M&T Bank Corporation
M&T BANK CORP (Form: 10-Q, Received: 04/29/2016 18:23:15)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 22, 2016: 158,999,014 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2016

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  
  

Item 1.

  Financial Statements.   
    

CONSOLIDATED BALANCE SHEET - March 31, 2016 and December  31, 2015

     3   
    

CONSOLIDATED STATEMENT OF INCOME - Three months ended March  31, 2016 and 2015

     4   
    

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three months ended March 31, 2016 and 2015

     5   
    

CONSOLIDATED STATEMENT OF CASH FLOWS - Three months ended March  31, 2016 and 2015

     6   
    

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Three months ended March 31, 2016 and 2015

     7   
    

NOTES TO FINANCIAL STATEMENTS

     8   
   Item 2.  

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

     51   
  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

     93   
  

Item 4.

 

Controls and Procedures.

     93   

Part II. OTHER INFORMATION

  
  

Item 1.

 

Legal Proceedings.

     93   
   Item 1A.  

Risk Factors.

     94   
   Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds.

     95   
  

Item 3.

 

Defaults Upon Senior Securities.

     95   
  

Item 4.

 

Mine Safety Disclosures.

     95   
  

Item 5.

 

Other Information.

     95   
  

Item 6.

 

Exhibits.

     96   

SIGNATURES

       97   

EXHIBIT INDEX

     97   

 

- 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

   March 31,
2016
    December 31,
2015
 

Assets

 

Cash and due from banks

   $ 1,178,175        1,368,040   
 

Interest-bearing deposits at banks

     9,545,181        7,594,350   
 

Trading account

     467,987        273,783   
 

Investment securities (includes pledged securities that can be sold or repledged of $2,133,492 at March 31, 2016; $2,136,712 at December 31, 2015)

    
 

Available for sale (cost: $11,937,326 at March 31, 2016; $12,138,636 at December 31, 2015)

     12,200,647        12,242,671   
 

Held to maturity (fair value: $2,769,343 at March 31, 2016; $2,864,147 at December 31, 2015)

     2,730,611        2,859,709   
 

Other (fair value: $536,062 at March 31, 2016; $554,059 at December 31, 2015)

     536,062        554,059   
    

 

 

   

 

 

 
 

Total investment securities

     15,467,320        15,656,439   
    

 

 

   

 

 

 
 

Loans and leases

     88,104,830        87,719,234   
 

Unearned discount

     (232,364     (229,735
    

 

 

   

 

 

 
 

Loans and leases, net of unearned discount

     87,872,466        87,489,499   
 

Allowance for credit losses

     (962,752     (955,992
    

 

 

   

 

 

 
 

Loans and leases, net

     86,909,714        86,533,507   
    

 

 

   

 

 

 
 

Premises and equipment

     662,891        666,682   
 

Goodwill

     4,593,112        4,593,112   
 

Core deposit and other intangible assets

     127,949        140,268   
 

Accrued interest and other assets

     5,673,303        5,961,703   
    

 

 

   

 

 

 
 

Total assets

   $ 124,625,632        122,787,884   
    

 

 

   

 

 

 

Liabilities

 

Noninterest-bearing deposits

   $ 29,709,218        29,110,635   
 

Interest-checking deposits

     2,848,126        2,939,274   
 

Savings deposits

     48,649,114        46,627,370   
 

Time deposits

     12,841,331        13,110,392   
 

Deposits at Cayman Islands office

     166,787        170,170   
    

 

 

   

 

 

 
 

Total deposits

     94,214,576        91,957,841   
    

 

 

   

 

 

 
 

Federal funds purchased and agreements to repurchase securities

     206,709        150,546   
 

Other short-term borrowings

     1,560,117        1,981,636   
 

Accrued interest and other liabilities

     1,948,142        1,870,714   
 

Long-term borrowings

     10,341,035        10,653,858   
    

 

 

   

 

 

 
 

Total liabilities

     108,270,579        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 March 31, 2016 and December 31, 2015; Liquidation preference of $10,000 per share: 50,000 shares at March 31, 2016 and December 31, 2015

     1,231,500        1,231,500   
 

Common stock, $.50 par, 250,000,000 shares authorized, 159,963,737 shares issued at March 31, 2016; 159,563,512 shares issued at December 31, 2015

     79,982        79,782   
 

Common stock issuable, 33,391 shares at March 31, 2016; 36,644 shares at December 31, 2015

     2,180        2,364   
 

Additional paid-in capital

     6,683,499        6,680,768   
 

Retained earnings

     8,596,752        8,430,502   
 

Accumulated other comprehensive income (loss), net

     (150,189     (251,627
 

Treasury stock - common, at cost - 841,082 shares at March 31, 2016

     (88,671     —     
    

 

 

   

 

 

 
 

Total shareholders’ equity

     16,355,053        16,173,289   
    

 

 

   

 

 

 
 

Total liabilities and shareholders’ equity

   $ 124,625,632        122,787,884   
    

 

 

   

 

 

 

 

- 3 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

         Three months ended March 31  

In thousands, except per share

   2016      2015  

Interest income

 

Loans and leases, including fees

   $ 863,385         647,179   
 

Investment securities

     
 

Fully taxable

     98,015         85,957   
 

Exempt from federal taxes

     795         1,318   
 

Deposits at banks

     10,337         3,118   
 

Other

     302         515   
    

 

 

    

 

 

 
 

Total interest income

     972,834         738,087   
    

 

 

    

 

 

 

Interest expense

 

Interest-checking deposits

     414         311   
 

Savings deposits

     15,891         10,219   
 

Time deposits

     24,322         3,740   
 

Deposits at Cayman Islands office

     193         147   
 

Short-term borrowings

     2,162         34   
 

Long-term borrowings

     57,888         64,048   
    

 

 

    

 

 

 
 

Total interest expense

     100,870         78,499   
    

 

 

    

 

 

 
 

Net interest income

     871,964         659,588   
 

Provision for credit losses

     49,000         38,000   
    

 

 

    

 

 

 
 

Net interest income after provision for credit losses

     822,964         621,588   
    

 

 

    

 

 

 

Other income

 

Mortgage banking revenues

     82,063         101,601   
 

Service charges on deposit accounts

     102,405         102,344   
 

Trust income

     111,077         123,734   
 

Brokerage services income

     16,004         15,461   
 

Trading account and foreign exchange gains

     7,458         6,231   
 

Gain (loss) on bank investment securities

     4         (98
 

Other revenues from operations

     101,922         90,930   
    

 

 

    

 

 

 
 

Total other income

     420,933         440,203   
    

 

 

    

 

 

 

Other expense

 

Salaries and employee benefits

     431,785         389,893   
 

Equipment and net occupancy

     74,178         66,470   
 

Printing, postage and supplies

     11,986         9,590   
 

Amortization of core deposit and other intangible assets

     12,319         6,793   
 

FDIC assessments

     25,225         10,660   
 

Other costs of operations

     220,602         202,969   
    

 

 

    

 

 

 
 

Total other expense

     776,095         686,375   
    

 

 

    

 

 

 
 

Income before taxes

     467,802         375,416   
 

Income taxes

     169,274         133,803   
    

 

 

    

 

 

 
 

Net income

   $ 298,528         241,613   
    

 

 

    

 

 

 
 

Net income available to common shareholders

     
 

Basic

   $ 275,744         218,830   
 

Diluted

     275,748         218,837   
 

Net income per common share

     
 

Basic

   $ 1.74         1.66   
 

Diluted

     1.73         1.65   
 

Cash dividends per common share

   $ .70         .70   
 

Average common shares outstanding

     
 

Basic

     158,734         132,049   
 

Diluted

     159,181         132,769   

 

- 4 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended March 31  

In thousands

   2016     2015  

Net income

   $ 298,528      $ 241,613   

Other comprehensive income, net of tax and reclassification adjustments:

    

Net unrealized gains on investment securities

     97,194        25,339   

Cash flow hedges adjustments

     (24     871   

Foreign currency translation adjustment

     (53     (2,384

Defined benefit plans liability adjustments

     4,321        4,677   
  

 

 

   

 

 

 

Total other comprehensive income

     101,438        28,503   
  

 

 

   

 

 

 

Total comprehensive income

   $ 399,966      $ 270,116   
  

 

 

   

 

 

 

 

- 5 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Three months ended March 31  

In thousands

   2016     2015  

Cash flows from operating activities

  

Net income

   $ 298,528        241,613   
  

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

    
  

Provision for credit losses

     49,000        38,000   
  

Depreciation and amortization of premises and equipment

     27,141        24,178   
  

Amortization of capitalized servicing rights

     12,249        12,199   
  

Amortization of core deposit and other intangible assets

     12,319        6,793   
  

Provision for deferred income taxes

     50,075        37,052   
  

Asset write-downs

     8,940        2,379   
  

Net gain on sales of assets

     (5,399     (1,066
  

Net change in accrued interest receivable, payable

     (16,530     (2,200
  

Net change in other accrued income and expense

     70,766        (80,084
  

Net change in loans originated for sale

     211        197,708   
  

Net change in trading account assets and liabilities

     (59,080     (18,206
     

 

 

   

 

 

 
  

Net cash provided by operating activities

     448,220        458,366   
     

 

 

   

 

 

 

Cash flows from investing activities

  

Proceeds from sales of investment securities

    
  

Available for sale

     518        693   
  

Other

     18,121        132   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     511,549        369,649   
  

Held to maturity

     132,636        148,708   
  

Purchases of investment securities

    
  

Available for sale

     (311,302     (1,871,491
  

Held to maturity

     (5,343     (7,442
  

Other

     (124     (348
  

Net increase in loans and leases

     (439,712     (666,220
  

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

     (1,950,831     179,376   
  

Capital expenditures, net

     (16,307     (9,598
  

Net decrease in loan servicing advances

     37,600        76,145   
  

Other, net

     7,920        (21,940
     

 

 

   

 

 

 
  

Net cash used by investing activities

     (2,015,275     (1,802,336
     

 

 

   

 

 

 

Cash flows from financing activities

  

Net increase (decrease) in deposits

     2,264,623        (4,543
  

Net increase (decrease) in short-term borrowings

     (343,838     819   
  

Proceeds from long-term borrowings

     —          1,500,000   
  

Payments on long-term borrowings

     (317,187     (1,797
  

Purchases of treasury stock

     (100,000     —     
  

Dividends paid - common

     (112,000     (93,631
  

Dividends paid - preferred

     (17,368     (17,368
  

Other, net

     2,960        (46,014
     

 

 

   

 

 

 
  

Net cash provided by financing activities

     1,377,190        1,337,466   
     

 

 

   

 

 

 
  

Net decrease in cash and cash equivalents

     (189,865     (6,504
  

Cash and cash equivalents at beginning of period

     1,368,040        1,373,357   
     

 

 

   

 

 

 
  

Cash and cash equivalents at end of period

   $ 1,178,175        1,366,853   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

  

Interest received during the period

   $ 968,223        726,475   
  

Interest paid during the period

     146,568        75,776   
  

Income taxes paid (refunded) during the period

     (86,146     88,578   
     

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

  

Real estate acquired in settlement of loans

   $ 33,737        10,846   
  

Securitization of residential mortgage loans allocated to

    
  

Available-for-sale investment securities

     8,452        12,920   
  

Capitalized servicing rights

     92        143   

 

- 6 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share

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

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

Preferred stock cash dividends

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

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

    —          1        —          (1     —          —          —          —     

Stock-based compensation plans:

               

Compensation expense, net

    —          147        —          5,425        —          —          —          5,572   

Exercises of stock options, net

    —          101        —          19,378        —          —          —          19,479   

Stock purchase plan

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

Directors’ stock plan

    —          2        —          423        —          —          —          425   

Deferred compensation plans, net, including dividend equivalents

    —          2        (298     270        (25     —          —          (51

Other

    —          —          —          405        —          —          —          405   

Common stock cash dividends - $.70 per share

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          —          298,528        101,438        —          399,966   

Preferred stock cash dividends

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

Purchases of treasury stock

    —          —          —          —          —          —          (100,000     (100,000

Stock-based compensation plans:

               

Compensation expense, net

    —          178        —          (978     —          —          745        (55

Exercises of stock options, net

    —          18        —          2,335        —          —          265        2,618   

Stock purchase plan

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

Directors’ stock plan

    —          2        —          471        —          —          —          473   

Deferred compensation plans, net, including dividend equivalents

    —          2        (184     234        (23     —          —          29   

Other

    —          —          —          394        —          —          —          394   

Common stock cash dividends - $.70 per share

    —          —          —          —          (111,937     —          —          (111,937
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2016

  $ 1,231,500        79,982        2,180        6,683,499        8,596,752        (150,189     (88,671     16,355,053   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 7 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS

 

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in 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. Acquisition

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 -


Table of Contents

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 first quarter of 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 $7 million during the three months ended March 31, 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
March 31,
2015
 
     (in thousands)  

Total revenues(a)

   $ 1,253,445   

Net income

     285,237   

 

(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 expects that there will be additional merger-related expenses in 2016.

 

- 9 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

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

 

     Three months
ended
March 31,
2016
 
     (in thousands)  

Salaries and employee benefits

   $ 5,274   

Equipment and net occupancy

     939   

Printing, postage and supplies

     937   

Other cost of operations

     16,012   
  

 

 

 

Total

   $ 23,162   
  

 

 

 

There were no merger-related expenses during the first quarter of 2015.

 

3. Investment securities

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

 

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

March 31, 2016

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 201,002         1,197         7       $ 202,192   

Obligations of states and political subdivisions

     5,356         138         46         5,448   

Mortgage-backed securities:

           

Government issued or guaranteed

     11,490,181         265,879         5,998         11,750,062   

Privately issued

     65         2         2         65   

Collateralized debt obligations

     28,483         18,170         1,613         45,040   

Other debt securities

     136,968         1,407         25,667         112,708   

Equity securities

     75,271         10,225         364         85,132   
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,937,326         297,018         33,697         12,200,647   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     103,408         886         332         103,962   

Mortgage-backed securities:

           

Government issued or guaranteed

     2,445,563         78,448         2,070         2,521,941   

Privately issued

     175,467         1,848         40,048         137,267   

Other debt securities

     6,173         —           —           6,173   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,730,611         81,182         42,450         2,769,343   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     536,062         —           —           536,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,203,999         378,200         76,147       $ 15,506,052   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

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

December 31, 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no significant gross realized gains or losses from sales of investment securities for the quarters ended March 31, 2016 and 2015.

At March 31, 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

   $ 7,504         7,551   

Due after one year through five years

     201,714         203,128   

Due after five years through ten years

     2,728         2,926   

Due after ten years

     159,863         151,783   
  

 

 

    

 

 

 
     371,809         365,388   

Mortgage-backed securities available for sale

     11,490,246         11,750,127   
  

 

 

    

 

 

 
   $ 11,862,055         12,115,515   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 32,387         32,542   

Due after one year through five years

     64,484         64,760   

Due after five years through ten years

     6,537         6,660   

Due after ten years

     6,173         6,173   
  

 

 

    

 

 

 
     109,581         110,135   

Mortgage-backed securities held to maturity

     2,621,030         2,659,208   
  

 

 

    

 

 

 
   $ 2,730,611         2,769,343   
  

 

 

    

 

 

 

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of March 31, 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)         

March 31, 2016

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 4,051         (7      —           —     

Obligations of states and political subdivisions

     —           —           1,706         (46

Mortgage-backed securities:

           

Government issued or guaranteed

     337,672         (1,959      1,233,329         (4,039

Privately issued

     —           —           34         (2

Collateralized debt obligations

     10,326         (527      1,858         (1,086

Other debt securities

     9,825         (1,203      88,715         (24,464

Equity securities

     2,115         (210      146         (154
  

 

 

    

 

 

    

 

 

    

 

 

 
     363,989         (3,906      1,325,788         (29,791
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     28,707         (215      8,813         (117

Mortgage-backed securities:

           

Government issued or guaranteed

     812         (12      232,432         (2,058

Privately issued

     —           —           105,355         (40,048
  

 

 

    

 

 

    

 

 

    

 

 

 
     29,519         (227      346,600         (42,223
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 393,508         (4,133      1,672,388         (72,014
  

 

 

    

 

 

    

 

 

    

 

 

 

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 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 538 individual investment securities with aggregate gross unrealized losses of $76 million at March 31, 2016. Based on a review of each of the securities in the investment securities portfolio at March 31, 2016, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 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 March 31, 2016, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $536 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:

 

     March 31,
2016
     December 31,
2015
 
     (in thousands)  

Outstanding principal balance

   $ 2,918,333         3,122,935   

Carrying amount:

     

Commercial, financial, leasing, etc.

     71,577         78,847   

Commercial real estate

     588,983         644,284   

Residential real estate

     964,893         1,016,129   

Consumer

     681,535         725,807   
  

 

 

    

 

 

 
   $ 2,306,988         2,465,067   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $716 million at March 31, 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-month periods ended March 31, 2016 and 2015 follows:

 

     Three months ended March 31, 2016  
     Purchased
impaired
     Other
acquired
     Total  
     (in thousands)  

Balance at beginning of period

   $ 184,618         296,434         481,052   

Interest income

     (14,062      (37,862      (51,924

Reclassifications from nonaccretable balance, net

     629         5,664         6,293   

Other (a)

     —           4,781         4,781   
  

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 171,185         269,017         440,202   
  

 

 

    

 

 

    

 

 

 

 

- 13 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

Balance at beginning of period

   $ 76,518         397,379         473,897   

Interest income

     (5,206      (41,277      (46,483

Reclassifications from nonaccretable balance, net

     110         183         293   

Other (a)

     —           1,610         1,610   
  

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 71,422         357,895         429,317   
  

 

 

    

 

 

    

 

 

 

 

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

A summary of current, past due and nonaccrual loans as of March 31, 2016 and December 31, 2015 were as 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  
March 31, 2016                  (in thousands)                       

Commercial, financial, leasing, etc.

   $ 20,911,645         30,495         2,358         524         1,765         279,790         21,226,577   

Real estate:

                    

Commercial

     23,740,729         149,108         41,776         6,818         39,840         171,256         24,149,527   

Residential builder and developer

     1,747,261         15,304         195         3,493         23,516         32,458         1,822,227   

Other commercial construction

     3,663,835         28,336         9,068         280         19,239         20,781         3,741,539   

Residential

     19,747,097         500,241         278,640         15,790         463,871         186,452         21,192,091   

Residential-limited documentation

     3,757,924         107,679         275         —           165,404         76,265         4,107,547   

Consumer:

              

Home equity lines and loans

     5,720,342         40,054         —           15,898         2,239         78,722         5,857,255   

Automobile

     2,580,241         33,439         —           2         —           14,817         2,628,499   

Other

     3,083,495         24,739         3,858         18,962         —           16,150         3,147,204   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 84,952,569         929,395         336,170         61,767         715,874         876,691         87,872,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Current      30-89 Days
past due
     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

     23,645,354         172,439         12,963         8,790         46,790         179,606         24,065,942   

Residential builder and developer

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

Other commercial construction

     3,428,939         65,932         7,936         2,001         24,525         16,363         3,545,696   

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 that were impaired at acquisition date and were recorded at fair value.

One-to-four family residential mortgage loans held for sale were $269 million and $353 million at March 31, 2016 and December 31, 2015, respectively. Commercial mortgage loans held for sale were $128 million at March 31, 2016 and $39 million at December 31, 2015.

Changes in the allowance for credit losses for the three months ended March 31, 2016 were as follows:

 

     Commercial,                          
     Financial,     Real Estate                    
     Leasing, etc.     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

     24,364        4,013        1,218        19,893        (488     49,000   

Net charge-offs

            

Charge-offs

     (6,149     (1,272     (6,972     (44,319     —          (58,712

Recoveries

     5,247        2,413        1,887        6,925        —          16,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (902     1,141        (5,085     (37,394     —          (42,240
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

             

Charge-offs

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

Recoveries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

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

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

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

 

     March 31, 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.

   $ 204,786         223,269         58,714         179,037         195,821         44,752   

Real estate:

                 

Commercial

     86,612         97,912         19,600         85,974         95,855         18,764   

Residential builder and developer

     6,581         8,296         839         3,316         5,101         196   

Other commercial construction

     2,358         2,678         397         3,548         3,843         348   

Residential

     77,579         95,679         4,348         79,558         96,751         4,727   

Residential-limited documentation

     87,791         101,841         7,000         90,356         104,251         8,000   

Consumer:

                 

Home equity lines and loans

     27,544         28,540         3,904         25,220         26,195         3,777   

Automobile

     21,289         21,289         4,867         22,525         22,525         4,709   

Other

     17,876         17,876         4,844         17,620         17,620         4,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     532,416         597,380         104,513         507,154         567,962         90,093   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     105,342         126,130         —           93,190         110,735         —     

Real estate:

                 

Commercial

     92,733         106,710         —           101,340         116,230         —     

Residential builder and developer

     28,938         49,177         —           27,651         47,246         —     

Other commercial construction

     18,811         37,498         —           13,221         31,477         —     

Residential

     17,574         28,336         —           19,621         30,940         —     

Residential-limited documentation

     17,362         29,544         —           18,414         31,113         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     280,760         377,395         —           273,437         367,741         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     310,128         349,399         58,714         272,227         306,556         44,752   

Real estate:

                 

Commercial

     179,345         204,622         19,600         187,314         212,085         18,764   

Residential builder and developer

     35,519         57,473         839         30,967         52,347         196   

Other commercial construction

     21,169         40,176         397         16,769         35,320         348   

Residential

     95,153         124,015         4,348         99,179         127,691         4,727   

Residential-limited documentation

     105,153         131,385         7,000         108,770         135,364         8,000   

Consumer:

                 

Home equity lines and loans

     27,544         28,540         3,904         25,220         26,195         3,777   

Automobile

     21,289         21,289         4,867         22,525         22,525         4,709   

Other

     17,876         17,876         4,844         17,620         17,620         4,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 813,176         974,775         104,513         780,591         935,703         90,093   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 17 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Three months ended
March 31, 2016
     Three months ended
March 31, 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.

   $ 296,584         611         611         214,618         604         604   

Real estate:

                 

Commercial

     182,454         1,474         1,474         153,070         1,102         1,102   

Residential builder and developer

     33,750         42         42         73,151         63         63   

Other commercial construction

     16,868         38         38         25,540         55         55   

Residential

     96,788         1,372         882         104,490         1,446         910   

Residential-limited documentation

     107,473         1,472         630         125,654         1,610         647   

Consumer:

                 

Home equity lines and loans

     26,019         246         85         19,683         201         48   

Automobile

     21,962         339         36         29,013         450         54   

Other

     17,717         178         27         18,861         174         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 799,615         5,772         3,825         764,080         5,705         3,516   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

- 18 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

March 31, 2016

           

Pass

   $ 20,155,277         23,138,987         1,700,088         3,631,947   

Criticized accrual

     791,510         839,284         89,681         88,811   

Criticized nonaccrual

     279,790         171,256         32,458         20,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,226,577         24,149,527         1,822,227         3,741,539   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

Pass

   $ 19,442,183         23,098,856         1,497,465         3,432,679   

Criticized accrual

     738,238         787,480         59,779         96,654   

Criticized nonaccrual

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

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,422,338         24,065,942         1,585,673         3,545,696   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $24 million, respectively, at March 31, 2016 and $55 million and $21 million, 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 $20 million and $32 million, respectively, at March 31, 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

 

- 19 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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)  

March 31, 2016

              

Individually evaluated for impairment

   $ 58,714         20,611         11,348         13,615       $ 104,288   

Collectively evaluated for impairment

     264,652         308,897         55,970         145,841         775,360   

Purchased impaired

     500         2,477         1,053         1,363         5,393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 323,866         331,985         68,371         160,819         885,041   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 77,711   
              

 

 

 

Total

               $ 962,752   
              

 

 

 

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   
              

 

 

 

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

 

     Commercial,
Financial,
Leasing, etc.
    

 

Real Estate

               
        Commercial      Residential      Consumer      Total  
     (in thousands)  

March 31, 2016

              

Individually evaluated for impairment

   $ 310,128         235,039         200,306         66,709       $ 812,182   

Collectively evaluated for impairment

     20,914,684         29,395,659         24,470,057         11,564,010         86,344,410   

Purchased impaired

     1,765         82,595         629,275         2,239         715,874   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,226,577         29,713,293         25,299,638         11,632,958       $ 87,872,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 20 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2016 and 2015:

 

            Recorded investment      Financial effects of
modification
 

Three months ended March 31, 2016

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

Commercial, financial, leasing, etc.

             

Principal deferral

     24       $ 11,571       $ 12,721       $ 1,150      $ —     

Combination of concession types

     7         6,157         5,952         (205     —     

Real estate:

             

Commercial

             

Principal deferral

     16         3,483         3,448         (35     —     

Combination of concession types

     5         3,933         3,924         (9     (35

Residential

             

Principal deferral

     17         1,981         2,191         210        —     

Combination of concession types

     10         2,321         2,369         48        —     

Residential-limited documentation

             

Principal deferral

     1         125         138         13        —     

Combination of concession types

     5         1,312         1,379         67        (339

Consumer:

             

Home equity lines and loans

             

Principal deferral

     3         335         335         —          —     

Combination of concession types

     23         2,496         2,496         —          (283

Automobile

             

Principal deferral

     48         521         521         —          —     

Other

     16         38         38         —          —     

Combination of concession types

     8         85         85         —          (3

Other

             

Principal deferral

     26         374         374         —          —     

Other

     2         25         25         —          —     

Combination of concession types

     8         147         147         —          (27
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     219       $ 34,904       $ 36,143       $ 1,239      $ (687
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

- 21 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

            Recorded investment      Financial effects of
modification
 

Three months ended March 31, 2015

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

Commercial, financial, leasing, etc.

             

Principal deferral

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

Interest rate reduction

     1         99         99         —          (19

Combination of concession types

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

Real estate:

             

Commercial

             

Principal deferral

     7         3,792         3,776         (16     —     

Combination of concession types

     4         1,646         1,637         (9     (52

Residential builder and developer

             

Principal deferral

     1         1,398         1,398         —          —     

Residential

             

Principal deferral

     7         721         742         21        —     

Combination of concession types

     3         294         349         55        (34

Residential-limited documentation

             

Combination of concession types

     1         210         210         —          (4

Consumer:

             

Home equity lines and loans

             

Principal deferral

     1         21         21         —          —     

Combination of concession types

     5         196         196         —          (13

Automobile

             

Principal deferral

     35         303         303         —          —     

Interest rate reduction

     3         42         42         —          (3

Other

     10         20         20         —          —     

Combination of concession types

     8         84         84         —          (7

Other

             

Principal deferral

     22         296         296         —          —     

Other

     5         59         59         —          —     

Combination of concession types

     13         224         224         —          (25
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2016 and 2015 and for which there was a subsequent payment default during the three-month periods ended March 31, 2016 and 2015, respectively, were not material.

The amount of foreclosed residential real estate property held by the Company was $169 million and $172 million at March 31, 2016 and December 31, 2015, respectively. There were $309 million and $315 million at March 31, 2016 and December 31, 2015, respectively, of loans secured by residential real estate that were in the process of foreclosure.

 

- 22 -


Table of Contents

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 March 31, 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. On April 15, 2015, M&T redeemed all of the issued and outstanding Capital Securities issued by M&T Capital Trust I, M&T Capital Trust II and M&T Capital Trust III, and the related Junior Subordinated Debentures held by those respective trusts. In the aggregate, $323 million of Junior Subordinated Debentures were redeemed.

Also included in long-term borrowings are agreements to repurchase securities of $1.9 billion at each of March 31, 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 $2.1 billion and $2.0 billion at March 31, 2016 and December 31, 2015, respectively.

 

- 23 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity

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

Issued and outstanding preferred stock of M&T as of March 31, 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 719,175 at March 31, 2016 and December 31, 2015, respectively.
(b) Dividends, if declared, are paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.
(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 March 31, 2016 and December 31, 2015. The obligation under that warrant was assumed by M&T in an acquisition.

 

- 24 -


Table of Contents

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 pension expense for defined benefit plans consisted of the following:

 

     Pension
benefits
     Other
postretirement
benefits
 
     Three months ended March 31  
     2016      2015      2016      2015  
     (in thousands)  

Service cost

   $ 6,382         6,000         458         200   

Interest cost on projected benefit obligation

     20,883         17,775         1,205         650   

Expected return on plan assets

     (27,814      (23,575      —           —     

Amortization of prior service credit

     (825      (1,525      (350      (350

Amortization of net actuarial loss

     8,300         11,175         —           25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 6,926         9,850         1,313         525   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $17,690,000 and $16,750,000 for the three months ended March 31, 2016 and 2015, respectively.

 

- 25 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

    

Three months ended

March 31

 
     2016      2015  
    

(in thousands,

except per share)

 

Income available to common shareholders:

     

Net income

   $ 298,528         241,613   

Less: Preferred stock dividends (a)

     (20,318      (20,318
  

 

 

    

 

 

 

Net income available to common equity

     278,210         221,295   

Less: Income attributable to unvested stock-based compensation awards

     (2,466      (2,465
  

 

 

    

 

 

 

Net income available to common shareholders

   $ 275,744         218,830   

Weighted-average shares outstanding:

     

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

     160,220         133,542   

Less: Unvested stock-based compensation awards

     (1,486      (1,493
  

 

 

    

 

 

 

Weighted-average shares outstanding

     158,734         132,049   

Basic earnings per common share

   $ 1.74         1.66   

 

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

 

- 26 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

     Three months ended
March 31
 
     2016      2015  
    

(in thousands,

except per share)

 

Net income available to common equity

   $ 278,210         221,295   

Less: Income attributable to unvested stock-based compensation awards

     (2,462      (2,458
  

 

 

    

 

 

 

Net income available to common shareholders

   $ 275,748         218,837   

Adjusted weighted-average shares outstanding:

     

Common and unvested stock-based compensation awards

     160,220         133,542   

Less: Unvested stock-based compensation awards

     (1,486      (1,493

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

     447         720   
  

 

 

    

 

 

 

Adjusted weighted-average shares outstanding

     159,181         132,769   

Diluted earnings per common share

   $ 1.73         1.65   

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 2.8 million and 2.7 million common shares during the three-month periods ended March 31, 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.

 

- 27 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income

The following tables display the components of other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income (loss) to net income:

 

    Investment Securities                                
    With
OTTI (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 (losses), net

    (370     159,660        —          —          159,290        (62,680     96,610   

Foreign currency translation adjustment

    —          —          —          (83     (83     30        (53
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) before reclassifications

    (370     159,660        —          (83     159,207        (62,650     96,557   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

             

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

    —          968        —          —          968  (b)      (381     587   

Gains realized in net income

    —          (4     —          —          (4 )(c)      1        (3

Accretion of net gain on terminated cash flow hedges

    —          —          —          (39     (39 )(d)      15        (24

Amortization of prior service credit

    —          —          (1,175     —          (1,175 )(e)      462        (713

Amortization of actuarial losses

    —          —          8,300        —          8,300  (e)      (3,266     5,034   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

    —          964        7,125        (39     8,050        (3,169     4,881   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

    (370     160,624        7,125        (122     167,257        (65,819     101,438   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2016

  $ 15,989        223,473        (482,535     (4,215   $  (247,288     97,099      $  (150,189
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 28 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

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

Balance - January 1, 2015

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

Other comprehensive income before reclassifications:

             

Unrealized holding gains, net

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

Foreign currency translation adjustment

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

Gains on cash flow hedges

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income(loss) before reclassifications

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

             

Amortization of unrealized holding losses on HTM securities

    —          739        —          —          739  (b)      (289     450   

Losses realized in net income

    —          98        —          —          98  (c)      (36     62   

Accretion of net gain on terminated cash flow hedges

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

Amortization of prior service credit

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

Amortization of actuarial losses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - March 31, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

    

 

Investment securities

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

Balance - December 31, 2015

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

Net gain (loss) during period

     (224     97,418         4,321        (77     101,438   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance - March 31, 2016

   $ 9,697        135,584         (292,658     (2,812   $ (150,189
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

- 29 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments

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

 

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

March 31, 2016

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         1.4         4.42     1.59
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2015

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         1.7         4.42     1.39
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

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

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $18.9 billion and $18.4 billion at March 31, 2016 and December 31, 2015, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $2.8 billion and $1.6 billion at March 31, 2016 and December 31, 2015, respectively.

 

- 30 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

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

 

     Asset derivatives      Liability derivatives  
     Fair value      Fair value  
     March 31,
2016
     December 31,
2015
     March 31,
2016
     December 31,
2015
 
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements (a)

   $ 41,259         43,892       $ —           —     

Commitments to sell real estate loans (a)

     412         1,844         3,243         656   
  

 

 

    

 

 

    

 

 

    

 

 

 
     41,671         45,736         3,243         656   

Derivatives not designated and qualifying as hedging instruments

           

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

     16,929         10,282         44         403   

Commitments to sell real estate loans (a)

     428         533         2,413         846   

Trading:

           

Interest rate contracts (b)

     329,739         203,517         278,981         153,723   

Foreign exchange and other option and futures contracts (b)

     17,807         8,569         16,888         7,022   
  

 

 

    

 

 

    

 

 

    

 

 

 
     364,903         222,901         298,326         161,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 406,574         268,637       $ 301,569         162,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

- 31 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

     Amount of gain (loss) recognized  
     Three months ended
March 31, 2016
     Three months ended
March 31, 2015
 
     Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

           

Interest rate swap agreements:

           

Fixed rate long-term borrowings (a)

   $ (2,633      1,870       $  (396      161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

           

Trading:

           

Interest rate contracts (b)

   $ 974          $ 660      

Foreign exchange and other option and futures contracts (b)

     1,212            2,789      
  

 

 

       

 

 

    

Total

   $ 2,186          $ 3,449      
  

 

 

       

 

 

    

 

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

The Company has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $22 million and $18 million at March 31, 2016 and December 31, 2015, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

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

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $98 million and $59 million at March 31, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $95 million and $55 million at March 31, 2016 and December 31, 2015, respectively. The Company was required to post collateral relating to those positions of $84 million and $52 million, at March 31, 2016 and December 31, 2015, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings,

 

- 32 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

the counterparties to the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on March 31, 2016 was $19 million, for which the Company had posted collateral of $13 million in the normal course of business. If the credit risk-related contingent features had been triggered on March 31, 2016, the maximum amount of additional collateral the Company would have been required to post with counterparties was $6 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $24 million and $23 million at March 31, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $21 million and $19 million at March 31, 2016 and December 31, 2015, respectively. Counterparties posted collateral relating to those positions of $21 million and $22 million at March 31, 2016 and December 31, 2015, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative financial instruments cleared through clearinghouses at March 31, 2016 was a net liability position of $156 million and at December 31, 2015 was a net liability position of $50 million. Collateral posted with clearinghouses was $204 million and $99 million at March 31, 2016 and December 31, 2015, respectively.

 

11. Variable interest entities and asset securitizations

In accordance with GAAP, at December 31, 2015 the Company determined that it was the primary beneficiary of a residential mortgage loan securitization trust considering its role as servicer and its retained subordinated interests in the trust. As a result, the Company had included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. In the first quarter of 2016, the securitization trust was terminated as the Company exercised its right to purchase the underlying mortgage loans pursuant to the clean-up call provisions of the trust. At December 31, 2015, the carrying value of the loans in the securitization trust was $81 million. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to the Company at December 31, 2015 was $13 million.

As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Company’s consolidated financial statements. At each of March 31, 2016 and December 31, 2015, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet and recognized $24 million in other assets for its “investment” in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 5.

 

- 33 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

11. Variable interest entities and asset securitizations, continued

 

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.1 billion at each of March 31, 2016 and December 31, 2015. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Company’s maximum exposure to loss of its investments in such partnerships was $290 million, including $80 million of unfunded commitments, at March 31, 2016 and $295 million, including $78 million of unfunded commitments, at December 31, 2015. Contingent commitments to provide additional capital contributions to these partnerships were not material at March 31, 2016. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as a limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements. The Company’s investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company amortized $11 million and $10 million of its investments in qualified affordable housing projects to income tax expense during the three-month periods ended March 31, 2016 and 2015, respectively, and recognized $14 million of tax credits and other tax benefits during each of those respective periods.

The Company serves as investment advisor for certain registered money-market funds. The Company has no explicit arrangement to provide support to those funds, but may waive portions of its management fees. Such waivers were not material during the three months ended March 31, 2016 and 2015.

 

12. Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at March 31, 2016.

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

 

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

 

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

 

- 34 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

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

Trading account assets and liabilities

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

Investment securities available for sale

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

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at March 31, 2016 and December 31, 2015. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR ranging from 4% to 10%, with a weighted-average of 8%, was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At March 31, 2016, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $28 million and $45 million, respectively, and at December 31, 2015 were $28 million and $47 million, respectively. Privately issued mortgage-backed securities and securities backed by trust preferred securities issued by financial institutions and other entities constituted all of the available-for-sale investment securities classified as Level 3 valuations.

 

- 35 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

Real estate loans held for sale

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

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

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

Interest rate swap agreements used for interest rate risk management

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

 

- 36 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The following tables present assets and liabilities at March 31, 2016 and December 31, 2015 measured at estimated fair value on a recurring basis:

 

     Fair value
measurements at
March 31,
2016
     Level 1(a)      Level 2(a)      Level 3  
     (in thousands)  

Trading account assets

   $ 467,987         69,689         398,298         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     202,192         —           202,192         —     

Obligations of states and political subdivisions

     5,448         —           5,448         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     11,750,062         —           11,750,062         —     

Privately issued

     65         —           —           65   

Collateralized debt obligations

     45,040         —           —           45,040   

Other debt securities

     112,708         —           112,708         —     

Equity securities

     85,132         67,150         17,982         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,200,647         67,150         12,088,392         45,105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

     396,764         —           396,764         —     

Other assets (b)

     59,028         —           42,099         16,929   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 13,124,426         136,839         12,925,553         62,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

   $ 295,869         —           295,869         —     

Other liabilities (b)

     5,700         —           5,656         44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 301,569         —           301,525         44   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 37 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

 

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

Trading account assets

   $ 273,783         56,763         217,020         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     299,997         —           299,997         —     

Obligations of states and political subdivisions

     6,028         —           6,028         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     11,686,628         —           11,686,628         —     

Privately issued

     74         —           —           74   

Collateralized debt obligations

     47,393         —           —           47,393   

Other debt securities

     118,880         —           118,880         —     

Equity securities

     83,671         65,178         18,493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     12,242,671         65,178         12,130,026         47,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

     392,036         —           392,036         —     

Other assets (b)

     56,551         —           46,269         10,282   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 12,965,041         121,941         12,785,351         57,749   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

   $ 160,745         —           160,745         —     

Other liabilities (b)

     1,905         —           1,502         403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 162,650         —           162,247