M&T Bank Corporation
M&T BANK CORP (Form: 10-Q, Received: 11/09/2011 15:48:12)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

One M & T Plaza

Buffalo, New York

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

(716) 842-5445

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on October 31, 2011: 125,626,022 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2011

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  
 

Item 1.

  

Financial Statements.

  
    

CONSOLIDATED BALANCE SHEET - September 30, 2011 and December 31, 2010

     3   
    

CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2011 and 2010

     4   
    

CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2011 and 2010

     5   
    

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Nine months ended September 30, 2011 and 2010

     6   
    

NOTES TO FINANCIAL STATEMENTS

     7   
 

Item 2.

  

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

     56   
 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk.

     108   
 

Item 4.

  

Controls and Procedures.

     108   

Part II. OTHER INFORMATION

  
 

Item 1.

  

Legal Proceedings.

     108   
 

Item 1A.

  

Risk Factors.

     108   
 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds.

     109   
 

Item 3.

  

Defaults Upon Senior Securities.

     109   
 

Item 4.

  

(Removed and Reserved).

     109   
 

Item 5.

  

Other Information.

     109   
 

Item 6.

  

Exhibits.

     110   

SIGNATURES

     110   

EXHIBIT INDEX

     111   

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share   

September 30,

2011

   

December 31,

2010

 

Assets

    
  

Cash and due from banks

   $ 1,349,057        908,755   
  

Interest-bearing deposits at banks

     2,226,779        101,222   
  

Federal funds sold

     5,000        25,000   
  

Trading account

     605,557        523,834   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,876,435 at September 30, 2011; $1,937,817 at December 31, 2010)

    
  

Available for sale (cost: $5,717,180 at September 30, 2011; $5,494,377 at December 31, 2010)

     5,635,878        5,413,492   
  

Held to maturity (fair value: $1,097,215 at September 30, 2011; $1,225,253 at December 31, 2010)

     1,161,837        1,324,339   
    

Other (fair value: $376,082 at September 30, 2011; $412,709 at December 31, 2010)

     376,082        412,709   
    

Total investment securities

     7,173,797        7,150,540   
  

Loans and leases

     58,694,038        52,315,942   
    

Unearned discount

     (292,774     (325,560
  

Loans and leases, net of unearned discount

     58,401,264        51,990,382   
    

Allowance for credit losses

     (908,525     (902,941
    

Loans and leases, net

     57,492,739        51,087,441   
  

Premises and equipment

     569,495        435,837   
  

Goodwill

     3,524,625        3,524,625   
  

Core deposit and other intangible assets

     257,656        125,917   
    

Accrued interest and other assets

     4,659,186        4,138,092   
    

Total assets

   $ 77,863,891        68,021,263   

Liabilities

    
  

Noninterest-bearing deposits

   $ 19,637,491        14,557,568   
  

NOW accounts

     1,754,873        1,393,349   
  

Savings deposits

     30,797,655        26,431,281   
  

Time deposits

     6,777,499        5,817,170   
    

Deposits at Cayman Islands office

     514,871        1,605,916   
    

Total deposits

     59,482,389        49,805,284   
  

Federal funds purchased and agreements to repurchase securities

     551,471        866,555   
  

Other short-term borrowings

     142,927        80,877   
  

Accrued interest and other liabilities

     1,563,121        1,070,701   
    

Long-term borrowings

     6,748,857        7,840,151   
    

Total liabilities

     68,488,765        59,663,568   

Shareholders’ equity

    
  

Preferred stock, $1.00 par, 1,000,000 shares authorized;
Issued and outstanding: Liquidation preference of $1,000 per share: 381,500 shares at September 30, 2011 and 778,000 shares at December 31, 2010; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2011 and none at December 31, 2010

     862,717        740,657   
  

Common stock, $.50 par, 250,000,000 shares authorized, 125,610,181 shares issued at September 30, 2011; 120,396,611 shares issued at December 31, 2010

     62,805        60,198   
  

Common stock issuable, 68,107 shares at September 30, 2011; 71,345 shares at December 31, 2010

     4,066        4,189   
  

Additional paid-in capital

     2,814,143        2,398,615   
  

Retained earnings

     5,823,928        5,426,701   
  

Accumulated other comprehensive income (loss), net

     (192,533     (205,220
    

Treasury stock - common, at cost - none at September 30, 2011; 693,974 shares at December 31, 2010

     —          (67,445
    

Total shareholders’ equity

     9,375,126        8,357,695   
    

Total liabilities and shareholders’ equity

   $ 77,863,891        68,021,263   

 

- 3 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended September 30     Nine months ended September 30  
In thousands, except per share    2011     2010     2011     2010  

Interest income

  

Loans and leases, including fees

   $ 655,581        603,199      $ 1,873,860        1,788,245   
  

Deposits at banks

     1,164        34        1,679        45   
  

Federal funds sold

     23        9        51        29   
  

Agreements to resell securities

     4        32        132        36   
  

Trading account

     312        94        982        287   
  

Investment securities

        
  

Fully taxable

     60,880        80,043        192,369        250,922   
    

Exempt from federal taxes

     2,387        2,489        7,014        7,506   
    

Total interest income

     720,351        685,900        2,076,087        2,047,070   

Interest expense

  

NOW accounts

     354        219        830        638   
  

Savings deposits

     22,664        21,453        62,660        63,366   
  

Time deposits

     17,684        23,309        56,065        79,009   
  

Deposits at Cayman Islands office

     188        315        775        1,016   
  

Short-term borrowings

     222        760        861        2,373   
    

Long-term borrowings

     62,520        69,976        183,171        207,239   
    

Total interest expense

     103,632        116,032        304,362        353,641   
  

Net interest income

     616,719        569,868        1,771,725        1,693,429   
    

Provision for credit losses

     58,000        93,000        196,000        283,000   
    

Net interest income after provision for credit losses

     558,719        476,868        1,575,725        1,410,429   

Other income

  

Mortgage banking revenues

     38,141        61,052        125,448        149,612   
  

Service charges on deposit accounts

     121,577        117,733        351,024        367,004   
  

Trust income

     113,652        30,485        218,565        91,582   
  

Brokerage services income

     13,907        12,127        43,129        38,021   
  

Trading account and foreign exchange gains

     4,176        6,035        19,253        14,531   
  

Gain on bank investment securities

     89        1,440        150,186        1,909   
  

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

     (7,649     (16,486     (50,374     (67,052
    

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

     (1,993     6,954        (1,839     8,338   
    

Net OTTI losses recognized in earnings

     (9,642     (9,532     (52,213     (58,714
  

Equity in earnings of Bayview Lending Group LLC

     (6,911     (6,460     (18,812     (18,353
    

Other revenues from operations

     93,393        77,019        347,878        235,570   
    

Total other income

     368,382        289,899        1,184,458        821,162   

Other expense

  

Salaries and employee benefits

     325,197        246,389        891,465        756,296   
  

Equipment and net occupancy

     68,101        54,353        184,434        165,185   
  

Printing, postage and supplies

     10,593        7,820        29,518        25,412   
  

Amortization of core deposit and other intangible assets

     17,401        13,526        44,455        44,834   
  

FDIC assessments

     26,701        18,039        72,404        60,995   
    

Other costs of operations

     214,026        140,006        516,209        392,841   
    

Total other expense

     662,019        480,133        1,738,485        1,445,563   
  

Income before taxes

     265,082        286,634        1,021,698        786,028   
    

Income taxes

     81,974        94,619        309,959        254,309   
    

Net income

   $ 183,108        192,015      $ 711,739        531,719   
  

Net income available to common shareholders

        
  

Basic

     $164,668        176,780        $651,941        486,811   
  

Diluted

     164,671        176,789        651,966        486,831   
  

Net income per common share

        
  

Basic

     $1.32        1.49        $5.34        4.12   
  

Diluted

     1.32        1.48        5.32        4.10   
  

Cash dividends per common share

   $ .70        .70      $ 2.10        2.10   
  

Average common shares outstanding

        
  

Basic

     124,575        118,320        122,005        118,048   
  

Diluted

     124,860        119,155        122,521        118,766   

 

- 4 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Nine months ended September 30  

In thousands

          2011        2010   
Cash flows from operating activities   

Net income

   $ 711,739        531,719   
  

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

    
  

Provision for credit losses

     196,000        283,000   
  

Depreciation and amortization of premises and equipment

     60,220        51,216   
  

Amortization of capitalized servicing rights

     39,895        42,917   
  

Amortization of core deposit and other intangible assets

     44,455        44,834   
  

Provision for deferred income taxes

     14,530        49,111   
  

Asset write-downs

     64,153        68,430   
  

Net gain on sales of assets

     (183,861     (3,006
  

Net change in accrued interest receivable, payable

     (6,206     4,764   
  

Net change in other accrued income and expense

     (21,427     119,728   
  

Net change in loans originated for sale

     316,623        67,172   
  

Net change in trading account assets and liabilities

     49,376        (10,482
    

Net cash provided by operating activities

     1,285,497        1,249,403   
Cash flows from investing activities   

Proceeds from sales of investment securities

    
  

Available for sale

     1,909,427        21,220   
  

Other

     106,925        62,331   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     1,007,612        1,097,531   
  

Held to maturity

     180,475        139,555   
  

Purchases of investment securities

    
  

Available for sale

     (2,569,168     (414,992
  

Held to maturity

     (19,386     (993,162
  

Other

     (30,438     (7,209
  

Net (increase) decrease in loans and leases

     (522,571     1,087,784   
  

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

     480,708        (268,289
  

Net (increase) decrease in agreements to resell securities

     15,000        (425,000
  

Other investments, net

     (9,856     (41,093
  

Capital expenditures, net

     (38,030     (39,380
  

Acquisitions, net of cash acquired

    
  

Banks and bank holding companies

     178,940        —     
  

Purchase of Wilmington Trust Corporation preferred stock

     (330,000     —     
  

Proceeds from sales of real estate acquired in settlement of loans

     181,310        62,609   
  

Other, net

     73,739        (28,198
    

Net cash provided by investing activities

     614,687        253,707   
Cash flows from financing activities   

Net increase in deposits

     825,434        1,217,511   
  

Net decrease in short-term borrowings

     (400,752     (1,230,890
  

Payments on long-term borrowings

     (1,750,195     (1,399,101
  

Proceeds from issuance of preferred stock

     495,000        —     
  

Redemption of preferred stock

     (370,000     —     
  

Dividends paid - common

     (261,589     (251,125
  

Dividends paid - preferred

     (24,815     (30,169
  

Other, net

     7,035        33,647   
    

Net cash used by financing activities

     (1,479,882     (1,660,127
  

Net increase (decrease) in cash and cash equivalents

     420,302        (157,017
  

Cash and cash equivalents at beginning of period

     933,755        1,246,342   
    

Cash and cash equivalents at end of period

   $ 1,354,057        1,089,325   
Supplemental disclosure of cash flow information   

Interest received during the period

   $ 2,087,083        2,072,464   
  

Interest paid during the period

     320,758        360,289   
    

Income taxes paid during the period

     308,057        214,903   
Supplemental schedule of noncash investing and financing activities   

Real estate acquired in settlement of loans

   $ 51,046        165,933   
  

Acquisitions:

    
  

Fair value of:

    
  

Assets acquired (noncash)

     10,666,102        —     
  

Liabilities assumed

     10,044,555        —     
  

Common stock issued

     405,557        —     
  

Retirement of Wilmington Trust Corporation preferred stock

     330,000        —     
  

Increase (decrease) from consolidation of securitization trusts:

    
  

Loans

     —          423,865   
  

Investment securities - available for sale

     —          (360,471
  

Long-term borrowings

     —          65,419   
  

Accrued interest and other

     —          2,025   

 

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Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share  

Preferred

stock

   

Common

stock

   

Common

stock

issuable

   

Additional

paid-in

capital

   

Retained

earnings

   

Accumulated

other

comprehensive

income

(loss), net

   

Treasury

stock

    Total  

2010

               

Balance - January 1, 2010

  $ 730,235        60,198        4,342        2,442,947        5,076,884        (335,997     (225,702     7,752,907   

Comprehensive income:

               

Net income

    —          —          —          —          531,719        —          —          531,719   

Other comprehensive income, net of tax and reclassification adjustments:

               

Unrealized gains on investment securities

    —          —          —          —          —          140,392        —          140,392   

Defined benefit plans liability adjustment

    —          —          —          —          —          3,262        —          3,262   

Unrealized gain on terminated cash flow hedge

    —          —          —          —          —          (211     —          (211
               

 

 

 
                  675,162   

Preferred stock cash dividends

    —          —          —          —          (30,169     —          —          (30,169

Amortization of preferred stock discount

    7,744        —          —          —          (7,744     —          —          —     

Repayment of management stock ownership program receivable

    —          —          —          2,686        —          —          —          2,686   

Stock-based compensation plans:

               

Compensation expense, net

    —          —          —          (3,545     —          —          41,672        38,127   

Exercises of stock options, net

    —          —          —          (25,639     —          —          58,892        33,253   

Stock purchase plan

    —          —          —          (8,482     —          —          17,480        8,998   

Directors’ stock plan

    —          —          —          (289     —          —          1,116        827   

Deferred compensation plans, net, including dividend equivalents

    —          —          (196     (295     (147     —          611        (27

Other

    —          —          —          1,354        —          —          —          1,354   

Common stock cash dividends - $2.10 per share

    —          —          —          —          (251,345     —          —          (251,345

Balance - September 30, 2010

  $ 737,979        60,198        4,146        2,408,737        5,319,198        (192,554     (105,931     8,231,773   

2011

               

Balance - January 1, 2011

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

Comprehensive income:

               

Net income

    —          —          —          —          711,739        —          —          711,739   

Other comprehensive income, net of tax and reclassification adjustments:

               

Unrealized gains on investment securities

    —          —          —          —          —          6,970        —          6,970   

Defined benefit plans liability adjustment

    —          —          —          —          —          6,431        —          6,431   

Unrealized gain on terminated cash flow hedge

    —          —          —          —          —          (211     —          (211

Foreign currency translation adjustment

    —          —          —          —          —          (503     —          (503
               

 

 

 
                  724,426   

Acquisition of Wilmington Trust Corporation - common stock issued

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

Partial redemption of Series A preferred stock

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

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

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

Issuance of Series D preferred stock

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

Preferred stock cash dividends

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

Amortization of preferred stock discount

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

Stock-based compensation plans:

               

Compensation expense, net

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

Exercises of stock options, net

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

Directors’ stock plan

    —          2        —          414        —          —          612        1,028   

Deferred compensation plans, net, including dividend equivalents

    —          —          (123     (203     (141     —          507        40   

Other

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

Common stock cash dividends - $2.10 per share

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

Balance - September 30, 2011

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

 

- 6 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS

 

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2010 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 May 16, 2011, M&T acquired all of the outstanding common stock of Wilmington Trust Corporation (“Wilmington Trust”), headquartered in Wilmington, Delaware, in a stock-for-stock transaction. Wilmington Trust operated 55 banking offices in Delaware and Pennsylvania at the date of acquisition. The results of operations acquired in the Wilmington Trust transaction have been included in the Company’s financial results since May 16, 2011. Wilmington Trust shareholders received .051372 shares of M&T common stock in exchange for each share of Wilmington Trust common stock, resulting in M&T issuing a total of 4,694,486 common shares with an acquisition date fair value of $406 million.

The Wilmington Trust transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Assets acquired totaled approximately $10.8 billion, including $6.4 billion of loans and leases (including approximately $3.2 billion of commercial real estate loans, $1.4 billion of commercial loans and leases, $1.1 billion of consumer loans and $680 million of residential real estate loans). Liabilities assumed aggregated $10.0 billion, including $8.9 billion of deposits. The common stock issued in the transaction added $406 million to M&T’s common shareholders’ equity. Immediately prior to the closing of the Wilmington Trust transaction, M&T redeemed the $330 million of preferred stock issued by Wilmington Trust as part of the Troubled Asset Relief Program – Capital Purchase Program of the U.S. Department of Treasury (“U.S. Treasury”). In connection with the acquisition, the Company recorded $176 million of core deposit and other intangible assets. The core deposit and other intangible assets are generally being amortized over periods of 5 to 7 years using an accelerated method. There was no goodwill recorded as a result of the transaction, however, a non-taxable gain of $65 million was realized, which represented the excess of the fair value of assets acquired less liabilities assumed over consideration exchanged. The acquisition of Wilmington Trust added to M&T’s market-leading position in the Mid-Atlantic region by giving M&T the leading deposit market share in Delaware.

In many cases, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the fair valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carry-over of Wilmington Trust’s previously established allowance for credit losses. Subsequent decreases in the expected cash flows require the Company to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in expected cash flows generally result in the recognition of additional interest income over the then remaining lives of the loans.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

2. Acquisitions, continued

 

In conjunction with the Wilmington Trust acquisition, the acquired loan portfolio was accounted for at fair value as follows:

 

     May 16, 2011  
     (in thousands)  

Contractually required principal and interest at acquisition

   $ 8,336,755   

Contractual cash flows not expected to be collected

     (1,209,749
  

 

 

 

Expected cash flows at acquisition

     7,127,006   

Interest component of expected cash flows

     (716,576
  

 

 

 

Basis in acquired loans at acquisition – estimated fair value

   $ 6,410,430   
  

 

 

 

Included in the above table is information related to loans for which there was specific evidence of credit deterioration at the acquisition date and for which it was deemed probable that the Company would be unable to collect all contractually required principal and interest payments (“purchased impaired loans”). Contractually required principal and interest, cash flows expected to be collected and estimated fair value of purchased impaired loans were $1,419,672,000, $747,265,000 and $707,907,000, respectively.

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

 

     (in thousands)  

Purchase price:

  

Value of:

  

Common shares issued (4,694,486 shares)

   $ 405,557   

Preferred stock purchased from U.S. Treasury

     330,000   
  

 

 

 

Total purchase price

     735,557   
  

 

 

 

Identifiable assets:

  

Cash and due from banks

     178,940   

Interest-bearing deposits at banks

     2,606,265   

Other short-term investments

     57,817   

Investment securities

     510,390   

Loans and leases

     6,410,430   

Core deposit and other intangibles

     176,194   

Other assets

     905,006   
  

 

 

 

Total identifiable assets

     10,845,042   
  

 

 

 

Liabilities:

  

Deposits

     8,864,161   

Short-term borrowings

     147,752   

Long-term borrowings

     600,830   

Other liabilities

     431,812   
  

 

 

 

Total liabilities

     10,044,555   
  

 

 

 

Net gain resulting from acquisition

   $ 64,930   
  

 

 

 

 

- 8 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

2. Acquisitions, continued

 

The following table discloses the impact of Wilmington Trust (excluding the impact of the merger-related gain and expenses) since the acquisition on May 16, 2011 through the end of the third quarter of 2011. The table also presents certain pro forma information as if Wilmington Trust had been acquired on January 1, 2010. These results combine the historical results of Wilmington Trust into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date. In particular, no adjustments have been made to eliminate the amount of Wilmington Trust’s provision for credit losses of $42 million in 2011 and $564 million in 2010 or the impact of other-than-temporary impairment losses recognized by Wilmington Trust of $5 million in 2011 and $30 million in 2010 that may not have been necessary had the acquired loans and investment securities been recorded at fair value as of the beginning of 2010. Furthermore, expenses related to systems conversions and other costs of integration of $67 million and the $65 million gain recorded in connection with the acquisition are included in the 2011 periods in which such costs were incurred and gain recognized. Additionally, the Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts that follow.

 

    

Actual since
acquisition

through

    

Pro forma

Nine months ended
September 30

 
     September 30, 2011      2011      2010  
     (in thousands)  

Total revenues (a)

   $ 229,842         3,190,437         3,036,507   

Net income

     9,315         663,048         13,535   

 

(a) Represents net interest income plus other income.

 

- 9 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

2. Acquisitions, continued

 

On November 5, 2010, M&T Bank, M&T’s principal banking subsidiary, entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits, except certain brokered deposits, and acquire certain assets of K Bank, based in Randallstown, Maryland. As part of the transaction, M&T Bank entered into a loss-share arrangement with the FDIC whereby M&T Bank will be reimbursed by the FDIC for most losses it incurs on the acquired loan portfolio. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at estimated fair value on the acquisition date. Assets acquired in the transaction totaled approximately $556 million, including $154 million of loans and $186 million in cash, and liabilities assumed aggregated $528 million, including $491 million of deposits. In accordance with GAAP, M&T Bank recorded an after-tax gain on the transaction of $17 million ($28 million before taxes). The gain reflected the amount of financial support and indemnification against loan losses that M&T Bank obtained from the FDIC. There was no goodwill or other intangible assets recorded in connection with this transaction. The operations obtained in the K Bank acquisition transaction did not have a material impact on the Company’s consolidated financial position or results of operations.

In connection with the Wilmington Trust and K Bank acquisitions, the Company incurred merger-related expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with the conversion of systems and/or integration of operations; costs related to termination of existing contractual arrangements of Wilmington Trust to purchase various services; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; travel costs; and printing, postage, supplies and other costs of completing the transactions and commencing operations in new markets and offices. There were no merger-related expenses during the three months or nine months ended September 30, 2010. The Company expects to incur additional merger-related expenses during the remainder of 2011. As of September 30, 2011, the remaining unpaid portion of incurred merger-related expenses was $17 million. A summary of merger-related expenses included in the consolidated statement of income follows.

 

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

Salaries and employee benefits

   $ 285       $ 15,597   

Equipment and net occupancy

     119         223   

Printing, postage and supplies

     723         1,188   

Other costs of operations

     24,876         50,286   
  

 

 

    

 

 

 
   $ 26,003       $ 67,294   
  

 

 

    

 

 

 

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities

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

 

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

September 30, 2011

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 69,668         1,360         —         $ 71,028   

Obligations of states and political subdivisions

     45,805         1,029         42         46,792   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,708,714         168,551         227         3,877,038   

Privately issued residential

     1,441,491         7,136         233,549         1,215,078   

Privately issued commercial

     19,446         —           2,617         16,829   

Collateralized debt obligations

     44,064         10,141         2,851         51,354   

Other debt securities

     216,635         4,164         39,946         180,853   

Equity securities

     171,357         8,530         2,981         176,906   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,717,180         200,911         282,213         5,635,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     184,472         6,942         19         191,395   

Mortgage-backed securities:

           

Government issued or guaranteed

     686,908         28,507         —           715,415   

Privately issued

     278,433         —           100,052         178,381   

Other debt securities

     12,024         —           —           12,024   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,161,837         35,449         100,071         1,097,215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     376,082         —           —           376,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,255,099         236,360         382,284       $ 7,109,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 61,772         1,680         18       $ 63,434   

Obligations of states and political subdivisions

     59,921         561         57         60,425   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,146,054         161,298         1,111         3,306,241   

Privately issued residential

     1,677,064         10,578         252,081         1,435,561   

Privately issued commercial

     25,357         —           2,950         22,407   

Collateralized debt obligations

     95,080         24,754         9,078         110,756   

Other debt securities

     310,017         26,883         38,000         298,900   

Equity securities

     119,112         5,098         8,442         115,768   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,494,377         230,852         311,737         5,413,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     191,119         1,944         694         192,369   

Mortgage-backed securities:

           

Government issued or guaranteed

     808,108         14,061         —           822,169   

Privately issued

     312,537         —           114,397         198,140   

Other debt securities

     12,575         —           —           12,575   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,324,339         16,005         115,091         1,225,253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     412,709         —           —           412,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,231,425         246,857         426,828       $ 7,051,454   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

3. Investment securities, continued

 

Gross realized gains on investment securities were $90 thousand and $150 million for the three-month and nine-month periods ended September 30, 2011, respectively. Gross realized losses were not significant in 2011. Gross realized gains and losses on investment securities were not significant during the three-month and nine-month periods ended September 30, 2010. During the second quarter of 2011, the Company sold residential mortgage-backed securities guaranteed by the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) having an aggregate amortized cost of approximately $1.0 billion which resulted in a gain of $66 million (pre-tax). The Company also sold trust preferred securities and collateralized debt obligations during the second quarter of 2011 having an aggregate amortized cost of $136 million and $100 million, respectively, which resulted in gains of $25 million (pre-tax) and $20 million (pre-tax), respectively. During the first quarter of 2011, the Company sold residential mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac having an aggregate amortized cost of approximately $484 million which resulted in a gain of $39 million (pre-tax).

The Company recognized $10 million and $52 million of pre-tax other-than-temporary impairment losses during the three- and nine-month periods ended September 30, 2011, respectively, related to privately issued mortgage-backed securities. The impairment charges were recognized in light of deterioration of real estate values and continued high levels of delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. Other-than-temporary impairment losses on investment securities of $10 million and $59 million (pre-tax) were recognized by the Company for the three- and nine-month periods ended September 30, 2010. Approximately $12 million of the losses recognized in the second quarter of 2010 related to American Depositary Shares of Allied Irish Banks, p.l.c. (“AIB ADSs”) which were obtained in M&T’s acquisition of a subsidiary of AIB in 2003. The remaining losses in 2010 related to certain privately issued residential mortgage-backed securities and collateralized debt obligations backed by pooled trust preferred securities. The impairment charges related to the AIB ADSs were recognized due to mounting credit and other losses incurred by AIB and significant dilution of AIB common shareholders based on the Irish government’s significant ownership position. The impairment charges related to the privately issued residential mortgage-backed securities were recognized in light of deterioration of housing values in the residential real estate market and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The other-than-temporary impairment losses on debt securities represent management’s estimate of credit losses inherent in the securities considering projected cash flows using assumptions of delinquency rates, loss severities, and other estimates of future collateral performance. The following table displays changes in credit losses for debt securities recognized in earnings for the three months and nine months ended September 30, 2011 and 2010.

 

- 12 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

3. Investment securities, continued

 

000000000 000000000
     Three months ended September 30  
     2011     2010  
     (in thousands)  

Beginning balance

   $ 298,141        314,263   

Additions for credit losses not previously recognized

     9,642        9,532   

Reductions for increases in cash flows

     (90     (108

Reductions for bond charge-offs

     (23,127     (11,812
  

 

 

   

 

 

 

Ending balance

   $ 284,566        311,875   
  

 

 

   

 

 

 

 

000000000 000000000
     Nine months ended September 30  
     2011     2010  
     (in thousands)  

Beginning balance

   $ 327,912        284,513   

Additions for credit losses not previously recognized

     52,213        46,721   

Reductions for increases in cash flows

     (5,110     (450

Reductions for bond charge-offs

     (90,449     (18,909
  

 

 

   

 

 

 

Ending balance

   $ 284,566        311,875   
  

 

 

   

 

 

 

At September 30, 2011, 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

   $          23,908         23,994   

Due after one year through five years

     77,765         79,896   

Due after five years through ten years

     15,648         16,947   

Due after ten years

     258,851         229,190   
  

 

 

    

 

 

 
     376,172         350,027   

Mortgage-backed securities available for sale

     5,169,651         5,108,945   
  

 

 

    

 

 

 
   $ 5,545,823         5,458,972   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 23,957         24,144   

Due after one year through five years

     21,814         22,731   

Due after five years through ten years

     134,730         140,377   

Due after ten years

     15,995         16,167   
  

 

 

    

 

 

 
     196,496         203,419   

Mortgage-backed securities held to maturity

     965,341         893,796   
  

 

 

    

 

 

 
   $ 1,161,837         1,097,215   
  

 

 

    

 

 

 

 

- 13 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

3. Investment securities, continued

 

A summary of investment securities that as of September 30, 2011 and December 31, 2010 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)  

September 30, 2011

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ 656         (5     2,389         (37

Mortgage-backed securities:

          

Government issued or guaranteed

     46,184         (167     3,523         (60

Privately issued residential

     295,370         (8,164     803,491         (225,385

Privately issued commercial

     —           —          16,829         (2,617

Collateralized debt obligations

     2,549         (531     4,684         (2,320

Other debt securities

     77,028         (5,252     72,961         (34,694

Equity securities

     9,189         (2,981     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     430,976         (17,100     903,877         (265,113
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     1,542         (11     184         (8

Privately issued mortgage-backed securities

     2,791         (1,116     175,590         (98,936
  

 

 

    

 

 

   

 

 

    

 

 

 
     4,333         (1,127     175,774         (98,944
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 435,309         (18,227     1,079,651         (364,057
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

December 31, 2010

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 27,289         (18     —           —     

Obligations of states and political subdivisions

     3,712         (18     2,062         (39

Mortgage-backed securities:

          

Government issued or guaranteed

     68,507         (1,079     2,965         (32

Privately issued residential

     61,192         (1,054     1,057,315         (251,027

Privately issued commercial

     —           —          22,407         (2,950

Collateralized debt obligations

     12,462         (6,959     6,004         (2,119

Other debt securities

     2,134         (10     88,969         (37,990

Equity securities

     5,326         (3,721     673         (4,721
  

 

 

    

 

 

   

 

 

    

 

 

 
     180,622         (12,859     1,180,395         (298,878
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     76,318         (638     467         (56

Privately issued mortgage-backed securities

     —           —          198,140         (114,397
  

 

 

    

 

 

   

 

 

    

 

 

 
     76,318         (638     198,607         (114,453
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 256,940         (13,497     1,379,002         (413,331
  

 

 

    

 

 

   

 

 

    

 

 

 

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

3. Investment securities, continued

 

The Company owned 317 individual investment securities with aggregate gross unrealized losses of $382 million at September 30, 2011. Approximately $234 million of the unrealized losses pertained to available-for-sale privately issued residential mortgage-backed securities with a cost basis of $1.3 billion. The Company also had $43 million of unrealized losses on available-for-sale trust preferred securities issued by financial institutions and securities backed by trust preferred securities having a cost basis of $200 million. Based on a review of each of the securities in the investment securities portfolio at September 30, 2011, with the exception of the aforementioned securities for which other-than-temporary impairment losses were recognized, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 30, 2011, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities. At September 30, 2011, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $376 million of cost method investment securities.

 

4. Loans and leases and the allowance for credit losses

Interest income on acquired loans that were recorded at fair value at the acquisition date for the three months and nine months ended September 30, 2011 was approximately $97 million and $207 million, respectively, and for the three months and nine months ended September 30, 2010 was approximately $46 million and $132 million, respectively. The outstanding principal balance and the carrying amount of such loans that is included in the consolidated balance sheet were as follows:

 

     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Outstanding principal balance

   $ 9,843,549         3,681,488   

Carrying amount:

     

Commercial, financial, leasing, etc.

     1,341,567         337,969   

Commercial real estate

     4,267,754         1,420,239   

Residential real estate

     959,714         348,225   

Consumer

     2,130,840         1,231,292   
  

 

 

    

 

 

 
   $ 8,699,875         3,337,725   
  

 

 

    

 

 

 

Purchased impaired loans totaled $704 million at September 30, 2011, representing less than 1% of the Company’s assets and $97 million at December 31, 2010, representing less than .2% of the Company’s assets. Interest income earned on purchased impaired loans was $11 million and $18 million during the three- and nine-month periods ended September 30, 2011, respectively, and $2 million and $4 million during the three- and nine-month periods ended September 30, 2010, respectively.

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

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

 

A summary of current, past due and nonaccrual loans as of September 30, 2011 and December 31, 2010 were as follows:

 

00000000 00000000 00000000 00000000 00000000 00000000 00000000
     Current      30-89
Days
past due
     90 Days
or more
past due
and
accruing
     Purchased
impaired
(a)
     Other
acquired
impaired
(b)
     Nonaccrual      Total  
    

(in thousands)

        

September 30, 2011

  

Commercial, financial, leasing, etc.

   $ 14,943,399         45,226         31,459         25,792         21,924         150,702         15,218,502   

Real estate:

                    

Commercial

     18,746,145         197,412         19,207         207,523         82,815         182,953         19,436,055   

Residential builder and developer

     813,855         116,705         32,767         338,182         49,483         318,957         1,669,949   

Other commercial construction

     2,600,321         57,034         1,972         67,045         24,035         104,895         2,855,302   

Residential

     5,787,582         261,641         218,434         59,120         25,724         165,058         6,517,559   

Residential Alt-A

     415,267         23,832         —           —           —           108,793         547,892   

Consumer:

                    

Home equity lines and loans

     6,671,948         45,028         —           4,794         12,607         41,593         6,775,970   

Automobile

     2,691,109         49,756         —           —           777         27,032         2,768,674   

Other

     2,531,909         57,950         6,127         1,176         394         13,805         2,611,361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,201,535         854,584         309,966         703,632         217,759         1,113,788         58,401,264   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

00000000 00000000 00000000 00000000 00000000 00000000 00000000
     Current      30-89
Days
past due
     90 Days
or more
past due
and
accruing
     Purchased
impaired
(a)
     Other
acquired
impaired
(b)
     Nonaccrual      Total  
    

(in thousands)

        

December 31, 2010

  

Commercial, financial, leasing, etc.

   $ 13,088,887         96,087         16,647         2,250         13,374         173,365         13,390,610   

Real estate:

                    

Commercial

     16,589,240         89,906         35,338         8,275         24,670         184,361         16,931,790   

Residential builder and developer

     891,764         30,805         9,763         72,710         29,637         316,811         1,351,490   

Other commercial construction

     2,723,399         36,420         11,323         2,098         10,376         116,265         2,899,881   

Residential

     4,699,711         229,641         192,276         9,320         10,728         162,001         5,303,677   

Residential Alt-A

     475,236         42,674         —           —           —           106,469         624,379   

Consumer:

                    

Home equity lines and loans

     6,472,563         38,367         —           2,366         9,692         33,363         6,556,351   

Automobile

     2,608,230         44,604         —           —           26         31,866         2,684,726   

Other

     2,190,353         36,689         4,246         —           951         15,239         2,247,478   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 49,739,383         645,193         269,593         97,019           99,454         1,139,740         51,990,382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Accruing loans that were specifically identified as impaired at acquisition date and recorded at fair value.
(b) Acquired loans that ceased performing in accordance with their contractual terms subsequent to the acquisition date, but are included in accounting pools that continue to accrue interest.

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

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

 

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

 

     Commercial,
Financial,
Leasing, etc.
   

 

Real Estate

    Consumer     Unallocated     Total  
       Commercial     Residential        
     (in thousands)  

Beginning balance

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

Provision for credit losses

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

Net charge-offs

            

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Commercial,
Financial,
Leasing, etc.
   

 

Real Estate

    Consumer     Unallocated      Total  
       Commercial     Residential         
     (in thousands)  

Beginning balance

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

Provision for credit losses

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

Net charge-offs

             

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any portfolio segment. Changes in the allowance for credit losses for the three months and nine months ended September 30, 2010 were as follows:

 

     Three months ended
September 30, 2010
    Nine months ended
September 30, 2010
 
     (in thousands)  

Beginning balance

   $ 894,667      $ 878,022   

Provision for credit losses

     93,000        283,000   

Consolidation of loan securitization trusts

     —          2,752   

Net charge-offs

    

Charge-offs

     (101,782     (313,167

Recoveries

     8,835        44,113   
  

 

 

   

 

 

 

Net charge-offs

     (92,947     (269,054
  

 

 

   

 

 

 

Ending balance

   $ 894,720      $ 894,720   
  

 

 

   

 

 

 

 

- 17 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

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

 

In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan by loan analysis of larger balance commercial and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to all commercial and commercial real estate credits. 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, financial condition, 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. Except for consumer and residential mortgage loans that are considered smaller balance homogenous loans and are evaluated collectively and purchased-impaired and other acquired impaired loans, 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. Purchased-impaired loans are considered impaired under GAAP 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. 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. Other acquired impaired loans were not specifically identified as impaired as of the acquisition date, but ceased performing in accordance with their contractual terms subsequent to their respective acquisition date. In accordance with GAAP, such loans are not considered impaired in the aggregate because they are included in accounting pools that continue to accrue interest. Impairment of expected cash flows for acquired loans is evaluated at the pool level. The following tables provide information with respect to loans and leases that were considered impaired as of September 30, 2011 and December 31, 2010 and for the three months and nine months ended September 30, 2011 and September 30, 2010.

 

- 18 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

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

 

     September 30, 2011      December 31, 2010  
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

                 

Commercial, financial, leasing, etc.

   $ 104,806         124,624         41,474         121,744         170,888         40,909   

Real estate:

                 

Commercial

     120,070         160,518         22,084         110,975         140,015         17,393   

Residential builder and developer

     189,304         242,088         81,048         263,545         295,031         78,597   

Other commercial construction

     86,961         91,053         13,182         80,934         85,432         22,067   

Residential

     93,210         113,852         2,247         73,006         85,279         3,375   

Residential Alt-A

     155,027         166,870         26,000         180,665         191,445         36,000   

Consumer:

                 

Home equity lines and loans

     11,730         12,920         2,863         11,799         13,378         2,227   

Automobile

     54,748         54,748         11,513         58,858         58,858         12,597   

Other

     7,283         7,283         1,805         2,978         2,978         768   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     823,139         973,956         202,216         904,504         1,043,304         213,933   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     55,175         66,315         —           52,453         66,692         —     

Real estate:

                 

Commercial

     66,572         71,403         —           77,269         81,800         —     

Residential builder and developer

     146,743         174,243         —           71,162         86,039         —     

Other commercial construction

     18,490         18,734         —           36,280         37,107         —     

Residential

     9,000         13,634         —           5,035         7,723         —     

Residential Alt-A

     34,437         59,606         —           28,967         47,879         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     330,417         403,935         —           271,166         327,240         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     159,981         190,939         41,474         174,197         237,580         40,909   

Real estate:

                 

Commercial

     186,642         231,921         22,084         188,244         221,815         17,393   

Residential builder and developer

     336,047         416,331         81,048         334,707         381,070         78,597   

Other commercial construction

     105,451         109,787         13,182         117,214         122,539         22,067   

Residential

     102,210         127,486         2,247         78,041         93,002         3,375   

Residential Alt-A

     189,464         226,476         26,000         209,632         239,324         36,000   

Consumer:

                 

Home equity lines and loans

     11,730         12,920         2,863         11,799         13,378         2,227   

Automobile

     54,748         54,748         11,513         58,858         58,858         12,597   

Other

     7,283         7,283         1,805         2,978         2,978         768   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,153,556         1,377,891         202,216         1,175,670         1,370,544         213,933   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 19 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

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

 

$1,148,537 $1,148,537 $1,148,537 $1,148,537 $1,148,537 $1,148,537
     Three months ended
September 30, 2011
     Three months ended
September 30, 2010
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 152,368         1,172         1,166         219,225         334         326   

Real estate:

                 

Commercial

     195,832         810         808         167,462         1,089         949   

Residential builder and developer

     338,897         422         98         268,579         352         72   

Other commercial construction

     96,482         62         51         26,550         79         65   

Residential

     98,885         1,183         630         70,418         774         477   

Residential Alt-A

     192,609         1,872         494         219,778         2,082         453   

Consumer:

                 

Home equity lines and loans

     11,814         174         26         11,128         177         26   

Automobile

     56,071         957         262         55,871         951         293   

Other

     5,579         75         32         3,186         57         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,148,537         6,727         3,567         1,042,197         5,895         2,673   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

$1,148,537 $1,148,537 $1,148,537 $1,148,537 $1,148,537 $1,148,537
     Nine months ended
September 30, 2011
     Nine months ended
September 30, 2010
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 163,005         2,844         2,820         262,310         1,509         1,492   

Real estate:

                 

Commercial

     191,818         1,705         1,630         219,816         1,585         1,426   

Residential builder and developer

     321,386         1,261         338         282,762         1,058         513   

Other commercial construction

     102,978         759         522         28,342         368         354   

Residential

     92,918         3,209         1,770         58,120         1,985         1,256   

Residential Alt-A

     199,066         5,858         1,455         223,328         6,410         1,338   

Consumer:

                 

Home equity lines and loans

     11,989         523         74         11,809         536         88   

Automobile

     57,704         2,925         850         53,062         2,722         959   

Other

     4,124         187         51         3,211         186         42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,144,988         19,271         9,510         1,142,760         16,359         7,468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 20 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

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

 

The Company utilizes a loan grading system that is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger balance criticized commercial and commercial real estate loans are individually reviewed by centralized loan review personnel each quarter to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. Smaller balance criticized loans are analyzed by business line risk management areas to ensure proper loan grade classification. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Company’s commercial and commercial real estate loans as of September 30, 2011 and December 31, 2010.

 

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

September 30, 2011

           

Pass

   $ 14,350,581         18,851,277         412,916         2,600,236   

Criticized accrual

     717,219         401,825         938,076         150,171   

Criticized nonaccrual

     150,702         182,953         318,957         104,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,218,502         19,436,055         1,669,949         2,855,302   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

Pass

   $ 12,384,512         15,855,774         722,747         2,263,965   

Criticized accrual

     832,733         891,655         311,932         519,651   

Criticized nonaccrual

     173,365         184,361         316,811         116,265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,390,610         16,931,790         1,351,490         2,899,881   
  

 

 

    

 

 

    

 

 

    

 

 

 

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance, recent loss experience and trends related thereto. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values.

The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Given the 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

 

- 21 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

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

 

allocated portion of the allowance. The determination of the allocated portion of the allowance for credit losses is very subjective. Factors that influence the precision in developing loss estimates for the allocated allowance impact the level of the unallocated portion of the allowance. Such factors might include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

At September 30, 2011 and December 31, 2010, 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)                

September 30, 2011

              

Individually evaluated for impairment

   $ 41,152         113,009         28,000         15,533       $ 197,694   

Collectively evaluated for impairment

     182,090         271,379         56,973         124,013         634,455   

Purchased impaired

     322         3,305         247         648         4,522   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 223,564         387,693         85,220         140,194         836,671   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 71,854   
              

 

 

 

Total

               $ 908,525   
              

 

 

 

December 31, 2010