10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2016

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

One M & T Plaza  
Buffalo, New York   14203
(Address of principal executive offices)   (Zip Code)

(716) 842-5445

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on July 29, 2016: 156,769,164 shares.

 

 

 


M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2016

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements.   
   CONSOLIDATED BALANCE SHEET - June 30, 2016 and December 31, 2015      3   
   CONSOLIDATED STATEMENT OF INCOME - Three and six months ended June 30, 2016 and 2015      4   
  

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME – Three and six months ended June 30, 2016 and 2015

     5   
   CONSOLIDATED STATEMENT OF CASH FLOWS - Six months ended June 30, 2016 and 2015      6   
  

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Six months ended June 30, 2016 and 2015

     7   
   NOTES TO FINANCIAL STATEMENTS      8   

Item 2.

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

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk.      103   

Item 4.

   Controls and Procedures.      103   

Part II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings.      103   

Item 1A.

   Risk Factors.      105   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds.      105   

Item 3.

   Defaults Upon Senior Securities.      105   

Item 4.

   Mine Safety Disclosures.      105   

Item 5.

   Other Information.      105   

Item 6.

   Exhibits.      106   

SIGNATURES

     106   

EXHIBIT INDEX

     107   

 

-2-


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share

   June 30,
2016
    December 31,
2015
 

Assets

   Cash and due from banks    $ 1,284,442        1,368,040   
  

Interest-bearing deposits at banks

     8,474,839        7,594,350   
  

Trading account

     506,131        273,783   
  

Investment securities (includes pledged securities that can be sold or repledged of $2,119,744 at June 30, 2016; $2,136,712 at December 31, 2015)

    
  

Available for sale (cost: $11,578,829 at June 30, 2016; $12,138,636 at December 31, 2015)

     11,918,974        12,242,671   
  

Held to maturity (fair value: $2,623,259 at June 30, 2016; $2,864,147 at December 31, 2015)

     2,574,421        2,859,709   
  

Other (fair value: $469,689 at June 30, 2016; $554,059 at December 31, 2015)

     469,689        554,059   
     

 

 

   

 

 

 
  

Total investment securities

     14,963,084        15,656,439   
     

 

 

   

 

 

 
  

Loans and leases

     88,754,824        87,719,234   
  

Unearned discount

     (232,826     (229,735
     

 

 

   

 

 

 
  

Loans and leases, net of unearned discount

     88,521,998        87,489,499   
  

Allowance for credit losses

     (970,496     (955,992
     

 

 

   

 

 

 
  

Loans and leases, net

     87,551,502        86,533,507   
     

 

 

   

 

 

 
  

Premises and equipment

     658,216        666,682   
  

Goodwill

     4,593,112        4,593,112   
  

Core deposit and other intangible assets

     116,531        140,268   
  

Accrued interest and other assets

     5,672,727        5,961,703   
     

 

 

   

 

 

 
  

Total assets

   $ 123,820,584        122,787,884   
     

 

 

   

 

 

 

Liabilities

   Noninterest-bearing deposits    $ 30,700,066        29,110,635   
  

Interest-checking deposits

     2,672,524        2,939,274   
  

Savings deposits

     48,453,713        46,627,370   
  

Time deposits

     12,630,277        13,110,392   
  

Deposits at Cayman Islands office

     193,523        170,170   
     

 

 

   

 

 

 
  

Total deposits

     94,650,103        91,957,841   
     

 

 

   

 

 

 
  

Federal funds purchased and agreements to repurchase securities

     206,943        150,546   
  

Other short-term borrowings

     200,180        1,981,636   
  

Accrued interest and other liabilities

     1,963,093        1,870,714   
  

Long-term borrowings

     10,328,751        10,653,858   
     

 

 

   

 

 

 
  

Total liabilities

     107,349,070        106,614,595   
     

 

 

   

 

 

 
Shareholders’ equity   

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at June 30, 2016 and December 31, 2015; Liquidation preference of $10,000 per share: 50,000 shares at June 30, 2016 and December 31, 2015

     1,231,500        1,231,500   
  

Common stock, $.50 par, 250,000,000 shares authorized, 159,957,393 shares issued at June 30, 2016; 159,563,512 shares issued at December 31, 2015

     79,979        79,782   
  

Common stock issuable, 33,546 shares at June 30, 2016; 36,644 shares at December 31, 2015

     2,201        2,364   
  

Additional paid-in capital

     6,690,671        6,680,768   
  

Retained earnings

     8,801,305        8,430,502   
  

Accumulated other comprehensive income (loss), net

     (101,021     (251,627
  

Treasury stock - common, at cost - 2,073,692 shares at June 30, 2016

     (233,121     —     
     

 

 

   

 

 

 
  

Total shareholders’ equity

     16,471,514        16,173,289   
     

 

 

   

 

 

 
  

Total liabilities and shareholders’ equity

   $ 123,820,584        122,787,884   
     

 

 

   

 

 

 

 

-3-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

         Three months ended June 30     Six months ended June 30  

In thousands, except per share

  2016      2015     2016      2015  

Interest income

  

Loans and leases, including fees

  $ 867,478         662,633      $ 1,730,863         1,309,812   
  

Investment securities

         
  

Fully taxable

    91,184         93,144        189,199         179,101   
  

Exempt from federal taxes

    663         1,062        1,458         2,380   
  

Deposits at banks

    10,993         3,351        21,330         6,469   
  

Other

    303         164        605         679   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Total interest income

    970,621         760,354        1,943,455         1,498,441   
    

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense

  

Interest-checking deposits

    400         349        814         660   
  

Savings deposits

    20,134         10,361        36,025         20,580   
  

Time deposits

    26,867         3,690        51,189         7,430   
  

Deposits at Cayman Islands office

    181         150        374         297   
  

Short-term borrowings

    1,143         36        3,305         70   
  

Long-term borrowings

    58,077         62,640        115,965         126,688   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Total interest expense

    106,802         77,226        207,672         155,725   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Net interest income

    863,819         683,128        1,735,783         1,342,716   
  

Provision for credit losses

    32,000         30,000        81,000         68,000   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Net interest income after provision for credit losses

    831,819         653,128        1,654,783         1,274,716   
    

 

 

    

 

 

   

 

 

    

 

 

 

Other income

  

Mortgage banking revenues

    89,383         102,602        171,446         204,203   
  

Service charges on deposit accounts

    103,872         105,257        206,277         207,601   
  

Trust income

    120,450         118,598        231,527         242,332   
  

Brokerage services income

    16,272         16,861        32,276         32,322   
  

Trading account and foreign exchange gains

    13,222         6,046        20,680         12,277   
  

Gain (loss) on bank investment securities

    264         (10     268         (108
  

Other revenues from operations

    104,791         147,673        206,713         238,603   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Total other income

    448,254         497,027        869,187         937,230   
    

 

 

    

 

 

   

 

 

    

 

 

 

Other expense

  

Salaries and employee benefits

    398,675         361,657        830,460         751,550   
  

Equipment and net occupancy

    75,724         66,852        149,902         133,322   
  

Printing, postage and supplies

    9,907         9,305        21,893         18,895   
  

Amortization of core deposit and other intangible assets

    11,418         5,965        23,737         12,758   
  

FDIC assessments

    22,370         10,801        47,595         21,461   
  

Other costs of operations

    231,801         242,048        452,403         445,017   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Total other expense

    749,895         696,628        1,525,990         1,383,003   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Income before taxes

    530,178         453,527        997,980         828,943   
  

Income taxes

    194,147         166,839        363,421         300,642   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Net income

  $ 336,031         286,688      $ 634,559         528,301   
    

 

 

    

 

 

   

 

 

    

 

 

 
  

Net income available to common shareholders

         
  

Basic

  $ 312,968         263,471      $ 588,697         482,295   
  

Diluted

    312,974         263,481        588,707         482,313   
  

Net income per common share

         
  

Basic

  $ 1.98         1.99      $ 3.72         3.65   
  

Diluted

    1.98         1.98        3.71         3.63   
  

Cash dividends per common share

  $ .70         .70      $ 1.40         1.40   
  

Average common shares outstanding

         
  

Basic

    157,802         132,356        158,268         132,203   
  

Diluted

    158,341         133,116        158,761         132,944   

 

-4-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended June 30     Six months ended June 30  

In thousands

   2016     2015     2016     2015  

Net income

   $ 336,031        286,688      $ 634,559        528,301   

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

        

Net unrealized gains (losses) on investment securities

     47,270        (72,618     144,464        (47,279

Cash flow hedges adjustments

     (23     (24     (47     847   

Foreign currency translation adjustment

     (1,565     1,866        (1,618     (518

Defined benefit plans liability adjustments

     3,486        5,765        7,807        10,442   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     49,168        (65,011     150,606        (36,508
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 385,199        221,677      $ 785,165        491,793   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

-5-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Six months ended June 30  

In thousands

        2016     2015  

Cash flows from operating activities

  

Net income

   $ 634,559        528,301   
  

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

    
  

Provision for credit losses

     81,000        68,000   
  

Depreciation and amortization of premises and equipment

     53,514        48,199   
  

Amortization of capitalized servicing rights

     24,648        24,572   
  

Amortization of core deposit and other intangible assets

     23,737        12,758   
  

Provision for deferred income taxes

     94,458        29,884   
  

Asset write-downs

     7,737        4,076   
  

Net gain on sales of assets

     (10,477     (48,637
  

Net change in accrued interest receivable, payable

     2,358        7,912   
  

Net change in other accrued income and expense

     (32,180     (39,503
  

Net change in loans originated for sale

     (188,771     (77,677
  

Net change in trading account assets and liabilities

     (40,552     198   
     

 

 

   

 

 

 
  

Net cash provided by operating activities

     650,031        558,083   
     

 

 

   

 

 

 

Cash flows from investing activities

  

Proceeds from sales of investment securities

    
  

Available for sale

     4,970        2,539   
  

Other

     85,389        254   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     1,067,100        859,904   
  

Held to maturity

     291,917        351,110   
  

Purchases of investment securities

    
  

Available for sale

     (518,203     (3,013,384
  

Held to maturity

     (10,456     (17,403
  

Other

     (1,019     (7,686
  

Net increase in loans and leases

     (930,426     (1,465,261
  

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

     (880,489     2,425,015   
  

Capital expenditures, net

     (36,619     (23,395
  

Net decrease in loan servicing advances

     119,190        317,276   
  

Other, net

     (98,452     16,450   
     

 

 

   

 

 

 
  

Net cash used by investing activities

     (907,098     (554,581
     

 

 

   

 

 

 

Cash flows from financing activities

  

Net increase (decrease) in deposits

     2,705,332        (951,347
  

Net decrease in short-term borrowings

     (1,693,603     (39,377
  

Proceeds from long-term borrowings

     —          1,500,000   
  

Payments on long-term borrowings

     (322,591     (323,025
  

Purchases of treasury stock

     (254,000     —     
  

Dividends paid - common

     (223,179     (187,278
  

Dividends paid - preferred

     (40,635     (40,635
  

Other, net

     2,145        15,661   
     

 

 

   

 

 

 
  

Net cash provided (used) by financing activities

     173,469        (26,001
     

 

 

   

 

 

 
  

Net decrease in cash and cash equivalents

     (83,598     (22,499
  

Cash and cash equivalents at beginning of period

     1,368,040        1,373,357   
     

 

 

   

 

 

 
  

Cash and cash equivalents at end of period

   $ 1,284,442        1,350,858   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

  

Interest received during the period

   $ 1,947,027        1,478,848   
  

Interest paid during the period

     257,222        149,255   
  

Income taxes paid during the period

     105,361        225,107   
     

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

  

Real estate acquired in settlement of loans

   $ 66,286        23,273   
  

Securitization of residential mortgage loans allocated to

    
  

Available-for-sale investment securities

     13,923        36,645   
  

Capitalized servicing rights

     143        368   

 

-6-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

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

In thousands, except per share

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

2015

                  

Balance - January 1, 2015

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

Total comprehensive income

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

Preferred stock cash dividends

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

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

     —           1         —          (1     —          —          —          —     

Stock-based compensation plans:

                  

Compensation expense, net

     —           144         —          20,966        —          —          —          21,110   

Exercises of stock options, net

     —           179         —          34,937        —          —          —          35,116   

Stock purchase plan

     —           45         —          10,301        —          —          —          10,346   

Directors’ stock plan

     —           3         —          827        —          —          —          830   

Deferred compensation plans, net, including dividend equivalents

     —           2         (276     274        (51     —          —          (51

Other

     —           —           —          801        —          —          —          801   

Common stock cash dividends - $1.40 per share

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2015

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2016

                  

Balance - January 1, 2016

   $ 1,231,500         79,782         2,364        6,680,768        8,430,502        (251,627     —          16,173,289   

Total comprehensive income

     —           —           —          —          634,559        150,606        —          785,165   

Preferred stock cash dividends

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

Exercise of 5,320 Series A stock warrants into 1,983 shares of common stock

     —           —           —          (223     —          —          223        —     

Purchases of treasury stock

     —           —           —          —          —          —          (254,000     (254,000

Stock-based compensation plans:

                  

Compensation expense, net

     —           175         —          6,746        —          —          5,880        12,801   

Exercises of stock options, net

     —           18         —          1,642        —          —          3,902        5,562   

Stock purchase plan

     —           —           —          275        —          —          10,319        10,594   

Directors’ stock plan

     —           2         —          500        —          —          551        1,053   

Deferred compensation plans, net, including dividend equivalents

     —           2         (163     232        (47     —          4        28   

Other

     —           —           —          731        —          —          —          731   

Common stock cash dividends - $1.40 per share

     —           —           —          —          (223,074     —          —          (223,074
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2016

   $ 1,231,500         79,979         2,201        6,690,671        8,801,305        (101,021     (233,121     16,471,514   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-7-


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 Form 10-K for the year ended December 31, 2015 (“2015 Annual Report”). In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

 

2. Acquisitions

On November 1, 2015, M&T completed the acquisition of Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey. On that date, Hudson City Savings Bank, the banking subsidiary of Hudson City, was merged into M&T Bank, a wholly owned banking subsidiary of M&T. Hudson City Savings Bank operated 135 banking offices in New Jersey, Connecticut and New York at the date of acquisition. The results of operations acquired in the Hudson City transaction have been included in the Company’s financial results since November 1, 2015. After application of the election, allocation and proration procedures contained in the merger agreement with Hudson City, M&T paid $2.1 billion in cash and issued 25,953,950 shares of M&T common stock in exchange for Hudson City shares outstanding at the time of the acquisition. The purchase price was approximately $5.2 billion based on the cash paid to Hudson City shareholders, the fair value of M&T stock exchanged and the estimated fair value of Hudson City stock awards converted into M&T stock awards. The acquisition of Hudson City expanded the Company’s presence in New Jersey, Connecticut and New York, and management expects that the Company will benefit from greater geographic diversity and the advantages of scale associated with a larger company.

The Hudson City transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. The consideration paid for Hudson City’s common equity and the amounts of identifiable assets acquired and liabilities assumed as of the acquisition date were as follows:

 

     (in thousands)  

Identifiable assets:

  

Cash and due from banks

   $ 131,688   

Interest-bearing deposits at banks

     7,568,934   

Investment securities

     7,929,014   

Loans

     19,015,013   

Goodwill

     1,079,787   

Core deposit intangible

     131,665   

Other assets

     843,219   
  

 

 

 

Total identifiable assets

     36,699,320   
  

 

 

 

Liabilities:

  

Deposits

     17,879,589   

Borrowings

     13,211,598   

Other liabilities

     405,025   
  

 

 

 

Total liabilities

     31,496,212   
  

 

 

 

Total consideration

   $ 5,203,108   
  

 

 

 

Cash paid

   $ 2,064,284   

Common stock issued (25,953,950 shares)

     3,110,581   

Common stock awards converted

     28,243   
  

 

 

 

Total consideration

   $ 5,203,108   
  

 

 

 

 

-8-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

In early November 2015, the Company sold $5.8 billion of investment securities obtained in the acquisition and repaid $10.6 billion of borrowings assumed in the transaction. In connection with the acquisition, the Company recorded approximately $1.1 billion of goodwill and $132 million of core deposit intangible. The core deposit intangible asset is being amortized over a period of 7 years using an accelerated method.

The following table presents certain pro forma information as if Hudson City had been included in the Company’s results of operations in the three-month and six-month periods ended June 30, 2015. These results combine the historical results of Hudson City into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place as indicated. In particular, no adjustments have been made to eliminate the impact of gains on securities transactions of $67 million during the three months ended June 30, 2015 and $74 million during the six months ended June 30, 2015 that may not have been recognized had the investment securities been recorded at fair value. Additionally, the Company expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts that follow.

 

     Pro forma
Three months
ended
June 30,
2015
     Pro forma
Six months
ended
June 30,
2015
 
     (in thousands)  

Total revenues(a)

   $ 1,370,594         2,624,039   

Net income

     357,654         642,891   

 

(a) Represents net interest income plus other income.

In connection with the Hudson City acquisition, the Company incurred merger-related expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with preparing for systems conversions and/or integration of operations; costs related to termination of existing contractual arrangements for various services; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; severance (for former Hudson City employees); travel costs; and other costs of completing the transaction and commencing operations in new markets and offices. The Company does not expect additional merger-related expenses in 2016.

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

 

     Three months
ended
June 30,
2016
     Six months
ended
June 30,
2016
 
     (in thousands)  

Salaries and employee benefits

   $ 60         5,334   

Equipment and net occupancy

     339         1,278   

Printing, postage and supplies

     545         1,482   

Other costs of operations

     11,649         27,661   
  

 

 

    

 

 

 

Total

   $ 12,593         35,755   
  

 

 

    

 

 

 

There were no merger-related expenses during the three-month and six-month periods ended June 30, 2015.

 

-9-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities

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

 

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

June 30, 2016

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 397,825         2,537         14       $ 400,348   

Obligations of states and political subdivisions

     5,158         131         48         5,241   

Mortgage-backed securities:

           

Government issued or guaranteed

     10,944,676         323,828         1,226         11,267,278   

Privately issued

     58         —           1         57   

Collateralized debt obligations

     28,255         17,466         2,416         43,305   

Other debt securities

     135,170         1,271         21,670         114,771   

Equity securities

     67,687         20,448         161         87,974   
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,578,829         365,681         25,536         11,918,974   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     84,614         712         240         85,086   

Mortgage-backed securities:

           

Government issued or guaranteed

     2,315,012         88,526         350         2,403,188   

Privately issued

     168,784         927         40,737         128,974   

Other debt securities

     6,011         —           —           6,011   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,574,421         90,165         41,327         2,623,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     469,689         —           —           469,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,622,939         455,846         66,863       $ 15,011,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 299,890         294         187       $ 299,997   

Obligations of states and political subdivisions

     5,924         146         42         6,028   

Mortgage-backed securities:

           

Government issued or guaranteed

     11,592,959         142,370         48,701         11,686,628   

Privately issued

     74         2         2         74   

Collateralized debt obligations

     28,438         20,143         1,188         47,393   

Other debt securities

     137,556         1,514         20,190         118,880   

Equity securities

     73,795         10,230         354         83,671   
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,138,636         174,699         70,664         12,242,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     118,431         1,003         421         119,013   

Mortgage-backed securities:

           

Government issued or guaranteed

     2,553,612         50,936         7,817         2,596,731   

Privately issued

     181,091         2,104         41,367         141,828   

Other debt securities

     6,575         —           —           6,575   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,859,709         54,043         49,605         2,864,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     554,059         —           —           554,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,552,404         228,742         120,269       $ 15,660,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-10-


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 three-month and six-month periods ended June 30, 2016 and 2015, respectively.

At June 30, 2016, 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

   $ 6,147         6,176   

Due after one year through five years

     399,312         402,100   

Due after five years through ten years

     3,425         3,822   

Due after ten years

     157,524         151,567   
  

 

 

    

 

 

 
     566,408         563,665   

Mortgage-backed securities available for sale

     10,944,734         11,267,335   
  

 

 

    

 

 

 
   $ 11,511,142         11,831,000   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 28,259         28,430   

Due after one year through five years

     51,414         51,611   

Due after five years through ten years

     4,941         5,045   

Due after ten years

     6,011         6,011   
  

 

 

    

 

 

 
     90,625         91,097   

Mortgage-backed securities held to maturity

     2,483,796         2,532,162   
  

 

 

    

 

 

 
   $ 2,574,421         2,623,259   
  

 

 

    

 

 

 

 

-11-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of June 30, 2016 and December 31, 2015 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:

 

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

June 30, 2016

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 7,831         (14      —           —     

Obligations of states and political subdivisions

     —           —           1,703         (48

Mortgage-backed securities:

           

Government issued or guaranteed

     245,977         (1,123      7,590         (103

Privately issued

     —           —           40         (1

Collateralized debt obligations

     2,883         (1,078      4,285         (1,338

Other debt securities

     11,275         (409      91,997         (21,261

Equity securities

     —           —           140         (161
  

 

 

    

 

 

    

 

 

    

 

 

 
     267,966         (2,624      105,755         (22,912
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     15,813         (89      12,057         (151

Mortgage-backed securities:

           

Government issued or guaranteed

     —           —           125,116         (350

Privately issued

     17,436         (3,075      94,454         (37,662
  

 

 

    

 

 

    

 

 

    

 

 

 
     33,249         (3,164      231,627         (38,163
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 301,215         (5,788      337,382         (61,075
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 147,508         (187      —           —     

Obligations of states and political subdivisions

     865         (2      1,335         (40

Mortgage-backed securities:

           

Government issued or guaranteed

     4,061,899         (48,534      7,216         (167

Privately issued

     —           —           43         (2

Collateralized debt obligations

     5,711         (335      2,063         (853

Other debt securities

     12,935         (462      93,344         (19,728

Equity securities

     18,073         (207      153         (147
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,246,991         (49,727      104,154         (20,937
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     42,913         (335      5,853         (86

Mortgage-backed securities:

           

Government issued or guaranteed

     459,983         (1,801      228,867         (6,016

Privately issued

     —           —           112,155         (41,367
  

 

 

    

 

 

    

 

 

    

 

 

 
     502,896         (2,136      346,875         (47,469
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,749,887         (51,863      451,029         (68,406
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-12-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

The Company owned 428 individual investment securities with aggregate gross unrealized losses of $67 million at June 30, 2016. Based on a review of each of the securities in the investment securities portfolio at June 30, 2016, the Company concluded that it expected to recover the amortized cost basis of its investment. As of June 30, 2016, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At June 30, 2016, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $470 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 loans acquired at a discount that were recorded at fair value at the acquisition date that is included in the consolidated balance sheet were as follows:

 

     June 30,
2016
     December 31,
2015
 
     (in thousands)  

Outstanding principal balance

   $ 2,735,024         3,122,935   

Carrying amount:

     

Commercial, financial, leasing, etc.

     68,648         78,847   

Commercial real estate

     548,485         644,284   

Residential real estate

     903,891         1,016,129   

Consumer

     650,456         725,807   
  

 

 

    

 

 

 
   $ 2,171,480         2,465,067   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $662 million at June 30, 2016 and $768 million at December 31, 2015, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for loans acquired at a discount for the three months and six months ended June 30, 2016 and 2015 follows:

 

     Three months ended June 30  
     2016      2015  
     Purchased
impaired
     Other
acquired
     Purchased
impaired
     Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 171,185         269,017       $ 71,422         357,895   

Interest income

     (14,060      (32,898      (5,772      (40,024

Reclassifications from nonaccretable balance, net

     4,898         2,933         11,974         26,840   

Other (a)

     —           6,143         —           278   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 162,023         245,195       $ 77,624         344,989   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-13-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Six months ended June 30  
     2016      2015  
     Purchased
impaired
     Other
acquired
     Purchased
impaired
     Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 184,618         296,434       $ 76,518         397,379   

Interest income

     (28,122      (70,760      (10,978      (81,301

Reclassifications from nonaccretable balance, net

     5,527         8,597         12,084         27,023   

Other (a)

     —           10,924         —           1,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 162,023         245,195       $ 77,624         344,989   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

A summary of current, past due and nonaccrual loans as of June 30, 2016 and December 31, 2015 follows:

 

     Current      30-89 Days
past due
     Accruing
loans past
due 90
days or
more(a)
     Accruing
loans
acquired at
a discount
past due
90 days
or more(b)
     Purchased
impaired(c)
     Nonaccrual      Total  
June 30, 2016    (in thousands)  

Commercial, financial, leasing, etc.

   $ 21,157,606         63,069         6,665         452         766         240,684       $ 21,469,242   

Real estate:

                    

Commercial

     23,390,039         125,657         16,487         13,935         36,111         172,670         23,754,899   

Residential builder and developer

     1,819,984         14,892         —           4,847         19,972         24,263         1,883,958   

Other commercial construction

     4,993,493         41,297         —           280         16,009         21,294         5,072,373   

Residential

     19,208,724         470,646         270,845         13,087         433,192         202,949         20,599,443   

Residential-limited documentation

     3,584,715         112,743         —           —           154,320         79,028         3,930,806   

Consumer:

                    

Home equity lines and loans

     5,658,417         34,735         —           14,608         1,689         86,870         5,796,319   

Automobile

     2,669,708         39,139         —           1         —           12,390         2,721,238   

Other

     3,232,679         26,501         4,452         21,381         —           8,707         3,293,720   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 85,715,365         928,679         298,449         68,591         662,059         848,855       $ 88,521,998   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-14-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Current      30-89 Days
past due
     Accruing
loans past
due 90
days or
more(a)
     Accruing
loans
acquired at
a discount
past due
90 days
or more(b)
     Purchased
impaired(c)
     Nonaccrual      Total  
December 31, 2015                  (in thousands)                       

Commercial, financial, leasing, etc.

   $ 20,122,648         52,868         2,310         693         1,902         241,917       $ 20,422,338   

Real estate:

                    

Commercial (d)

     23,111,673         172,439         12,963         8,790         46,790         179,606         23,532,261   

Residential builder and developer

     1,507,856         7,969         5,760         6,925         28,734         28,429         1,585,673   

Other commercial construction (d)

     3,962,620         65,932         7,936         2,001         24,525         16,363         4,079,377   

Residential

     20,507,551         560,312         284,451         16,079         488,599         153,281         22,010,273   

Residential-limited documentation

     3,885,073         137,289         —           —           175,518         61,950         4,259,830   

Consumer:

                    

Home equity lines and loans

     5,805,222         45,604         —           15,222         2,261         84,467         5,952,776   

Automobile

     2,446,473         56,181         —           6         —           16,597         2,519,257   

Other

     3,051,435         36,702         4,021         18,757         —           16,799         3,127,714   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 84,400,551         1,135,296         317,441         68,473         768,329         799,409       $ 87,489,499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Excludes loans acquired at a discount.
(b) Loans acquired at a discount that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately.
(c) Accruing loans acquired at a discount that were impaired at acquisition date and recorded at fair value.
(d) The Company expanded its definition of construction loans in 2016 and, as a result, re-characterized certain commercial real estate loans as other commercial construction loans. The December 31, 2015 balances reflect such changes.

One-to-four family residential mortgage loans held for sale were $374 million and $353 million at June 30, 2016 and December 31, 2015, respectively. Commercial mortgage loans held for sale were $228 million at June 30, 2016 and $39 million at December 31, 2015.

Changes in the allowance for credit losses for the three months ended June 30, 2016 were as follows:

 

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

Beginning balance

   $ 323,866        331,985        68,371        160,819        77,711       $ 962,752   

Provision for credit losses

     (10,919     15,823        4,404        22,681        11         32,000   

Net charge-offs

             

Charge-offs

     (7,487     (733     (5,090     (33,560     —           (46,870

Recoveries

     10,619        2,599        1,975        7,421        —           22,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     3,132        1,866        (3,115     (26,139     —           (24,256
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 316,079        349,674        69,660        157,361        77,722       $ 970,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

-15-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

             

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in the allowance for credit losses for the six months ended June 30, 2016 were as follows:

 

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

Beginning balance

   $ 300,404        326,831        72,238        178,320        78,199      $ 955,992   

Provision for credit losses

     13,445        19,836        5,622        42,574        (477     81,000   

Net charge-offs

            

Charge-offs

     (13,636     (2,005     (12,062     (77,879     —          (105,582

Recoveries

     15,866        5,012        3,862        14,346        —          39,086   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     2,230        3,007        (8,200     (63,533     —          (66,496
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 316,079        349,674        69,660        157,361        77,722      $ 970,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

             

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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.

 

-16-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

-17-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The following tables provide information with respect to loans and leases that were considered impaired as of June 30, 2016 and December 31, 2015 and for the three-month and six-month periods ended June 30, 2016 and 2015:

 

     June 30, 2016      December 31, 2015  
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

                 

Commercial, financial, leasing, etc.

   $ 196,990         219,662         50,010         179,037         195,821         44,752   

Real estate:

                 

Commercial

     79,748         89,051         16,562         85,974         95,855         18,764   

Residential builder and developer

     6,854         7,788         581         3,316         5,101         196   

Other commercial construction

     3,312         3,731         1,223         3,548         3,843         348   

Residential

     77,975         96,157         3,337         79,558         96,751         4,727   

Residential-limited documentation

     85,201         98,607         6,700         90,356         104,251         8,000   

Consumer:

                 

Home equity lines and loans

     40,004         40,914         7,421         25,220         26,195         3,777   

Automobile

     19,137         19,137         4,022         22,525         22,525         4,709   

Other

     4,426         4,426         940         17,620         17,620         4,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     513,647         579,473         90,796         507,154         567,962         90,093   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     74,409         83,632         —           93,190         110,735         —     

Real estate:

                 

Commercial

     101,949         118,540         —           101,340         116,230         —     

Residential builder and developer

     21,619         30,837         —           27,651         47,246         —     

Other commercial construction

     18,334         37,278         —           13,221         31,477         —     

Residential

     18,945         27,933         —           19,621         30,940         —     

Residential-limited documentation

     17,790         29,972         —           18,414         31,113         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     253,046         328,192         —           273,437         367,741         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     271,399         303,294         50,010         272,227         306,556         44,752   

Real estate:

                 

Commercial

     181,697         207,591         16,562         187,314         212,085         18,764   

Residential builder and developer

     28,473         38,625         581         30,967         52,347         196   

Other commercial construction

     21,646         41,009         1,223         16,769         35,320         348   

Residential

     96,920         124,090         3,337         99,179         127,691         4,727   

Residential-limited documentation

     102,991         128,579         6,700         108,770         135,364         8,000   

Consumer:

                 

Home equity lines and loans

     40,004         40,914         7,421         25,220         26,195         3,777   

Automobile

     19,137         19,137         4,022         22,525         22,525         4,709   

Other

     4,426         4,426         940         17,620         17,620         4,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 766,693         907,665         90,796         780,591         935,703         90,093   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-18-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

     Three months ended
June 30, 2016
     Three months ended
June 30, 2015
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 291,970         5,700         5,700         221,952         502         502   

Real estate:

                 

Commercial

     175,028         611         611         153,105         1,004         1,004   

Residential builder and developer

     31,751         41         41         66,334         131         131   

Other commercial construction

     20,955         335         335         23,614         168         168   

Residential

     97,936         1,834         1,139         101,560         1,358         785   

Residential-limited documentation

     103,795         1,607         640         120,286         1,650         697   

Consumer:

                 

Home equity lines and loans

     34,234         323         98         20,221         224         65   

Automobile

     20,542         322         28         26,123         416         43   

Other

     11,169         121         36         19,058         185         30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 787,380         10,894         8,628         752,253         5,638         3,425   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Six months ended
June 30, 2016
     Six months ended
June 30, 2015
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
Basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 294,277         6,311         6,311         218,285         1,106         1,106   

Real estate:

                 

Commercial

     178,741         2,085         2,085         153,088         2,106         2,106   

Residential builder and developer

     32,750         83         83         69,742         194         194   

Other commercial construction

     18,911         373         373         24,577         223         223   

Residential

     97,362         3,206         2,021         103,025         2,804         1,695   

Residential-limited documentation

     105,634         3,079         1,270         122,970         3,260         1,344   

Consumer:

                 

Home equity lines and loans

     30,127         569         183         19,952         425         113   

Automobile

     21,252         661         64         27,568         866         97   

Other

     14,443         299         63         18,960         359         63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 793,497         16,666         12,453         758,167         11,343         6,941   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-19-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

In accordance with the previously described policies, the Company utilizes a loan grading system that is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger balance criticized commercial 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.

 

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

June 30, 2016

           

Pass

   $ 20,409,928         22,785,132         1,704,457         4,847,810   

Criticized accrual

     818,630         797,097         155,238         203,269   

Criticized nonaccrual

     240,684         172,670         24,263         21,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,469,242         23,754,899         1,883,958         5,072,373   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

Pass

   $ 19,442,183         22,697,398         1,497,465         3,834,137   

Criticized accrual

     738,238         655,257         59,779         228,877   

Criticized nonaccrual

     241,917         179,606         28,429         16,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,422,338         23,532,261         1,585,673         4,079,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. The 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 $52 million and $31 million, respectively, at June 30, 2016 and $55 million and $21 million,

 

-20-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

respectively, at December 31, 2015. 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 $18 million and $39 million, respectively, at June 30, 2016 and $20 million and $28 million, respectively, at December 31, 2015.

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

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

 

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

June 30, 2016

              

Individually evaluated for impairment

   $ 50,010         18,292         10,037         12,383       $ 90,722   

Collectively evaluated for impairment

     266,069         328,919         57,666         143,891         796,545   

Purchased impaired

     —           2,463         1,957         1,087         5,507   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 316,079         349,674         69,660         157,361         892,774   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 77,722   
              

 

 

 

Total

               $ 970,496   
              

 

 

 

December 31, 2015

              

Individually evaluated for impairment

   $ 44,752         19,175         12,727         13,306       $ 89,960   

Collectively evaluated for impairment

     255,615         307,000         57,624         163,511         783,750   

Purchased impaired

     37         656         1,887         1,503         4,083   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 300,404         326,831         72,238         178,320         877,793   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 78,199   
              

 

 

 

Total

               $ 955,992   
              

 

 

 

 

-21-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

June 30, 2016

              

Individually evaluated for impairment

   $ 271,399         230,960         199,911         63,567       $ 765,837   

Collectively evaluated for impairment

     21,197,077         30,408,178         23,742,826         11,746,021         87,094,102   

Purchased impaired

     766         72,092         587,512         1,689         662,059   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,469,242         30,711,230         24,530,249         11,811,277       $ 88,521,998   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

              

Individually evaluated for impairment

   $ 272,227         234,132         207,949         65,365       $ 779,673   

Collectively evaluated for impairment

     20,148,209         28,863,130         25,398,037         11,532,121         85,941,497   

Purchased impaired

     1,902         100,049         664,117         2,261         768,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,422,338         29,197,311         26,270,103         11,599,747       $ 87,489,499   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

-22-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The tables that follow summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended June 30, 2016 and 2015:

 

            Recorded investment      Financial effects of
modification
 

Three months ended June 30, 2016

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

Commercial, financial, leasing, etc.

             

Principal deferral

     33       $ 45,733       $ 45,657       $ (76   $ —     

Combination of concession types

     5         15,257         14,217         (1,040     —     

Real estate:

             

Commercial

             

Principal deferral

     10         2,726         2,710         (16     —     

Interest rate reduction

     1         129         129         —          (25

Other

     1         4,723         4,447         (276     —     

Combination of concession types

     4         7,065         7,008         (57     (31

Residential builder and developer

             

Principal deferral

     3         23,905         22,958         (947     —     

Other commercial construction

             

Principal deferral

     1         250         250         —          —     

Combination of concession types

     1         124         124         —          —     

Residential

             

Principal deferral

     8         963         1,040         77        —     

Combination of concession types

     8         1,043         1,122         79        —     

Residential-limited documentation

             

Principal deferral

     2         151         195         44        —     

Consumer:

             

Home equity lines and loans

             

Principal deferral

     1         69         69         —          —     

Combination of concession types

     31         3,737         3,737         —          (280

Automobile

             

Principal deferral

     44         158         158         —          —     

Other

     22         17         17         —          —     

Other

             

Principal deferral

     29         551         551         —          —     

Other

     3         20         20         —          —     

Combination of concession types

     9         49         49         —          (5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     216       $ 106,670       $ 104,458       $ (2,212   $ (341
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

-23-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

            Recorded investment      Financial effects of
modification
 

Three months ended June 30, 2015

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

Commercial, financial, leasing, etc.

             

Principal deferral

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

Other

     2         8,991         8,883         (108     —     

Combination of concession types

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

Real estate:

             

Commercial

             

Principal deferral

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

Combination of concession types

     1         436         436         —          (53

Residential builder and developer

             

Principal deferral

     1         9,252         9,200         (52     —     

Residential

             

Principal deferral

     12         693         754         61        —     

Combination of concession types

     9         961         1,066         105        (144

Residential-limited documentation

             

Principal deferral

     1         161         161         —          —     

Combination of concession types

     2         424         426         2        (26

Consumer:

             

Home equity lines and loans

             

Principal deferral

     1         1,198         1,198         —          —     

Combination of concession types

     14         1,356         1,356         —          (212

Automobile

             

Principal deferral

     63         615         615         —          —     

Interest rate reduction

     4         95         95         —          (7

Other

     13         21         21         —          —     

Combination of concession types

     9         138         138         —          (4

Other

             

Principal deferral

     27         770         770         —          —     

Other

     2         21         21         —          —     

Combination of concession types

     10         43         43         —          (7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

-24-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the six months ended June 30, 2016 and 2015:

 

            Recorded investment      Financial effects of
modification
 

Six months ended June 30, 2016

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

Commercial, financial, leasing, etc.

             

Principal deferral

     57       $ 57,304       $ 58,378       $ 1,074      $ —     

Combination of concession types

     12         21,414         20,169         (1,245     —     

Real estate:

             

Commercial

             

Principal deferral

     26         6,209         6,158         (51     —     

Interest rate reduction

     1         129         129         —          (25

Other

     1         4,723         4,447         (276     —     

Combination of concession types

     9         10,998         10,932         (66     (66

Residential builder and developer

             

Principal deferral

     3         23,905         22,958         (947     —     

Other commercial construction

             

Principal deferral

     1         250         250         —          —     

Combination of concession types

     1         124         124         —          —     

Residential

             

Principal deferral

     25         2,944         3,231         287        —     

Combination of concession types

     18         3,364         3,491         127        —     

Residential-limited documentation

             

Principal deferral

     3         276         333         57        —     

Combination of concession types

     5         1,312         1,379         67        (339

Consumer:

             

Home equity lines and loans

             

Principal deferral

     4         404         404         —          —     

Combination of concession types

     54         6,233         6,233         —          (563

Automobile

             

Principal deferral

     92         679         679         —          —     

Other

     38         55         55         —          —     

Combination of concession types

     8         85         85         —          (3

Other

             

Principal deferral

     55         925         925         —          —     

Other

     5         45         45         —          —     

Combination of concession types

     17         196         196         —          (32
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     435       $ 141,574       $ 140,601       $ (973   $ (1,028
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

-25-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

            Recorded investment      Financial effects of
modification
 

Six months ended June 30, 2015

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

Commercial, financial, leasing, etc.

             

Principal deferral

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

Interest rate reduction

     1         99         99         —          (19

Other

     2         8,991         8,883         (108     —     

Combination of concession types

     5         25,044         24,853         (191     (239

Real estate:

             

Commercial

             

Principal deferral

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

Combination of concession types

     5         2,082         2,073         (9     (105

Residential builder and developer

             

Principal deferral

     2         10,650         10,598         (52     —     

Residential

             

Principal deferral

     19         1,414         1,496         82        —     

Combination of concession types

     12         1,255         1,415         160        (178

Residential-limited documentation

             

Principal deferral

     1         161         161         —          —     

Combination of concession types

     3         634         636         2        (30

Consumer:

             

Home equity lines and loans

             

Principal deferral

     2         1,219         1,219         —          —     

Combination of concession types

     19         1,552         1,552         —          (225

Automobile

             

Principal deferral

     98         918         918         —          —     

Interest rate reduction

     7         137         137         —          (10

Other

     23         41         41         —          —     

Combination of concession types

     17         222         222         —          (11

Other

             

Principal deferral

     49         1,066         1,066         —          —     

Other

     7         80         80         —          —     

Combination of concession types

     23         267         267         —          (32
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended June 30, 2016 and 2015 and for which there was a subsequent payment default during the six-month periods ended June 30, 2016 and 2015, respectively, were not material.

The amount of foreclosed residential real estate property held by the Company was $158 million and $172 million at June 30, 2016 and December 31, 2015, respectively. There were $305 million and $315 million at June 30, 2016 and December 31, 2015, respectively, in loans secured by residential real estate that were in the process of foreclosure.

 

-26-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings

M&T had $515 million of fixed and variable rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at June 30, 2016 that are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust. Under the Federal Reserve Board’s risk-based capital guidelines, beginning in 2016 none of the securities are includable in M&T’s Tier 1 regulatory capital, but do qualify for inclusion in Tier 2 regulatory capital.

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

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

Also included in long-term borrowings are agreements to repurchase securities of $1.9 billion at each of June 30, 2016 and December 31, 2015. The agreements reflect various repurchase dates through 2020, however, the contractual maturities of the underlying investment securities extend beyond such repurchase dates. The agreements are subject to legally enforceable master netting arrangements, however, the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $2.0 billion at each of June 30, 2016 and December 31, 2015.

 

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.

 

-27-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

Issued and outstanding preferred stock of M&T as of June 30, 2016 and December 31, 2015 is presented below:

 

     Shares
issued and
outstanding
     Carrying value  
     (dollars in thousands)  

Series A (a)

     

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

     230,000       $ 230,000   

Series C (a)

     

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

     151,500       $ 151,500   

Series D (b)

     

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

     50,000       $ 500,000   

Series E (c)

     

Fixed-to-Floating Rate Non-cumulative Perpetual Preferred Stock $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 713,855 at June 30, 2016 and 719,175 at December 31, 2015.
(b) Dividends, if declared, are paid semi-annually at a rate of 6.875% per year. The shares became redeemable in whole or in part on June 15, 2016.
(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 LIBOR plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.

In addition to the Series A warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at June 30, 2016 and December 31, 2015. The obligation under that warrant was assumed by M&T in an acquisition.

 

-28-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

7. Pension plans and other postretirement benefits

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

 

     Pension
benefits
     Other
postretirement
benefits
 
     Three months ended June 30  
     2016      2015      2016      2015  
     (in thousands)  

Service cost

   $ 6,137         5,832         340         174   

Interest cost on projected benefit obligation

     20,822         17,732         1,281         652   

Expected return on plan assets

     (26,423      (23,476      —           —     

Amortization of prior service credit

     (789      (1,478      (330      (329

Amortization of net actuarial loss

     6,773         11,237         30         28   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 6,520         9,847         1,321         525   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pension
benefits
     Other
postretirement
benefits
 
     Six months ended June 30  
     2016      2015      2016      2015  
     (in thousands)  

Service cost

   $ 12,519         11,832         798         374   

Interest cost on projected benefit obligation

     41,705         35,507         2,486         1,302   

Expected return on plan assets

     (54,237      (47,051      —           —     

Amortization of prior service credit

     (1,614      (3,003      (680      (679

Amortization of net actuarial loss

     15,073         22,412         30         53   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 13,446         19,697         2,634         1,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $15,274,000 and $13,346,000 for the three months ended June 30, 2016 and 2015, respectively, and $32,964,000 and $30,096,000 for the six months ended June 30, 2016 and 2015, respectively.

 

-29-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

    

Three months ended

June 30

    

Six months ended

June 30

 
     2016      2015      2016      2015  
     (in thousands, except per share)  

Income available to common shareholders:

           

Net income

   $ 336,031         286,688         634,559         528,301   

Less: Preferred stock dividends (a)

     (20,317      (20,317      (40,635      (40,635
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common equity

     315,714         266,371         593,924         487,666   

Less: Income attributable to unvested stock-based compensation awards

     (2,746      (2,900      (5,227      (5,371
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 312,968         263,471         588,697         482,295   

Weighted-average shares outstanding:

           

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

     159,164         133,818         159,692         133,680   

Less: Unvested stock-based compensation awards

     (1,362      (1,462      (1,424      (1,477
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding

     157,802         132,356         158,268         132,203   

Basic earnings per common share

   $ 1.98         1.99         3.72         3.65   

 

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

 

-30-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

    

Three months ended

June 30

    

Six months ended

June 30

 
     2016      2015      2016      2015  
     (in thousands, except per share)  

Net income available to common equity

   $ 315,714         266,371         593,924         487,666   

Less: Income attributable to unvested stock-based compensation awards

     (2,740      (2,890      (5,217      (5,353
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 312,974         263,481         588,707         482,313   

Adjusted weighted-average shares outstanding:

           

Common and unvested stock-based compensation awards

     159,164         133,818         159,692         133,680   

Less: Unvested stock-based compensation awards

     (1,362      (1,462      (1,424      (1,477

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

     539         760         493         741   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted-average shares outstanding

     158,341         133,116         158,761         132,944   

Diluted earnings per common share

   $ 1.98         1.98         3.71         3.63   

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 1.6 million common shares during the three-month periods ended June 30, 2016 and 2015, respectively, and 2.8 million and 2.1 million common shares during the six-month periods ended June 30, 2016 and 2015, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

-31-


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, 2016

   $ 16,359         62,849        (489,660     (4,093   $ (414,545     162,918      $ (251,627

Other comprehensive income before reclassifications:

               

Unrealized holding gains, net

     9,260         227,118        —          —          236,378        (93,010     143,368   

Foreign currency translation adjustment

     —           —          —          (2,489     (2,489     871        (1,618
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) before reclassifications

     9,260         227,118        —          (2,489     233,889        (92,139     141,750   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

               

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

     —           2,081        —          —          2,081 (b)      (819     1,262   

Gains realized in net income

     —           (268     —          —          (268 )(c)      102        (166

Accretion of net gain on terminated cash flow hedges

     —           —          —          (77     (77 )(d)      30        (47

Amortization of prior service credit

     —           —          (2,294     —          (2,294 )(e)      902        (1,392

Amortization of actuarial losses

     —           —          15,103        —          15,103 (e)      (5,904     9,199   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     —           1,813        12,809        (77     14,545        (5,689     8,856   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     9,260         228,931        12,809        (2,566     248,434        (97,828     150,606   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2016

   $ 25,619         291,780        (476,851     (6,659   $ (166,111     65,090      $ (101,021
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-32-


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, 2015

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

Other comprehensive income before reclassifications:

               

Unrealized holding gains (losses), net

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

Foreign currency translation adjustment

     —           —          —          (779     (779     261        (518

Gains on cash flow hedges

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) before reclassifications

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

               

Accretion of unrealized holding losses on HTM securities

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

Losses realized in net income

     —           108        —          —          108 (c)      (40     68   

Accretion of net gain on terminated cash flow hedges

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

Amortization of prior service credit

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

Amortization of actuarial losses

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2015

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

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

Balance – December 31, 2015

   $ 9,921         38,166         (296,979     (2,735   $ (251,627

Net gain (loss) during period

     5,616         138,848         7,807        (1,665     150,606   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance – June 30, 2016

   $ 15,537         177,014         (289,172     (4,400   $ (101,021
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

-33-


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 material as of June 30, 2016.

The net effect of interest rate swap agreements was to increase net interest income by $10 million and $11 million for the three-month periods ended June 30, 2016 and 2015, respectively, and $20 million and $22 million for the six-month periods ended June 30, 2016 and 2015, respectively.

Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:

 

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

June 30, 2016

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         1.2         4.42     1.63
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2015

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000  &