     12,199        17,792   
  

Amortization of core deposit and other intangible assets

     6,793        10,062   
  

Provision for deferred income taxes

     37,052        42,256   
  

Asset write-downs

     2,379        1,117   
  

Net gain on sales of assets

     (1,066     (852
  

Net change in accrued interest receivable, payable

     (2,200     (3,185
  

Net change in other accrued income and expense

     (80,084     57,884   
  

Net change in loans originated for sale

     197,708        122,406   
  

Net change in trading account assets and liabilities

     (18,206 )     27,893   
     

 

 

   

 

 

 

Net cash provided by operating activities

  458,366     561,098   
     

 

 

   

 

 

 

Cash flows from investing activities

Proceeds from sales of investment securities

Available for sale

  693      —     

Other

  132      146   

Proceeds from maturities of investment securities

Available for sale

  369,649      166,324   

Held to maturity

  148,708      92,305   

Purchases of investment securities

Available for sale

  (1,871,491   (1,709,847

Held to maturity

  (7,442   (3,238

Other

  (348   (258

Net increase in loans and leases

  (666,220   (220,551

Net (increase) decrease in interest bearing deposits at banks

  179,376      (1,648,047

Capital expenditures, net

  (9,598   (16,725

Net (increase) decrease in loan servicing advances

  76,145      (122,910

Other, net

  (21,940 )   21,763   
     

 

 

   

 

 

 

Net cash used by investing activities

  (1,802,336 )   (3,441,038
     

 

 

   

 

 

 

Cash flows from financing activities

Net increase (decrease) in deposits

  (4,543   1,581,705   

Net increase (decrease) in short-term borrowings

  819      (30,246

Proceeds from long-term borrowings

  1,500,000      1,498,688   

Payments on long-term borrowings

  (1,797   (352,245

Proceeds from issuance of preferred stock

  —        346,500   

Dividends paid - common

  (93,631   (92,406

Dividends paid - preferred

  (17,368   (6,080

Other, net

  (46,014 )   24,208   
     

 

 

   

 

 

 

Net cash provided by financing activities

  1,337,466     2,970,124   
     

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  (6,504   90,184   

Cash and cash equivalents at beginning of period

  1,373,357      1,672,934   
     

 

 

   

 

 

 

Cash and cash equivalents at end of period

$ 1,366,853     1,763,118   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

Interest received during the period

$ 726,475      695,653   

Interest paid during the period

  75,776      61,841   

Income taxes paid during the period

  88,578     4,789   
     

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

Securitization of residential mortgage loans allocated to

Available-for-sale investment securities

$ 12,920      29,785   

Capitalized servicing rights

  143      372   

Real estate acquired in settlement of loans

  10,846      8,886   

 

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Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share

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

2014

                

Balance - January 1, 2014

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

Total comprehensive income

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

Preferred stock cash dividends

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

Issuance of Series E preferred stock

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

Stock-based compensation plans:

                

Compensation expense, net

     —           123         —          13,999        —          —          14,122   

Exercises of stock options, net

     —           266         —          49,228        —          —          49,494   

Stock purchase plan

     —           43         —          9,545        —          —          9,588   

Directors’ stock plan

     —           2         —          439        —          —          441   

Deferred compensation plans, net, including dividend equivalents

     —           2         (299     265        (29     —          (61

Other

     —           —           —          412        —          —          412   

Common stock cash dividends - $.70 per share

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2014

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2015

Balance - January 1, 2015

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

Total comprehensive income

  —        —        —        —        241,613      28,503      270,116   

Preferred stock cash dividends

  —        —        —        —        (20,318   —        (20,318

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

  —        1      —        (1   —        —        —     

Stock-based compensation plans:

Compensation expense, net

  —        147      —        5,425      —        —        5,572   

Exercises of stock options, net

  —        101      —        19,378      —        —        19,479   

Stock purchase plan

  45      10,301      10,346   

Directors’ stock plan

  —        2      —        423      —        —        425   

Deferred compensation plans, net, including dividend equivalents

  —        2      (298   270      (25   —        (51

Other

  —        —        —        405      —        —        405   

Common stock cash dividends - $.70 per share

  —        —        —        —        (93,569   —        (93,569
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2015

$ 1,231,500     66,455      2,310     3,445,707      7,934,820     (152,491   12,528,301   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS

 

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2014 Annual Report. Additionally, effective January 1, 2015 the Company made an accounting policy election in accordance with amended accounting guidance issued by the Financial Accounting Standards Board in January 2014 to account for investments in qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The adoption of the amended guidance did not have a significant effect on the Company’s financial position or results of operation, but did result in the restatement of the consolidated statement of income for the three-month period ended March 31, 2014 to remove $12 million of losses associated with qualified affordable housing projects from “other costs of operations” and include the amortization of the initial cost of the investment in income tax expense. The cumulative effect adjustment associated with adopting the amended guidance was not material as of the beginning of any period presented in these consolidated financial statements. See note 11 for information regarding the Company’s investments in qualified affordable housing projects.

In the opinion of management, all adjustments necessary for a fair presentation have been made and, except as described above, were all of a normal recurring nature.

 

2. Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of March 31, 2015 total consideration to be paid was valued at approximately $5.5 billion.

At March 31, 2015, Hudson City had $36.1 billion of assets, including $20.9 billion of loans and $8.3 billion of investment securities, and $31.3 billion of liabilities, including $18.9 billion of deposits. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals.

On June 17, 2013, M&T and Manufacturers and Traders Trust Company (“M&T Bank”), M&T’s principal banking subsidiary, entered into a written agreement with the Federal Reserve Bank of New York (“Federal Reserve Bank”). Under the terms of the agreement, M&T and M&T Bank are required to submit to the Federal Reserve Bank a revised compliance risk management program designed to ensure compliance with the Bank Secrecy Act and anti-money-laundering laws and regulations and to take certain other steps to enhance their compliance practices. The Company commenced a major initiative, including the hiring of outside consulting firms, intended to fully address the Federal Reserve Bank’s concerns. On April 3, 2015, M&T was advised that the Federal Reserve Board intends to act on the M&T and Hudson City merger application no later than September 30, 2015. As a result, M&T and Hudson City extended the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed from

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

April 30, 2015 to October 31, 2015. Nevertheless, there can be no assurances that the merger will be completed by that date.

 

3. Investment securities

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

 

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

March 31, 2015

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 161,672         1,563         1       $ 163,234   

Obligations of states and political subdivisions

     7,704         199         53         7,850   

Mortgage-backed securities:

           

Government issued or guaranteed

     10,008,191         265,739         8,709         10,265,221   

Privately issued

     96         2         3         95   

Collateralized debt obligations

     29,704         19,360         1,786         47,278   

Other debt securities

     138,366         1,909         19,002         121,273   

Equity securities

     79,987         18,999         437         98,549   
  

 

 

    

 

 

    

 

 

    

 

 

 
  10,425,720      307,771      29,991      10,703,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

Obligations of states and political subdivisions

  148,698      2,178      350      150,526   

Mortgage-backed securities:

Government issued or guaranteed

  3,007,420      88,417      4,024      3,091,813   

Privately issued

  197,509      1,421      36,620      162,310   

Other debt securities

  7,185      —        —        7,185   
  

 

 

    

 

 

    

 

 

    

 

 

 
  3,360,812      92,016      40,994      3,411,834   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

  328,958      —        —        328,958   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 14,115,490      399,787      70,985    $ 14,444,292   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Investment securities available for sale:

U.S. Treasury and federal agencies

$ 161,408      544      5    $ 161,947   

Obligations of states and political subdivisions

  8,027      224      53      8,198   

Mortgage-backed securities:

Government issued or guaranteed

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

Privately issued

  104      2      3      103   

Collateralized debt obligations

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

Other debt securities

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

Equity securities

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

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

Obligations of states and political subdivisions

  148,961      2,551      189      151,323   

Mortgage-backed securities:

Government issued or guaranteed

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

Privately issued

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

Other debt securities

  7,854      —        —        7,854   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

  328,742      —        —        328,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

- 9 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

There were no significant gross realized gains or losses from sales of investment securities for the quarters ended March 31, 2015 and 2014.

At March 31, 2015, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:

 

     Amortized
cost
     Estimated
fair value
 
     (in thousands)  

Debt securities available for sale:

     

Due in one year or less

   $ 9,059         9,117   

Due after one year through five years

     163,114         165,027   

Due after five years through ten years

     3,272         3,314   

Due after ten years

     162,001         162,177   
  

 

 

    

 

 

 
  337,446      339,635   

Mortgage-backed securities available for sale

  10,008,287      10,265,316   
  

 

 

    

 

 

 
$ 10,345,733      10,604,951   
  

 

 

    

 

 

 

Debt securities held to maturity:

Due in one year or less

$ 27,663      27,865   

Due after one year through five years

  87,320      88,357   

Due after five years through ten years

  33,715      34,304   

Due after ten years

  7,185      7,185   
  

 

 

    

 

 

 
  155,883      157,711   

Mortgage-backed securities held to maturity

  3,204,929      3,254,123   
  

 

 

    

 

 

 
$ 3,360,812      3,411,834   
  

 

 

    

 

 

 

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of March 31, 2015 and December 31, 2014 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:

 

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

March 31, 2015

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 4,681         (1      —           —     

Obligations of states and political subdivisions

     986         (4      1,524         (49

Mortgage-backed securities:

     

Government issued or guaranteed

     1,603,068         (8,597      4,138         (112

Privately issued

     —           —           59         (3

Collateralized debt obligations

     6,091         (1,255      5,220         (531

Other debt securities

     12,689         (443      92,304         (18,559

Equity securities

     374         (437      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  1,627,889      (10,737   103,245      (19,254
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

Obligations of states and political subdivisions

  35,272      (317   1,802      (33

Mortgage-backed securities:

Government issued or guaranteed

  16,660      (85   266,979      (3,939

Privately issued

  —        —        131,779      (36,620
  

 

 

    

 

 

    

 

 

    

 

 

 
  51,932      (402   400,560      (40,592
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,679,821      (11,139   503,805      (59,846
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Investment securities available for sale:

U.S. Treasury and federal agencies

$ 6,505      (5   —        —     

Obligations of states and political subdivisions

  1,785      (52   121      (1

Mortgage-backed securities:

Government issued or guaranteed

  39,001      (186   5,555      (151

Privately issued

  —        —        65      (3

Collateralized debt obligations

  2,108      (696   5,512      (337

Other debt securities

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

Equity securities

  2,138      (1,164   —        —     
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

Obligations of states and political subdivisions

  29,886      (184   268      (5

Mortgage-backed securities:

Government issued or guaranteed

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

Privately issued

  —        —        127,512      (44,576
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 294 individual investment securities with aggregate gross unrealized losses of $71 million at March 31, 2015. Based on a review of each of the securities in the investment securities portfolio at March 31, 2015, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 2015, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At March 31, 2015, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $329 million of cost method investment securities.

 

4. Loans and leases and the allowance for credit losses

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

 

     March 31,
2015
     December 31,
2014
 
     (in thousands)  

Outstanding principal balance

   $ 2,837,256         3,070,268   

Carrying amount:

     

Commercial, financial, leasing, etc.

     207,884         247,820   

Commercial real estate

     869,700         961,828   

Residential real estate

     434,454         453,360   

Consumer

     888,985         933,537   
  

 

 

    

 

 

 
$ 2,401,023      2,596,545   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $184 million at March 31, 2015 and $198 million at December 31, 2014, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for acquired loans for the three-month periods ended March 31, 2015 and 2014 follows:

 

     Three months ended March 31, 2015  
     Purchased
impaired
     Other
acquired
     Total  
     (in thousands)  

Balance at beginning of period

   $ 76,518         397,379         473,897   

Interest income

     (5,206      (41,277      (46,483

Reclassifications from nonaccretable balance, net

     110         183         293   

Other (a)

     —           1,610         1,610   
  

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 71,422      357,895      429,317   
  

 

 

    

 

 

    

 

 

 

 

- 12 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

Balance at beginning of period

   $ 37,230         538,633         575,863   

Interest income

     (6,328      (52,633      (58,961

Reclassifications from nonaccretable balance, net

     37         —           37   

Other (a)

     —           (838      (838
  

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 30,939      485,162      516,101   
  

 

 

    

 

 

    

 

 

 

 

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

A summary of current, past due and nonaccrual loans as of March 31, 2015 and December 31, 2014 were as 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)                

March 31, 2015

                    

Commercial, financial, leasing, etc.

   $ 19,519,566         43,213         4,265         3,323         9,724         195,403         19,775,494   

Real estate:

                    

Commercial

     22,225,088         116,465         27,261         17,187         45,752         142,007         22,573,760   

Residential builder and developer

     1,460,981         6,119         —           6,953         91,839         65,310         1,631,202   

Other commercial construction

     3,575,578         18,244         3,864         1,721         17,061         24,280         3,640,748   

Residential

     7,580,514         189,901         197,299         20,058         17,283         171,496         8,176,551   

Residential Alt-A

     241,467         11,831         —           —           —           74,270         327,568   

Consumer:

           

Home equity lines and loans

     5,783,865         35,478         —           13,298         2,359         87,985         5,922,985   

Automobile

     2,024,526         25,322         —           —           —           14,100         2,063,948   

Other

     2,921,142         28,407         3,932         17,570         —           15,735         2,986,786   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 65,332,727      474,980      236,621      80,110      184,018      790,586      67,099,042   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 13 -


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, 2014

                    

Commercial, financial, leasing, etc.

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

Real estate:

                    

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential Alt-A

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

Consumer:

                    

Home equity lines and loans

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

Automobile

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

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

One-to-four family residential mortgage loans held for sale were $423 million and $435 million at March 31, 2015 and December 31, 2014, respectively. Commercial mortgage loans held for sale were $117 million at March 31, 2015 and $308 million at December 31, 2014.

Changes in the allowance for credit losses for the three months ended March 31, 2015 were as follows:

 

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

Beginning balance

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

Provision for credit losses

     1,442        15,542        960        19,574        482         38,000   

Net charge-offs

             

Charge-offs

     (12,350     (6,679     (3,118     (25,329     —           (47,476

Recoveries

     3,939        585        989        5,774        —           11,287   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

  (8,411   (6,094   (2,129   (19,555   —        (36,189
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Changes in the allowance for credit losses for the three months ended March 31, 2014 were as follows:

 

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

      

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan by loan analysis of larger balance commercial loans and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also monitored by the Company’s loan review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes at any time. Except for consumer and residential real estate loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Modified loans, including smaller balance homogenous loans, that are considered to be troubled debt restructurings are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows.

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

 

     March 31, 2015      December 31, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (in thousands)  

With an allowance recorded:

           

Commercial, financial, leasing, etc.

   $ 108,870         130,029         19,335         132,340         165,146         31,779   

Real estate:

           

Commercial

     99,729         122,098         15,836         83,955         96,209         14,121   

Residential builder and developer

     6,512         8,731         591         17,632         22,044         805   

Other commercial construction

     5,116         6,084         831         5,480         6,484         900   

Residential

     86,691         104,630         4,405         88,970         107,343         4,296   

Residential Alt-A

     97,984         110,835         11,000         101,137         114,565         11,000   

Consumer:

           

Home equity lines and loans

     19,701         20,794         6,304         19,771         20,806         6,213   

Automobile

     27,122         27,122         6,983         30,317         30,317         8,070   

Other

     18,814         18,814         5,297         18,973         18,973         5,459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  470,539      549,137      70,582      498,575      581,887      82,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

Commercial, financial, leasing, etc.

  116,325      135,534      —        73,978      81,493      —     

Real estate:

Commercial

  51,734      59,235      —        66,777      78,943      —     

Residential builder and developer

  62,611      101,964      —        58,820      96,722      —     

Other commercial construction

  19,657      40,072      —        20,738      41,035      —     

Residential

  17,203      27,886      —        16,815      26,750      —     

Residential Alt-A

  24,785      43,635      —        26,752      46,964      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
  292,315      408,326      —        263,880      371,907      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

Commercial, financial, leasing, etc.

  225,195      265,563      19,335      206,318      246,639      31,779   

Real estate:

Commercial

  151,463      181,333      15,836      150,732      175,152      14,121   

Residential builder and developer

  69,123      110,695      591      76,452      118,766      805   

Other commercial construction

  24,773      46,156      831      26,218      47,519      900   

Residential

  103,894      132,516      4,405      105,785      134,093      4,296   

Residential Alt-A

  122,769      154,470      11,000      127,889      161,529      11,000   

Consumer:

Home equity lines and loans

  19,701      20,794      6,304      19,771      20,806      6,213   

Automobile

  27,122      27,122      6,983      30,317      30,317      8,070   

Other

  18,814      18,814      5,297      18,973      18,973      5,459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 762,854      957,463      70,582      762,455      953,794      82,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Three months ended
March 31, 2015
     Three months ended
March 31, 2014
 
            Interest income
recognized
            Interest income
recognized
 
     Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 214,618         604         604         134,306         548         548   

Real estate:

                 

Commercial

     153,070         1,102         1,102         185,425         926         926   

Residential builder and developer

     73,151         63         63         101,253         74         74   

Other commercial construction

     25,540         55         55         87,292         1,087         1,087   

Residential

     104,490         1,446         910         174,168         1,400         902   

Residential Alt-A

     125,654         1,610         647         139,651         1,626         559   

Consumer:

                 

Home equity lines and loans

     19,683         201         48         15,676         121         29   

Automobile

     29,013         450         54         39,383         625         87   

Other

     18,861         174         33         17,700         174         52   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 764,080      5,705      3,516      894,854      6,581      4,264   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 loans 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 loans and commercial real estate loans.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

March 31, 2015

     

Pass

   $ 18,880,311         21,755,661         1,522,471         3,466,705   

Criticized accrual

     699,780         676,092         43,421         149,763   

Criticized nonaccrual

     195,403         142,007         65,310         24,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 19,775,494      22,573,760      1,631,202      3,640,748   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Pass

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

Criticized accrual

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

Criticized nonaccrual

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

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a second lien position. Residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. The carrying value of residential real estate loans and home equity loans and lines of credit for which a partial charge-off has been recognized aggregated $62 million and $20 million, respectively, at March 31, 2015 and $63 million and $18 million, respectively, at December 31, 2014. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance totaled $24 million and $29 million, respectively, at March 31, 2015 and $27 million and $28 million, respectively, at December 31, 2014.

The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

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

 

     Commercial,
Financial,
Leasing, etc.
    

 

Real Estate

               
      Commercial      Residential      Consumer      Total  
     (in thousands)  

March 31, 2015

  

Individually evaluated for impairment

   $ 19,335         16,921         14,811         18,584       $ 69,651   

Collectively evaluated for impairment

     258,028         299,262         43,547         166,296         767,133   

Purchased impaired

     3,706         1,192         2,383         1,172         8,453   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

$ 281,069      317,375      60,741      186,052      845,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

  76,136   
              

 

 

 

Total

$ 921,373   
              

 

 

 

December 31, 2014

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

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

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

  75,654   
              

 

 

 

Total

$ 919,562   
              

 

 

 

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

 

     Commercial,
Financial,
Leasing, etc.
    

 

Real Estate

               
      Commercial      Residential      Consumer      Total  
     (in thousands)  

March 31, 2015

  

Individually evaluated for impairment

   $ 225,195         244,340         225,364         65,637       $ 760,536   

Collectively evaluated for impairment

     19,540,575         27,446,718         8,261,472         10,905,723         66,154,488   

Purchased impaired

     9,724         154,652         17,283         2,359         184,018   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 19,775,494      27,845,710      8,504,119      10,973,719    $ 67,099,042   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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.

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2015 and 2014:

 

            Recorded investment      Financial effects of
modification
 

Three months ended March 31, 2015

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

Commercial, financial, leasing, etc.

        

Principal deferral

     21       $ 1,572       $ 1,557       $ (15   $ —     

Interest rate reduction

     1         99         99         —          (19

Combination of concession types

     3         9,155         6,989         (2,166     —     

Real estate:

        

Commercial

        

Principal deferral

     7         3,792         3,776         (16     —     

Combination of concession types

     4         1,646         1,637         (9     (52

Residential builder and developer

        

Principal deferral

     1         1,398         1,398         —          —     

Residential

        

Principal deferral

     7         721         742         21        —     

Combination of concession types

     3         294         349         55        (34

Residential Alt-A

        

Combination of concession types

     1         210         210         —          (4

Consumer:

        

Home equity lines and loans

        

Principal deferral

     1         21         21         —          —     

Combination of concession types

     5         196         196         —          (13

Automobile

        

Principal deferral

     35         303         303         —          —     

Interest rate reduction

     3         42         42         —          (3

Other

     10         20         20         —          —     

Combination of concession types

     8         84         84         —          (7

Other

        

Principal deferral

     22         296         296         —          —     

Other

     5         59         59         —          —     

Combination of concession types

     13         224         224         —          (25
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

  150    $ 20,132    $ 18,002    $ (2,130 $ (157
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Three months ended March 31, 2014

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

Commercial, financial, leasing, etc.

             

Principal deferral

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

Combination of concession types

     2         41         39         (2     (4

Real estate:

             

Commercial

             

Principal deferral

     13         7,044         7,002         (42     —     

Combination of concession types

     1         346         401         55        (104

Other commercial construction

             

Principal deferral

     1         151         151         —          —     

Residential

             

Principal deferral

     13         1,602         1,663         61        —     

Interest rate reduction

     1         98         104         6        (32

Other

     1         188         188         —          —     

Combination of concession types

     14         2,188         2,160         (28     (282

Residential Alt-A

             

Principal deferral

     2         166         202         36        —     

Combination of concession types

     10         1,746         1,736         (10     (61

Consumer:

             

Home equity lines and loans

             

Principal deferral

     3         280         280         —          —     

Combination of concession types

     15         1,856         1,856         —          (172

Automobile

             

Principal deferral

     80         993         993         —          —     

Other

     11         61         61         —          —     

Combination of concession types

     23         250         250         —          (26

Other

             

Principal deferral

     8         55         55         —          —     

Other

     1         45         45         —          —     

Combination of concession types

     14         466         466         —          (188
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2015 and 2014 and for which there was a subsequent payment default during the three-month periods ended March 31, 2015 and 2014, respectively, were not material.

Effective January 1, 2015, the Company adopted amended accounting and disclosure guidance for reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amended guidance clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The adoption resulted in an insignificant increase in other real estate owned. The amount of foreclosed residential real estate property held by the Company was $42 million and $44 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, there were $158 million in loans secured by residential real estate that were in the process of foreclosure.

 

5. Borrowings

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

M&T had $836 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2015 that are held by various trusts and were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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

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

On April 15, 2015, M&T redeemed all of the issued and outstanding Capital Securities issued by M&T Capital Trust I, M&T Capital Trust II and M&T Capital Trust III, and the related Junior Subordinated Debentures held by those respective trusts. In the aggregate, $323 million of Junior Subordinated Debentures were redeemed. In February 2014, M&T redeemed all of the issued and outstanding 8.5% $350 million Capital Securities issued by M&T Capital Trust IV and the related Junior Subordinated Debentures held by M&T Capital Trust IV.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings, continued

 

Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of March 31, 2015 and December 31, 2014. The agreements reflect various repurchase dates in 2016 and 2017 and are subject to legally enforceable master netting arrangements, however the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $1.5 billion at each of March 31, 2015 and December 31, 2014.

 

6. Shareholders’ equity

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

Issued and outstanding preferred stock of M&T as of March 31, 2015 and December 31, 2014 is presented below:

 

     Shares
issued and
outstanding
     Carrying value  
     (dollars in thousands)  

Series A (a)

     

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

     230,000       $ 230,000   

Series C (a)

     

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

     151,500       $ 151,500   

Series D (b)

     

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

     50,000       $ 500,000   

Series E (c)

     

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

     350,000       $ 350,000   

 

(a) Dividends, if declared, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 719,175 at March 31, 2015 and 721,490 at December 31, 2014.
(b) Dividends, if declared, are paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 regulatory capital, M&T may redeem all of the shares within 90 days following that occurrence.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

(c) Dividends, if declared, are paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month London Interbank Offered Rate (“LIBOR”) plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 regulatory capital, M&T may redeem all of the shares within 90 days following that occurrence.

In addition to the Series A warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at March 31, 2015 and December 31, 2014. The obligation under that warrant was assumed by M&T in an acquisition.

 

7. Pension plans and other postretirement benefits

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

 

     Pension
benefits
     Other
postretirement
benefits
 
     Three months ended March 31  
     2015      2014      2015      2014  
     (in thousands)  

Service cost

   $ 6,000         5,100         200         150   

Interest cost on projected benefit obligation

     17,775         17,250         650         675   

Expected return on plan assets

     (23,575      (22,925      —           —     

Amortization of prior service credit

     (1,525      (1,650      (350      (350

Amortization of net actuarial loss

     11,175         3,350         25         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

$ 9,850      1,125      525      475   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $16,750,000 and $15,732,000 for the three months ended March 31, 2015 and 2014, respectively.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

     Three months ended
March 31
 
     2015      2014  
    

(in thousands,

except per share)

 

Income available to common shareholders:

  

Net income

   $ 241,613         229,017   

Less: Preferred stock dividends (a)

     (20,318      (14,674
  

 

 

    

 

 

 

Net income available to common equity

  221,295      214,343   

Less: Income attributable to unvested stock-based compensation awards

  (2,465   (2,623
  

 

 

    

 

 

 

Net income available to common shareholders

$ 218,830      211,720   

Weighted-average shares outstanding:

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

  133,542      131,800   

Less: Unvested stock-based compensation awards

  (1,493   (1,588
  

 

 

    

 

 

 

Weighted-average shares outstanding

  132,049      130,212   

Basic earnings per common share

$ 1.66      1.63   

 

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

     Three months ended
March 31
 
     2015      2014  
     (in thousands,
except per share)
 

Net income available to common equity

   $ 221,295         214,343   

Less: Income attributable to unvested stock-based compensation awards

     (2,458      (2,612
  

 

 

    

 

 

 

Net income available to common shareholders

$ 218,837      211,731   

Adjusted weighted-average shares outstanding:

Common and unvested stock-based compensation awards

  133,542      131,800   

Less: Unvested stock-based compensation awards

  (1,493   (1,588

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

  720      914   
  

 

 

    

 

 

 

Adjusted weighted-average shares outstanding

  132,769      131,126   

Diluted earnings per common share

$ 1.65      1.61   

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 2.7 million and 3.0 million common shares during the three-month periods ended March 31, 2015 and 2014, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

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

Balance – January 1, 2015

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

Other comprehensive income before reclassifications:

                

Unrealized holding gains, net

     8,011         32,063         —          —          40,074        (15,247     24,827   

Foreign currency translation adjustment

     —           —           —          (3,732     (3,732     1,348        (2,384

Gains on cash flow hedges

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

  8,011      32,063      —        (2,279   37,795      (14,467   23,328   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

  —        739      —        —        739  (b)    (289   450   

Losses realized in net income

  —        98      —        —        98  (c)    (36   62   

Accretion of gain on terminated cash flow hedges

  —        —        —        (24   (24 ) (d)    10      (14

Amortization of prior service credit

  —        —        (1,875   —        (1,875 ) (e)    934      (941

Amortization of actuarial losses

  —        —        11,200      —        11,200  (e)    (5,582   5,618   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

  —        837      9,325      (24   10,138      (4,963   5,175   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

  8,011      32,900      9,325      (2,303   47,933      (19,430   28,503   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2015 

$ 15,449      234,728      (493,702   (6,385 $ (249,910   97,419    $ (152,491
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

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

Balance – January 1, 2014

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

Other comprehensive income before reclassifications:

                

Unrealized holding gains, net

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

Foreign currency translation adjustment

     —           —           —          (234     (234     98        (136
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Accretion of unrealized holding losses on HTM securities

  2      823      —        —        825  (b)    (324   501   

Amortization of prior service credit

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

Amortization of actuarial losses

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2014

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

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

Balance – December 31, 2014

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

Net gain (loss) during period

     4,898         20,441         4,677        (1,513     28,503   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance – March 31, 2015

$ 9,416      143,124      (300,912   (4,119 $ (152,491
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant as of March 31, 2015.

The net effect of interest rate swap agreements was to increase net interest income by $11 million for each of the three-month periods ended March 31, 2015 and 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)               

March 31, 2015

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         2.4         4.42     1.22
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2014

Fair value hedges:

Fixed rate long-term borrowings (a)

$ 1,400,000      2.7      4.42   1.19
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

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

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

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $17.1 billion and $17.6 billion at March 31, 2015 and December 31, 2014, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.4 billion and $1.3 billion at March 31, 2015 and December 31, 2014, respectively.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

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

 

     Asset derivatives      Liability derivatives  
     Fair value      Fair value  
     March 31,
2015
     December 31,
2014
     March 31,
2015
     December 31,
2014
 
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements (a)

   $ 72,855         73,251       $ —           —     

Commitments to sell real estate loans (a)

     662         728         3,529         4,217   
  

 

 

    

 

 

    

 

 

    

 

 

 
  73,517      73,979      3,529      4,217   

Derivatives not designated and qualifying as hedging instruments

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

  26,295      17,396      65      49   

Commitments to sell real estate loans (a)

  1,571      754      8,552      4,330   

Trading:

Interest rate contracts (b)

  246,819      215,614      204,484      173,513   

Foreign exchange and other option and futures contracts (b)

  37,957      31,112      35,684      29,950   
  

 

 

    

 

 

    

 

 

    

 

 

 
  312,642      264,876      248,785      207,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

$ 386,159      338,855    $ 252,314      212,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

     Amount of unrealized gain (loss) recognized  
     Three months ended
March 31, 2015
     Three months ended
March 31, 2014
 
     Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

           

Interest rate swap agreements:

           

Fixed rate long-term borrowings (a)

   $ (396      161       $ (8,160      7,920   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

Trading:

Interest rate contracts (b)

$ 660    $ (302

Foreign exchange and other option and futures contracts (b)

  (167   (5,030
  

 

 

       

 

 

    

Total

$ 493    $ (5,332
  

 

 

       

 

 

    

 

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

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

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

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $174 million and $161 million at March 31, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $114 million and $103 million at March 31, 2015 and December 31, 2014, respectively. The Company was required to post collateral relating to those positions of $102 million and $90 million, at March 31, 2015 and December 31, 2014, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

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 March 31, 2015 was $22 million, for which the Company had posted collateral of $15 million in the normal course of business. If the credit risk-related contingent features had been triggered on March 31, 2015, the maximum amount of additional collateral the Company would have been required to post with counterparties was $7 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $106 million and $104 million at March 31, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $46 million at each of March 31, 2015 and December 31, 2014. Counterparties posted collateral relating to those positions of $47 million and $46 million at March 31, 2015 and December 31, 2014, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative instruments cleared through clearinghouses at March 31, 2015 was a net liability position of $65 million and at December 31, 2014 was a net liability position of $35 million. Collateral posted with clearinghouses was $97 million and $61 million at March 31, 2015 and December 31, 2014, respectively.

 

11. Variable interest entities and asset securitizations

During the first quarter of 2015, the Company securitized approximately $13 million of one-to-four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with the Government National Mortgage Association (“Ginnie Mae”) and retained the resulting securities in its investment securities portfolio. In similar transactions for the three months ended March 31, 2014, the Company securitized $29 million of one-to-four family residential real estate loans. Gains associated with those transactions were not significant.

In accordance with GAAP, the Company determined that it was the primary beneficiary of a residential mortgage loan securitization trust considering its role as servicer and its retained subordinated interests in the trust. As a result, the Company has included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. At March 31, 2015 and December 31, 2014, the carrying values of the loans in the securitization trust were $93 million and $98 million, respectively. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to M&T at March 31, 2015 and December 31, 2014 was $14 million and $15 million, respectively. Because the transaction was non-recourse, the Company’s maximum exposure to loss as a result of its association with the trust at March 31, 2015 is limited to realizing the carrying value of the loans less the amount of the mortgage-backed securities held by third parties.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

11. Variable interest entities and asset securitizations, continued

 

As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Company’s consolidated financial statements. At March 31, 2015 and December 31, 2014, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet. The Company has recognized $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 Capital Securities described in note 5.

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.2 billion at March 31, 2015 and December 31, 2014. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Company’s maximum exposure to loss on its investments in such partnerships was $303 million, including $88 million of unfunded commitments, at March 31, 2015 and $243 million, including $56 million of unfunded commitments, at December 31, 2014. Contingent commitments to provide additional capital contributions to these partnerships were not material at March 31, 2015. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as a limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements. As described in note 1, effective January 1, 2015 the Company retrospectively adopted for all periods presented amended accounting guidance on the accounting for investments in qualified affordable housing projects whereby the Company’s investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company amortized $10 million and $12 million of its investments in qualified affordable housing projects to income tax expense during the three-month periods ended March 31, 2015 and 2014, respectively, and recognized $14 million and $17 million of tax credits and other tax benefits during those respective periods.

 

12. Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at March 31, 2015.

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

 

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

 

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

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

Trading account assets and liabilities

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

Investment securities available for sale

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

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at March 31, 2015 and December 31, 2014. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR ranging from 5% to 10%, with a weighted-average of 8%, was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

significant unobservable inputs to Level 3 measurements. At March 31, 2015, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $30 million and $47 million, respectively, and at December 31, 2014 were $30 million and $50 million, respectively. Securities backed by trust preferred securities issued by financial institutions and other entities constituted substantially all of the available-for-sale investment securities classified as Level 3 valuations.

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

Real estate loans held for sale

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

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

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

Interest rate swap agreements used for interest rate risk management

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

 

     Fair value
measurements at
March 31,
2015
     Level 1 (a)      Level 2 (a)      Level 3  
     (in thousands)  

Trading account assets

   $ 363,085         48,978         314,107         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     163,234         —           163,234         —     

Obligations of states and political subdivisions

     7,850         —           7,850         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     10,265,221         —           10,265,221         —     

Privately issued

     95         —           —           95   

Collateralized debt obligations

     47,278         —           —           47,278   

Other debt securities

     121,273         —           121,273         —     

Equity securities

     98,549         71,804         26,745         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  10,703,500      71,804      10,584,323      47,373   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

  540,546      —        540,546      —     

Other assets (b)

  101,383      —        75,088      26,295   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 11,708,514      120,782      11,514,064      73,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

$ 240,168      —        240,168      —     

Other liabilities (b)

  12,146      —        12,081      65   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 252,314      —        252,249      65   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

Trading account assets

   $ 308,175         51,416         256,759         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     161,947         —           161,947         —     

Obligations of states and political subdivisions

     8,198         —           8,198         —     

Mortgage-backed securities:

           

Government issued or guaranteed

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

Privately issued

     103         —           —           103   

Collateralized debt obligations

     50,316         —           —           50,316   

Other debt securities

     121,488         —           121,488         —     

Equity securities

     83,757         64,841         18,916         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
  9,156,932      64,841      9,041,672      50,419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

  742,249      —        742,249      —     

Other assets (b)

  92,129      —        74,733      17,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 10,299,485      116,257      10,115,413      67,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

$ 203,464      —        203,464      —     

Other liabilities (b)

  8,596      —        8,547      49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 212,060      —        212,011      49   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2015 and the year ended December 31, 2014.
(b) Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3).

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2015 were as follows:

 

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

Balance – January 1, 2015

   $ 103       $ 50,316      $ 17,347   

Total gains (losses) realized/unrealized:

       

Included in earnings

     —           —          29,770  (a) 

Included in other comprehensive income

     —           (2,004 ) (d)      —     

Settlements

     (8      (1,034     —     

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

     —           —          (20,887 ) (c) 
  

 

 

    

 

 

   

 

 

 

Balance – March 31, 2015

$ 95    $ 47,278    $ 26,230   
  

 

 

    

 

 

   

 

 

 

Changes in unrealized gains included in earnings related to assets still held at March 31, 2015

$ —      $ —      $ 22,636  (a) 
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

 

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

Balance – January 1, 2014

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

Total gains (losses) realized/unrealized:

      

Included in earnings

     —          —          22,383  (a) 

Included in other comprehensive income

     67  (d)      4,646  (d)      —     

Settlements

     (1,221     (5,961     —     

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

     —          —          (13,735 ) (c) 
  

 

 

   

 

 

   

 

 

 

Balance – March 31, 2014

$ 696    $ 61,768    $ 12,589   
  

 

 

   

 

 

   

 

 

 

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

$ —      $ —      $ 15,050  (a) 
  

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

Loans

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 10% to 80% at March 31, 2015. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $101 million at March 31, 2015 ($67 million and $34 million of which were classified as Level 2 and Level 3, respectively), $173 million at December 31, 2014 ($94 million and $79 million of which were classified as Level 2 and Level 3, respectively) and $161 million at March 31, 2014 ($100 million and $61 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on March 31, 2015 and 2014 were decreases of $8 million and $15 million for the three-month periods ended March 31, 2015 and 2014, respectively.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $11 million at each of March 31, 2015 and March 31, 2014. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three-month periods ended March 31, 2015 and 2014.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

Significant unobservable inputs to Level 3 measurements

The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at March 31, 2015 and December 31, 2014:

 

     Fair value at
March 31, 2015
     Valuation
technique
   Unobservable
input/assumptions
    

Range

(weighted-

average)

     (in thousands)                   

Recurring fair value measurements

           

Privately issued mortgage–backed securities

   $ 95       Two
independent
pricing
quotes
     —         —  

Collateralized debt obligations

     47,278       Discounted
cash flow
    
 
Probability
of default
  
  
   12%-57% (45%)
           Loss severity       100%

Net other assets (liabilities) (a)

     26,230       Discounted
cash flow
    
 
Commitment
expirations
  
  
   0%-96% (19%)
     Fair value at
December 31,
2014
     Valuation
technique
   Unobservable
input/assumptions
    

Range

(weighted-

average)

     (in thousands)                   

Recurring fair value measurements

           

Privately issued mortgage–backed securities

   $ 103       Two
independent
pricing
quotes
     —         —  

Collateralized debt obligations

     50,316       Discounted
cash flow
    
 
Probability
of default
  
  
   12%-57% (36%)
           Loss severity       100%

Net other assets (liabilities) (a)

     17,347       Discounted
cash flow
    
 
Commitment
expirations
  
  
   0%-96% (17%)

 

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

Sensitivity of fair value measurements to changes in unobservable inputs

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

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

Disclosures of fair value of financial instruments

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

 

     March 31, 2015  
     Carrying
amount
    Estimated
fair value
    Level 1      Level 2     Level 3  
     (in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 1,366,853      $ 1,366,853      $ 1,311,917       $ 54,936      $ —     

Interest-bearing deposits at banks

     6,291,491        6,291,491        —           6,291,491        —     

Trading account assets

     363,085        363,085        48,978         314,107        —     

Investment securities

     14,393,270        14,444,292        71,804         14,162,805        209,683   

Loans and leases:

           

Commercial loans and leases

     19,775,494        19,484,920        —           —          19,484,920   

Commercial real estate loans

     27,845,710        27,746,166        —           117,366        27,628,800   

Residential real estate loans

     8,504,119        8,609,248        —           5,119,739        3,489,509   

Consumer loans

     10,973,719        10,880,895        —           —          10,880,895   

Allowance for credit losses

     (921,373     —          —           —          —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and leases, net

  66,177,669      66,721,229      —        5,237,105      61,484,124   

Accrued interest receivable

  244,079      244,079      —        244,079      —     

Financial liabilities:

Noninterest-bearing deposits

$ (27,181,120 $ (27,181,120 $ —      $ (27,181,120 $ —     

Savings deposits and NOW accounts

  (43,288,329   (43,288,329   —        (43,288,329   —     

Time deposits

  (2,946,126   (2,967,329   —        (2,967,329   —     

Deposits at Cayman Islands office

  (178,545   (178,545   —        (178,545   —     

Short-term borrowings

  (193,495   (193,495   —        (193,495   —     

Long-term borrowings

  (10,509,143   (10,641,367   —        (10,641,367   —     

Accrued interest payable

  (77,903   (77,903   —        (77,903   —     

Trading account liabilities

  (240,168   (240,168   —        (240,168   —     

Other financial instruments:

Commitments to originate real estate loans for sale

$ 26,230    $ 26,230    $ —      $ —      $ 26,230   

Commitments to sell real estate loans

  (9,848   (9,848   —        (9,848   —     

Other credit-related commitments

  (112,511   (112,511   —        —        (112,511

Interest rate swap agreements used for interest rate risk management

  72,855      72,855      —        72,855      —     

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

Financial assets:

           

Cash and cash equivalents

   $ 1,373,357      $ 1,373,357      $ 1,296,923       $ 76,434      $ —     

Interest-bearing deposits at banks

     6,470,867        6,470,867        —           6,470,867        —     

Trading account assets

     308,175        308,175        51,416         256,759        —     

Investment securities

     12,993,542        13,023,956        64,841         12,750,396        208,719   

Loans and leases:

           

Commercial loans and leases

     19,461,292        19,188,574        —           —          19,188,574   

Commercial real estate loans

     27,567,569        27,487,818        —           307,667        27,180,151   

Residential real estate loans

     8,657,301        8,729,056        —           5,189,086        3,539,970   

Consumer loans

     10,982,794        10,909,623        —           —          10,909,623   

Allowance for credit losses

     (919,562     —          —           —          —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans and leases, net

  65,749,394      66,315,071      —        5,496,753      60,818,318   

Accrued interest receivable

  227,348      227,348      —        227,348      —     

Financial liabilities:

Noninterest-bearing deposits

$ (26,947,880 $ (26,947,880 $ —      $ (26,947,880 $ —     

Savings deposits and NOW accounts

  (43,393,618   (43,393,618   —        (43,393,618   —     

Time deposits

  (3,063,973   (3,086,126   —        (3,086,126   —     

Deposits at Cayman Islands office

  (176,582   (176,582   —        (176,582   —     

Short-term borrowings

  (192,676   (192,676   —        (192,676   —     

Long-term borrowings

  (9,006,959   (9,139,789   —        (9,139,789   —     

Accrued interest payable

  (63,372   (63,372   —        (63,372   —     

Trading account liabilities

  (203,464   (203,464   —        (203,464   —     

Other financial instruments:

Commitments to originate real estate loans for sale

$ 17,347    $ 17,347    $ —      $ —      $ 17,347   

Commitments to sell real estate loans

  (7,065   (7,065   —        (7,065   —     

Other credit-related commitments

  (119,079   (119,079   —        —        (119,079

Interest rate swap agreements used for interest rate risk management

  73,251      73,251      —        73,251      —     

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

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

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

Investment securities

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

Loans and leases

In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses. However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans and leases would seek.

Deposits

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

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

Long-term borrowings

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

Other commitments and contingencies

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

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

 

13. Commitments and contingencies

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

 

     March 31,
2015
     December 31,
2014
 
     (in thousands)  

Commitments to extend credit

     

Home equity lines of credit

   $ 6,219,783         6,194,516   

Commercial real estate loans to be sold

     346,664         212,257   

Other commercial real estate and construction

     5,161,878         4,834,699   

Residential real estate loans to be sold

     661,132         432,352   

Other residential real estate

     581,384         524,399   

Commercial and other

     11,493,613         11,080,856   

Standby letters of credit

     3,648,095         3,706,888   

Commercial letters of credit

     42,291         46,965   

Financial guarantees and indemnification contracts

     2,535,609         2,490,050   

Commitments to sell real estate loans

     1,322,998         1,237,294   

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

13. Commitments and contingencies, continued

 

Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in financial guarantees and indemnification contracts are loan principal amounts sold with recourse in conjunction with the Company’s involvement in the Fannie Mae Delegated Underwriting and Servicing program. The Company’s maximum credit risk for recourse associated with loans sold under this program totaled approximately $2.4 billion at each of March 31, 2015 and December 31, 2014.

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

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

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

The Company is contractually obligated to repurchase previously sold residential real estate loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan documentation. When required to do so, the Company may reimburse loan purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues by an estimate for losses related to its obligations to loan purchasers. The amount of those charges is based on the volume of loans sold, the level of reimbursement requests received from loan purchasers and estimates of losses that may be associated with previously sold loans. At March 31, 2015, management believes that any further liability arising out of the Company’s obligation to loan purchasers is not material to the Company’s consolidated financial position.

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Company’s liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible further losses in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

14. Segment information

Reportable segments have been determined based upon the Company’s internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.

The financial information of the Company’s segments was compiled utilizing the accounting policies described in note 22 to the Company’s consolidated financial statements as of and for the year ended December 31, 2014. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, the financial information of the reported segments is not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. Effective January 1, 2015, the Company made certain changes to its methodology for measuring segment profit and loss. Those changes in the measurement of segment profitability were largely the result of updated funds transfer pricing and various cost allocation reviews. The most significant changes to the funds transfer pricing resulted from ascribing a longer duration to non-maturity deposits, which significantly benefitted the Retail Banking segment. The cost allocation review having the largest impact related to a branch cost study. That study consisted of transaction reviews and time studies which resulted in a higher cost allocation from the Retail Banking segment to the Business Banking segment. As a result of the changes, prior period financial information has been restated to provide segment information on a comparable basis, as noted below:

 

     Three months ended March 31, 2014  
     Net income (loss) as
previously reported
     Impact of
changes
     Net income (loss)
as restated
 
     (in thousands)  

Business Banking

   $ 28,598         (3,625      24,973   

Commercial Banking

     99,765         (924      98,841   

Commercial Real Estate

     74,561         (2,009      72,552   

Discretionary Portfolio

     11,279         81         11,360   

Residential Mortgage Banking

     19,411         (831      18,580   

Retail Banking

     29,711         39,323         69,034   

All Other

     (34,308      (32,015      (66,323
  

 

 

    

 

 

    

 

 

 

Total

$ 229,017      —        229,017   
  

 

 

    

 

 

    

 

 

 

As also described in note 22 to the Company’s 2014 consolidated financial statements, neither goodwill nor core deposit and other intangible assets (and the amortization charges associated with such assets) resulting from acquisitions of financial institutions have been allocated to the Company’s reportable segments, but are included in the “All Other” category. The Company does, however, assign such intangible assets to business units for purposes of testing for impairment.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

14. Segment information, continued

 

Information about the Company’s segments is presented in the following table:

 

     Three months ended March 31  
     2015     2014  
     Total
revenues (a)
     Inter-
segment
revenues
    Net
income
(loss)
    Total
revenues (a)
     Inter-
segment
revenues
    Net
income
(loss)
 
     (in thousands)  

Business Banking

   $ 108,560         1,045        24,811      $ 111,770         1,057        24,973   

Commercial Banking

     246,581         1,085        96,423        249,349         1,197        98,841   

Commercial Real Estate

     163,320         82        80,086        157,323         348        72,552   

Discretionary Portfolio

     15,474         (5,443     5,954        24,657         (5,039     11,360   

Residential Mortgage Banking

     111,458         11,387        31,965        93,765         9,748        18,580   

Retail Banking

     300,391         3,137        68,888        306,780         3,505        69,034   

All Other

     154,007         (11,293     (66,514     132,896         (10,816     (66,323
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,099,791      —        241,613    $ 1,076,540      —        229,017   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Average total assets  
     Three months ended
March 31
     Year ended
December 31
 
     2015      2014      2014  
     (in millions)  

Business Banking

   $ 5,300         5,242         5,281   

Commercial Banking

     23,683         22,523         22,892   

Commercial Real Estate

     18,019         16,937         17,113   

Discretionary Portfolio

     22,714         18,581         20,798   

Residential Mortgage Banking

     3,512         3,157         3,333   

Retail Banking

     10,788         10,155         10,449   

All Other

     11,876         10,070         12,277   
  

 

 

    

 

 

    

 

 

 

Total

$ 95,892      86,665      92,143   
  

 

 

    

 

 

    

 

 

 

 

(a)

Total revenues are comprised of net interest income and other income. Net interest income is the difference between taxable-equivalent interest earned on assets and interest paid on liabilities owed by a segment and a funding charge (credit) based on the Company’s internal funds transfer pricing and allocation methodology. Segments are charged a cost to fund any assets (e.g. loans) and are paid a funding credit for any funds provided

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

14. Segment information, continued

 

  (e.g. deposits). The taxable-equivalent adjustment aggregated $5,838,000 and $5,945,000 for the three-month periods ended March 31, 2015 and 2014, respectively, and is eliminated in “All Other” total revenues. Intersegment revenues are included in total revenues of the reportable segments. The elimination of intersegment revenues is included in the determination of “All Other” total revenues.

 

15. Relationship with Bayview Lending Group LLC and Bayview Financial Holdings, L.P.

M&T holds a 20% minority interest in Bayview Lending Group LLC (“BLG”), a privately-held commercial mortgage company. M&T recognizes income or loss from BLG using the equity method of accounting. The carrying value of that investment was $43 million at March 31, 2015.

Bayview Financial Holdings, L.P. (together with its affiliates, “Bayview Financial”), a privately-held specialty mortgage finance company, is BLG’s majority investor. In addition to their common investment in BLG, the Company and Bayview Financial conduct other business activities with each other. The Company has obtained loan servicing rights for mortgage loans from BLG and Bayview Financial having outstanding principal balances of $4.6 billion and $4.8 billion at March 31, 2015 and December 31, 2014, respectively. Revenues from those servicing rights were $6 million and $7 million during the three-month periods ended March 31, 2015 and 2014, respectively. The Company sub-services residential mortgage loans for Bayview Financial having outstanding principal balances totaling $39.5 billion and $41.3 billion at March 31, 2015 and December 31, 2014, respectively. Revenues earned for sub-servicing loans for Bayview Financial were $35 million and $26 million for the three-month periods ended March 31, 2015 and 2014, respectively. In addition, the Company held $198 million and $202 million of mortgage-backed securities in its held-to-maturity portfolio at March 31, 2015 and December 31, 2014, respectively, that were securitized by Bayview Financial.

 

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

Overview

M&T Bank Corporation (“M&T”) recorded net income in the first quarter of 2015 of $242 million or $1.65 of diluted earnings per common share, compared with $229 million or $1.61 of diluted earnings per common share in the initial 2014 quarter. During the fourth quarter of 2014, net income totaled $278 million or $1.92 of diluted earnings per common share. Basic earnings per common share were $1.66 in the recent quarter, compared with $1.63 and $1.93 in the first and fourth quarters of 2014, respectively. The annualized rate of return on average total assets for M&T and its consolidated subsidiaries (“the Company”) in the initial 2015 quarter was 1.02%, compared with 1.07% in the year-earlier quarter and 1.12% in the fourth quarter of 2014. The annualized rate of return on average common shareholders’ equity was 7.99% in the first three months of 2015, compared with 8.22% and 9.10% in the first and fourth quarters of 2014, respectively.

On March 12, 2015, M&T announced that the Federal Reserve did not object to M&T’s proposed 2015 Capital Plan. Accordingly, M&T may maintain a quarterly common stock dividend of $.70 per share; pay dividends and interest on other equity and debt instruments included in regulatory capital, including preferred stock, trust preferred securities and subordinated debt that were outstanding at December 31, 2014, consistent with the contractual terms of those instruments; repurchase up to $200 million of common shares during the first half of 2016; and redeem or repurchase up to $310 milli