10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2015

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One M & T Plaza

Buffalo, New York

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

(716) 635-4000

(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.    Yes  x    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).    Yes  x    No  ¨

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

 

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on October 23, 2015: 133,289,778 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2015

Table of Contents of Information Required in Report

 

         Page  

Part I. FINANCIAL INFORMATION

  

    Item 1.

  Financial Statements   
 

CONSOLIDATED BALANCE SHEET - September 30, 2015 and December 31, 2014

     3   
 

CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2015 and 2014

     4   
 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three and nine months ended September 30, 2015 and 2014

     5   
 

CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2015 and 2014

     6   
 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Nine months ended September 30, 2015 and 2014

     7   
 

NOTES TO FINANCIAL STATEMENTS

     8   

    Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      55   

    Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      102   

    Item 4.

  Controls and Procedures      102   

Part II. OTHER INFORMATION

  

    Item 1.

  Legal Proceedings      102   

    Item 1A.

  Risk Factors      103   

    Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      104   

    Item 3.

  Defaults Upon Senior Securities      104   

    Item 4.

  Mine Safety Disclosures      104   

    Item 5.

  Other Information      104   

    Item 6.

  Exhibits      105   

SIGNATURES

     105   

EXHIBIT INDEX

     106   

 

-2-


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)

 

          September 30,     December 31,  

Dollars in thousands, except per share

   2015     2014  

Assets

   Cash and due from banks    $ 1,249,704        1,289,965   
  

Interest-bearing deposits at banks

     4,713,266        6,470,867   
  

Federal funds sold

     —          83,392   
  

Trading account

     340,710        308,175   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,614,909 at September 30, 2015; $1,631,267 at December 31, 2014)

    
  

Available for sale (cost: $10,923,234 at September 30, 2015; $8,919,324 at December 31, 2014)

     11,159,509        9,156,932   
  

Held to maturity (fair value: $3,025,687 at September 30, 2015; $3,538,282 at December 31, 2014)

     2,998,486        3,507,868   
  

Other (fair value: $336,544 at September 30, 2015; $328,742 at December 31, 2014)

     336,544        328,742   
     

 

 

   

 

 

 
  

Total investment securities

     14,494,539        12,993,542   
     

 

 

   

 

 

 
  

Loans and leases

     68,766,144        66,899,369   
  

Unearned discount

     (225,896     (230,413
     

 

 

   

 

 

 
  

Loans and leases, net of unearned discount

     68,540,248        66,668,956   
  

Allowance for credit losses

     (933,798     (919,562
     

 

 

   

 

 

 
  

Loans and leases, net

     67,606,450        65,749,394   
     

 

 

   

 

 

 
  

Premises and equipment

     581,976        612,984   
  

Goodwill

     3,513,325        3,524,625   
  

Core deposit and other intangible assets

     18,179        35,027   
  

Accrued interest and other assets

     5,278,913        5,617,564   
     

 

 

   

 

 

 
  

Total assets

   $ 97,797,062        96,685,535   
     

 

 

   

 

 

 

Liabilities

   Noninterest-bearing deposits    $ 28,189,330        26,947,880   
  

NOW accounts

     2,459,527        2,307,815   
  

Savings deposits

     39,298,134        41,085,803   
  

Time deposits

     2,791,367        3,063,973   
  

Deposits at Cayman Islands office

     206,185        176,582   
     

 

 

   

 

 

 
  

Total deposits

     72,944,543        73,582,053   
     

 

 

   

 

 

 
  

Federal funds purchased and agreements to repurchase securities

     173,783        192,676   
  

Accrued interest and other liabilities

     1,582,513        1,567,951   
  

Long-term borrowings

     10,174,289        9,006,959   
     

 

 

   

 

 

 
  

Total liabilities

     84,875,128        84,349,639   
     

 

 

   

 

 

 

Shareholders’ equity

  

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at September 30, 2015 and December 31, 2014; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2015 and December 31, 2014

     1,231,500        1,231,500   
  

Common stock, $.50 par, 250,000,000 shares authorized, 133,274,963 shares issued at September 30, 2015; 132,312,931 shares issued at December 31, 2014

     66,637        66,157   
  

Common stock issuable, 36,462 shares at September 30, 2015; 41,330 shares at December 31, 2014

     2,341        2,608   
  

Additional paid-in capital

     3,511,182        3,409,506   
  

Retained earnings

     8,273,747        7,807,119   
  

Accumulated other comprehensive income (loss), net

     (163,473     (180,994
     

 

 

   

 

 

 
  

Total shareholders’ equity

     12,921,934        12,335,896   
     

 

 

   

 

 

 
  

Total liabilities and shareholders’ equity

   $ 97,797,062        96,685,535   
     

 

 

   

 

 

 

 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended September 30     Nine months ended September 30  

In thousands, except per share

   2015     2014     2015     2014  

Interest income

   Loans and leases, including fees    $ 672,092        647,280      $ 1,981,904        1,937,531   
   Investment securities         
  

Fully taxable

     93,062        91,036        272,163        250,145   
  

Exempt from federal taxes

     950        1,271        3,330        4,068   
   Deposits at banks      3,852        3,198        10,321        7,617   
   Other      70        238        749        904   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest income

     770,026        743,023        2,268,467        2,200,265   
     

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   NOW accounts      360        394        1,020        1,021   
   Savings deposits      10,937        11,532        31,517        34,314   
   Time deposits      3,643        3,805        11,073        11,600   
   Deposits at Cayman Islands office      151        161        448        550   
   Short-term borrowings      32        19        102        76   
   Long-term borrowings      62,076        58,053        188,764        158,098   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest expense

     77,199        73,964        232,924        205,659   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net interest income      692,827        669,059        2,035,543        1,994,606   
   Provision for credit losses      44,000        29,000        112,000        91,000   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net interest income after provision for credit losses      648,827        640,059        1,923,543        1,903,606   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other income

   Mortgage banking revenues      84,035        93,532        288,238        269,237   
   Service charges on deposit accounts      107,259        110,071        314,860        321,637   
   Trust income      113,744        128,671        356,076        379,816   
   Brokerage services income      16,902        17,416        49,224        51,403   
   Trading account and foreign exchange gains      8,362        6,988        20,639        21,477   
   Loss on bank investment securities      —          —          (108     —     
   Equity in earnings of Bayview Lending Group LLC      (3,721     (4,114     (11,043     (12,623
   Other revenues from operations      113,118        98,547        359,043        296,683   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other income

     439,699        451,111        1,376,929        1,327,630   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

   Salaries and employee benefits      363,567        348,776        1,115,117        1,059,815   
   Equipment and net occupancy      68,470        67,713        201,792        206,964   
   Printing, postage and supplies      8,691        9,184        27,586        29,320   
   Amortization of core deposit and other intangible assets      4,090        7,358        16,848        26,654   
   FDIC assessments      11,090        13,193        32,551        43,836   
   Other costs of operations      197,908        219,135        642,925        656,664   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other expense

     653,816        665,359        2,036,819        2,023,253   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Income before taxes      434,710        425,811        1,263,653        1,207,983   
   Income taxes      154,309        150,467        454,951        419,286   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net income    $ 280,401        275,344      $ 808,702        788,697   
     

 

 

   

 

 

   

 

 

   

 

 

 
   Net income available to common shareholders         
  

Basic

   $ 257,337        251,905      $ 739,627        724,307   
  

Diluted

     257,346        251,917        739,656        724,344   
   Net income per common share         
  

Basic

   $ 1.94        1.92      $ 5.59        5.54   
  

Diluted

     1.93        1.91        5.56        5.50   
   Cash dividends per common share    $ .70        .70      $ 2.10        2.10   
   Average common shares outstanding         
  

Basic

     132,630        131,265        132,347        130,782   
  

Diluted

     133,376        132,128        133,089        131,698   

 

-4-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended September 30     Nine months ended September 30  

In thousands

   2015     2014     2015     2014  

Net income

   $ 280,401        275,344      $ 808,702        788,697   

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

        

Net unrealized gains (losses) on investment securities

     48,332        (27,637     1,053        75,229   

Unrealized gains (losses) on cash flow hedges

     (24     613        823        (98

Foreign currency translation adjustment

     (3     (1,817     (521     (1,504

Defined benefit plans liability adjustment

     5,724        1,000        16,166        2,999   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     54,029        (27,841     17,521        76,626   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 334,430        247,503      $ 826,223        865,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

-5-


Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Nine months ended September 30  

In thousands

        2015     2014  

Cash flows from operating activities

  

Net income

   $ 808,702        788,697   
  

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

    
  

Provision for credit losses

     112,000        91,000   
  

Depreciation and amortization of premises and equipment

     73,916        74,516   
  

Amortization of capitalized servicing rights

     36,730        51,572   
  

Amortization of core deposit and other intangible assets

     16,848        26,654   
  

Provision for deferred income taxes

     20,141        33,777   
  

Asset write-downs

     5,775        5,114   
  

Net gain on sales of assets

     (61,969     (3,771
  

Net change in accrued interest receivable, payable

     (5,484     9,638   
  

Net change in other accrued income and expense

     11,200        (89,425
  

Net change in loans originated for sale

     232,974        (224,425
  

Net change in trading account assets and liabilities

     (2,993     11,163   
     

 

 

   

 

 

 
  

Net cash provided by operating activities

     1,247,840        774,510   
     

 

 

   

 

 

 

Cash flows from investing activities

  

Proceeds from sales of investment securities

    
  

Available for sale

     2,579        16   
  

Other

     377        23,309   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     1,343,869        686,183   
  

Held to maturity

     519,359        337,677   
  

Purchases of investment securities

    
  

Available for sale

     (3,320,931     (5,310,246
  

Held to maturity

     (22,592     (15,202
  

Other

     (8,179     (53,264
  

Net increase in loans and leases

     (2,208,660     (1,420,572
  

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

     1,757,601        (6,024,926
  

Capital expenditures, net

     (42,744     (50,400
  

Net (increase) decrease in loan servicing advances

     461,700        (340,750
  

Other, net

     (75,449     38,707   
     

 

 

   

 

 

 
  

Net cash used by investing activities

     (1,593,070     (12,129,468
     

 

 

   

 

 

 

Cash flows from financing activities

  

Net increase (decrease) in deposits

     (636,144     7,225,487   
  

Net decrease in short-term borrowings

     (18,893     (95,846
  

Proceeds from long-term borrowings

     1,500,000        4,345,478   
  

Payments on long-term borrowings

     (324,308     (373,642
  

Proceeds from issuance of preferred stock

     —          346,500   
  

Dividends paid - common

     (281,149     (278,118
  

Dividends paid - preferred

     (58,003     (46,966
  

Other, net

     40,074        82,774   
     

 

 

   

 

 

 
  

Net cash provided by financing activities

     221,577        11,205,667   
     

 

 

   

 

 

 
  

Net decrease in cash and cash equivalents

     (123,653     (149,291
  

Cash and cash equivalents at beginning of period

     1,373,357        1,672,934   
     

 

 

   

 

 

 
  

Cash and cash equivalents at end of period

   $ 1,249,704        1,523,643   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

  

Interest received during the period

   $ 2,234,476        2,147,236   
  

Interest paid during the period

     234,989        185,377   
  

Income taxes paid during the period

     373,016        329,621   

Supplemental schedule of noncash investing and financing activities

  

Securitization of residential mortgage loans allocated to

    
  

Available-for-sale investment securities

   $ 51,481        110,971   
  

Capitalized servicing rights

     528        1,429   
  

Real estate acquired in settlement of loans

     35,018        35,422   

 

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Table of Contents

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

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

In thousands, except per share

   stock      stock      issuable     capital     earnings     (loss), net     Total  

2014

                

Balance - January 1, 2014

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

Total comprehensive income

     —           —           —          —          788,697        76,626        865,323   

Preferred stock cash dividends

     —           —           —          —          (55,560     —          (55,560

Issuance of Series E preferred stock

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

Exercise of 395,905 Series A stock warrants into 156,521 shares of common stock

     —           78         —          (78     —          —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           128         —          34,117        —          —          34,245   

Exercises of stock options, net

     —           535         —          102,695        —          —          103,230   

Stock purchase plan

     —           43         —          9,545        —          —          9,588   

Directors’ stock plan

     —           5         —          1,266        —          —          1,271   

Deferred compensation plans, net, including dividend equivalents

     —           3         (325     335        (87     —          (74

Other

     —           —           —          1,320        —          —          1,320   

Common stock cash dividends - $2.10 per share

     —           —           —          —          (278,059     —          (278,059
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - September 30, 2014

   $ 1,231,500         66,050         2,590        3,377,714        7,642,995        12,467        12,333,316   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —           —           —          —          808,702        17,521        826,223   

Preferred stock cash dividends

     —           —           —          —          (60,953     —          (60,953

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

     —           1         —          (1     —          —          —     

Stock-based compensation plans:

                

Compensation expense, net

     —           143         —          31,416        —          —          31,559   

Exercises of stock options, net

     —           285         —          57,133        —          —          57,418   

Stock purchase plan

     —           45         —          10,301        —          —          10,346   

Directors’ stock plan

     —           4         —          1,346        —          —          1,350   

Deferred compensation plans, net, including dividend equivalents

     —           2         (267     290        (76     —          (51

Other

     —           —           —          1,191        —          —          1,191   

Common stock cash dividends - $2.10 per share

     —           —           —          —          (281,045     —          (281,045
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - September 30, 2015

   $ 1,231,500         66,637         2,341        3,511,182        8,273,747        (163,473     12,921,934   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2014 Annual Report. Additionally, effective January 1, 2015 the Company made an accounting policy election in accordance with amended accounting guidance issued by the Financial Accounting Standards Board in January 2014 to account for investments in qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The adoption of the amended guidance did not have a significant effect on the Company’s financial position or results of operations, but did result in the restatement of the consolidated statement of income for the three months and nine months ended September 30, 2014 to remove $14 million and $39 million, respectively, of losses associated with qualified affordable housing projects from “other costs of operations” and include the amortization of the initial cost of the investment in income tax expense. The cumulative effect adjustment associated with adopting the amended guidance was not material as of the beginning of any period presented in these consolidated financial statements. See note 11 for information regarding the Company’s investments in qualified affordable housing projects.

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

2. Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at ..08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of September 30, 2015, total consideration to be paid was valued at approximately $5.3 billion.

The merger has received the approval of the common shareholders of M&T and Hudson City. M&T announced on September 30, 2015 that it had received the approval of the Federal Reserve to acquire Hudson City and on October 9, 2015 M&T received approval of the proposed acquisition from the New York State Department of Financial Services. The transaction is expected to be completed on or about November 1, 2015 pending the satisfaction of customary closing conditions. At September 30, 2015, Hudson City had $35.1 billion of assets, including $19.2 billion of loans and $8.3 billion of investment securities, and $30.3 billion of liabilities, including $17.9 billion of deposits.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities

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

 

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

September 30, 2015

     

Investment securities available for sale:

     

U.S. Treasury and federal agencies

   $ 197,764         1,630         —         $ 199,394   

Obligations of states and political subdivisions

     6,174         170         48         6,296   

Mortgage-backed securities:

     

Government issued or guaranteed

     10,504,756         228,333         19,041         10,714,048   

Privately issued

     82         2         2         82   

Collateralized debt obligations

     28,467         22,465         1,056         49,876   

Other debt securities

     136,793         1,650         17,975         120,468   

Equity securities

     49,198         20,360         213         69,345   
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,923,234         274,610         38,335         11,159,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

     

Obligations of states and political subdivisions

     125,251         1,395         347         126,299   

Mortgage-backed securities:

     

Government issued or guaranteed

     2,679,546         69,486         4,787         2,744,245   

Privately issued

     186,883         1,628         40,174         148,337   

Other debt securities

     6,806         —           —           6,806   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,998,486         72,509         45,308         3,025,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     336,544         —           —           336,544   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,258,264         347,119         83,643       $ 14,521,740   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2014

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 161,408         544         5       $ 161,947   

Obligations of states and political subdivisions

     8,027         224         53         8,198   

Mortgage-backed securities:

           

Government issued or guaranteed

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

Privately issued

     104         2         3         103   

Collateralized debt obligations

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

Other debt securities

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

Equity securities

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

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     148,961         2,551         189         151,323   

Mortgage-backed securities:

           

Government issued or guaranteed

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

Privately issued

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

Other debt securities

     7,854         —           —           7,854   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     328,742         —           —           328,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

There were no significant gross realized gains or losses from the sale of investment securities for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.

At September 30, 2015, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:

 

     Amortized cost      Estimated
fair value
 
     (in thousands)  

Debt securities available for sale:

     

Due in one year or less

   $ 8,282         8,330   

Due after one year through five years

     197,796         199,712   

Due after five years through ten years

     3,296         3,495   

Due after ten years

     159,824         164,497   
  

 

 

    

 

 

 
     369,198         376,034   

Mortgage-backed securities available for sale

     10,504,838         10,714,130   
  

 

 

    

 

 

 
   $ 10,874,036         11,090,164   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 30,523         30,706   

Due after one year through five years

     74,511         75,150   

Due after five years through ten years

     20,217         20,443   

Due after ten years

     6,806         6,806   
  

 

 

    

 

 

 
     132,057         133,105   

Mortgage-backed securities held to maturity

     2,866,429         2,892,582   
  

 

 

    

 

 

 
   $ 2,998,486         3,025,687   
  

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of September 30, 2015 and December 31, 2014 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:

 

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

September 30, 2015

           

Investment securities available for sale:

           

Obligations of states and political subdivisions

   $ 516         (2      1,405         (46

Mortgage-backed securities:

           

Government issued or guaranteed

     1,942,135         (18,925      5,503         (116

Privately issued

     —           —           48         (2

Collateralized debt obligations

     5,733         (324      2,155         (732

Other debt securities

     19,335         (458      86,813         (17,517

Equity securities

     —           —           212         (213
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,967,719         (19,709      96,136         (18,626
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     37,336         (292      4,096         (55

Mortgage-backed securities:

           

Government issued or guaranteed

     16,619         (129      240,730         (4,658

Privately issued

     —           —           118,840         (40,174
  

 

 

    

 

 

    

 

 

    

 

 

 
     53,955         (421      363,666         (44,887
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,021,674         (20,130      459,802         (63,513
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 6,505         (5      —           —     

Obligations of states and political subdivisions

     1,785         (52      121         (1

Mortgage-backed securities:

           

Government issued or guaranteed

     39,001         (186      5,555         (151

Privately issued

     —           —           65         (3

Collateralized debt obligations

     2,108         (696      5,512         (337

Other debt securities

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

Equity securities

     2,138         (1,164      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     29,886         (184      268         (5

Mortgage-backed securities:

           

Government issued or guaranteed

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

Privately issued

     —           —           127,512         (44,576
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 320 individual investment securities with aggregate gross unrealized losses of $84 million at September 30, 2015. Based on a review of each of the securities in the investment securities portfolio at September 30, 2015, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 30, 2015, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At September 30, 2015, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $337 million of cost method investment securities.

4. Loans and leases and the allowance for credit losses

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

 

     September 30,      December 31,  
     2015      2014  
     (in thousands)  

Outstanding principal balance

   $ 2,410,454         3,070,268   

Carrying amount:

     

Commercial, financial, leasing, etc.

     103,583         247,820   

Commercial real estate

     728,376         961,828   

Residential real estate

     385,885         453,360   

Consumer

     812,117         933,537   
  

 

 

    

 

 

 
   $ 2,029,961         2,596,545   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $149 million at September 30, 2015 and $198 million at December 31, 2014, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for acquired loans for the three months and nine months ended September 30, 2015 and 2014 follows:

 

     Three months ended September 30  
     2015      2014  
     Purchased      Other      Purchased      Other  
     impaired      acquired      impaired      acquired  
     (in thousands)  

Balance at beginning of period

   $ 77,624         344,989       $ 26,082         450,970   

Interest income

     (5,865      (37,396      (4,149      (39,019

Reclassifications from nonaccretable balance

     47         769         129         9,673   

Other (a)

     —           4,697         —           1,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 71,806         313,059       $ 22,062         423,494   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine months ended September 30  
     2015      2014  
     Purchased      Other      Purchased      Other  
     impaired      acquired      impaired      acquired  
     (in thousands)  

Balance at beginning of period

   $ 76,518         397,379       $ 37,230         538,633   

Interest income

     (16,843      (118,697      (15,583      (135,105

Reclassifications from nonaccretable balance

     12,131         27,792         415         10,448   

Other (a)

     —           6,585         —           9,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 71,806         313,059       $ 22,062         423,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

A summary of current, past due and nonaccrual loans as of September 30, 2015 and December 31, 2014 follows:

 

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

September 30, 2015

        

Commercial, financial, leasing, etc.

   $ 19,965,307         29,451         5,882         3,477         4,645         224,415       $ 20,233,177   

Real estate:

              

Commercial

     23,184,906         105,140         21,629         17,906         45,523         176,491         23,551,595   

Residential builder and developer

     1,479,659         15,951         —           7,488         65,102         46,022         1,614,222   

Other commercial construction

     3,493,349         28,433         1,373         1,769         17,484         12,312         3,554,720   

Residential

     7,323,813         206,044         194,280         16,295         14,392         153,354         7,908,178   

Residential Alt-A

     226,871         11,662         —           —           —           64,351         302,884   

Consumer:

        

Home equity lines and loans

     5,710,632         38,506         —           15,454         2,275         78,126         5,844,993   

Automobile

     2,319,556         36,867         —           53         —           13,892         2,370,368   

Other

     3,084,080         31,210         8,301         18,385         —           18,135         3,160,111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,788,173         503,264         231,465         80,827         149,421         787,098       $ 68,540,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2014

                    

Commercial, financial, leasing, etc.

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

Real estate:

              

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential Alt-A

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

Consumer:

                    

Home equity lines and loans

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

Automobile

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

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

-13-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

One-to-four family residential mortgage loans held for sale were $422 million and $435 million at September 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans held for sale were $71 million at September 30, 2015 and $308 million at December 31, 2014.

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

 

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

Beginning balance

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

Provision for credit losses

     21,507        1,879        (3,155     24,448        (679     44,000   

Net charge-offs

            

Charge-offs

     (26,912     (2,203     (3,268     (20,758     —          (53,141

Recoveries

     5,322        2,119        1,125        4,386        —          12,952   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (21,590     (84     (2,143     (16,372     —          (40,189
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 286,667        313,089        54,996        202,314        76,732      $ 933,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Beginning balance

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

Provision for credit losses

     2,373        8,046        (3,187     21,815        (47     29,000   

Net charge-offs

            

Charge-offs

     (15,921     (1,666     (4,193     (21,312     —          (43,092

Recoveries

     7,849        1,267        2,498        3,445        —          15,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (8,072     (399     (1,695     (17,867     —          (28,033
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 286,552        318,901        67,522        169,819        75,839      $ 918,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Beginning balance

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

Provision for credit losses

     32,686        13,769        (571     65,038        1,078         112,000   

Net charge-offs

             

Charge-offs

     (46,990     (12,352     (9,695     (64,542     —           (133,579

Recoveries

     12,933        3,745        3,352        15,785        —           35,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (34,057     (8,607     (6,343     (48,757     —           (97,764
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 286,667        313,089        54,996        202,314        76,732       $ 933,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

-14-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

Beginning balance

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

Provision for credit losses

     40,527        (4,067     (916     54,632        824         91,000   

Net charge-offs

             

Charge-offs

     (44,872     (7,966     (17,124     (62,407     —           (132,369

Recoveries

     17,514        5,956        6,906        12,950        —           43,326   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (27,358     (2,010     (10,218     (49,457     —           (89,043
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 286,552        318,901        67,522        169,819        75,839       $ 918,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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 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 loans and residential real estate loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Modified loans, including smaller balance homogenous loans, that are considered to be troubled

 

-15-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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.

Information with respect to loans and leases that were considered impaired follows.

 

     September 30, 2015      December 31, 2014  
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

           

Commercial, financial, leasing, etc.

   $ 144,051         166,877         35,195         132,340         165,146         31,779   

Real estate:

              

Commercial

     105,561         122,369         18,932         83,955         96,209         14,121   

Residential builder and developer

     6,544         10,276         788         17,632         22,044         805   

Other commercial construction

     2,445         3,991         391         5,480         6,484         900   

Residential

     83,349         101,367         4,775         88,970         107,343         4,296   

Residential Alt-A

     93,168         107,075         8,500         101,137         114,565         11,000   

Consumer:

              

Home equity lines and loans

     23,257         24,239         3,541         19,771         20,806         6,213   

Automobile

     23,985         23,985         5,118         30,317         30,317         8,070   

Other

     18,870         18,870         5,486         18,973         18,973         5,459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     501,230         579,049         82,726         498,575         581,887         82,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

              

Commercial, financial, leasing, etc.

     111,023         133,100         —           73,978         81,493         —     

Real estate:

              

Commercial

     77,147         84,677         —           66,777         78,943         —     

Residential builder and developer

     42,800         68,906         —           58,820         96,722         —     

Other commercial construction

     10,307         28,480         —           20,738         41,035         —     

Residential

     16,232         26,626         —           16,815         26,750         —     

Residential Alt-A

     20,891         35,836         —           26,752         46,964         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     278,400         377,625         —           263,880         371,907         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Commercial, financial, leasing, etc.

     255,074         299,977         35,195         206,318         246,639         31,779   

Real estate:

              

Commercial

     182,708         207,046         18,932         150,732         175,152         14,121   

Residential builder and developer

     49,344         79,182         788         76,452         118,766         805   

Other commercial construction

     12,752         32,471         391         26,218         47,519         900   

Residential

     99,581         127,993         4,775         105,785         134,093         4,296   

Residential Alt-A

     114,059         142,911         8,500         127,889         161,529         11,000   

Consumer:

              

Home equity lines and loans

     23,257         24,239         3,541         19,771         20,806         6,213   

Automobile

     23,985         23,985         5,118         30,317         30,317         8,070   

Other

     18,870         18,870         5,486         18,973         18,973         5,459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 779,630         956,674         82,726         762,455         953,794         82,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-16-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

     Three months ended
September 30, 2015
     Three months ended
September 30, 2014
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 242,157         1,017         1,017         228,749         611         611   

Real estate:

           

Commercial

     179,327         2,327         2,327         189,952         821         821   

Residential builder and developer

     53,009         81         81         90,493         18         18   

Other commercial construction

     17,236         1,943         1,943         58,500         251         251   

Residential

     99,939         1,835         1,316         104,516         1,328         776   

Residential Alt-A

     116,191         1,539         618         131,574         1,643         681   

Consumer:

           

Home equity lines and loans

     21,952         231         66         19,268         219         81   

Automobile

     24,429         391         39         33,666         528         67   

Other

     19,238         188         23         18,677         177         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 773,478         9,552         7,430         875,395         5,596         3,350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine months ended
September 30, 2015
     Nine months ended
September 30, 2014
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 226,243         2,123         2,123         171,227         1,379         1,379   

Real estate:

        

Commercial

     161,834         4,433         4,433         194,337         2,616         2,616   

Residential builder and developer

     64,165         275         275         94,453         131         131   

Other commercial construction

     22,130         2,166         2,166         74,531         1,694         1,694   

Residential

     101,997         4,639         3,011         132,606         7,784         6,146   

Residential Alt-A

     120,710         4,799         1,962         135,374         5,002         1,900   

Consumer:

        

Home equity lines and loans

     20,619         656         179         17,902         540         182   

Automobile

     26,521         1,257         136         36,560         1,742         228   

Other

     19,053         547         86         18,229         517         145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 763,272         20,895         14,371         875,219         21,405         14,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $59 million and $20 million, respectively, at September 30, 2015 and $63 million and $18 million,

 

-17-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

respectively, at December 31, 2014. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance totaled $20 million and $28 million, respectively, at September 30, 2015 and $27 million and $28 million, respectively, at December 31, 2014.

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

 

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

September 30, 2015

     

Pass

   $ 19,223,102         22,479,501         1,507,057         3,447,841   

Criticized accrual

     785,660         895,603         61,143         94,567   

Criticized nonaccrual

     224,415         176,491         46,022         12,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,233,177         23,551,595         1,614,222         3,554,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

     

Pass

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

Criticized accrual

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

Criticized nonaccrual

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

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

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

 

-18-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

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

 

    

Commercial,

Financial,

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

September 30, 2015

              

Individually evaluated for impairment

   $ 35,195         19,743         13,275         14,145       $ 82,358   

Collectively evaluated for impairment

     250,271         292,214         39,804         186,706         768,995   

Purchased impaired

     1,201         1,132         1,917         1,463         5,713   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 286,667         313,089         54,996         202,314         857,066   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

           76,732   
              

 

 

 

Total

         $ 933,798   
              

 

 

 

December 31, 2014

        

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

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

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

           75,654   
              

 

 

 

Total

         $ 919,562   
              

 

 

 

 

-19-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

    

Commercial,

Financial,

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

September 30, 2015

              

Individually evaluated for impairment

   $ 255,074         243,743         213,640         66,112       $ 778,569   

Collectively evaluated for impairment

     19,973,458         28,348,685         7,983,030         11,307,085         67,612,258   

Purchased impaired

     4,645         128,109         14,392         2,275         149,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,233,177         28,720,537         8,211,062         11,375,472       $ 68,540,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

        

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

-20-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended September 30, 2015 and 2014:

 

            Recorded investment      Financial effects of
modification
 

Three months ended September 30, 2015

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

Commercial, financial, leasing, etc.

        

Principal deferral

     36       $ 7,893       $ 7,419       $ (474   $ —     

Combination of concession types

     1         31         31         —          (6

Real estate:

        

Commercial

        

Principal deferral

     15         4,230         4,208         (22     —     

Combination of concession types

     1         1,156         1,169         13        (54

Other commercial construction

        

Principal deferral

     3         296         390         94        —     

Residential

        

Principal deferral

     31         3,540         3,743         203        —     

Other

     1         267         267         —          —     

Combination of concession types

     10         1,296         1,380         84        (178

Residential Alt-A

        

Principal deferral

     1         265         276         11        —     

Combination of concession types

     4         605         662         57        (91

Consumer:

        

Home equity lines and loans

        

Principal deferral

     4         727         727         —          —     

Combination of concession types

     22         2,003         2,003         —          (199

Automobile

        

Principal deferral

     35         316         316         —          —     

Other

     15         93         93         —          —     

Combination of concession types

     25         471         471         —          (17

Other

        

Principal deferral

     24         352         352         —          —     

Other

     5         33         33         —          —     

Combination of concession types

     12         117         117         —          (12
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     245       $ 23,691       $ 23,657       $ (34   $ (557
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 September 30, 2014

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

Commercial, financial, leasing, etc.

        

Principal deferral

     15       $ 1,305       $ 1,300       $ (5   $ —     

Real estate:

        

Commercial

        

Principal deferral

     8         2,081         2,068         (13     —     

Other

     1         650         —           (650     —     

Combination of concession types

     4         483         478         (5     (95

Residential builder and developer

        

Principal deferral

     1         241         241         —          —     

Other commercial construction

        

Principal deferral

     1         145         142         (3     —     

Residential

        

Principal deferral

     3         98         97         (1     —     

Combination of concession types

     8         1,100         1,136         36        (135

Residential Alt-A

        

Combination of concession types

     3         349         369         20        (64

Consumer:

        

Home equity lines and loans

        

Combination of concession types

     5         519         519         —          (67

Automobile

        

Principal deferral

     45         1,003         1,003         —          —     

Interest rate reduction

     3         30         30         —          (2

Other

     7         96         96         —          —     

Combination of concession types

     19         348         348         —          (21

Other

        

Principal deferral

     6         48         48         —          —     

Interest rate reduction

     1         2         2         —          —     

Combination of concession types

     24         511         511         —          (121
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     154       $ 9,009       $ 8,388       $ (621   $ (505
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

-22-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the nine months ended September 30, 2015 and 2014:

 

            Recorded investment      Financial effects of
modification
 

Nine months ended September 30, 2015

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

Commercial, financial, leasing, etc.

        

Principal deferral

     87       $ 25,483       $ 24,331       $ (1,152   $ —     

Interest rate reduction

     1         99         99         —          (19

Other

     2         8,991         8,883         (108     —     

Combination of concession types

     6         25,075         24,884         (191     (245

Real estate:

        

Commercial

        

Principal deferral

     37         47,005         45,569         (1,436     —     

Combination of concession types

     6         3,238         3,242         4        (159

Residential builder and developer

        

Principal deferral

     2         10,650         10,598         (52     —     

Other commercial construction

        

Principal deferral

     3         296         390         94        —     

Residential

        

Principal deferral

     50         4,954         5,239         285        —     

Other

     1         267         267         —          —     

Combination of concession types

     22         2,551         2,795         244        (356

Residential Alt-A

        

Principal deferral

     2         426         437         11        —     

Combination of concession types

     7         1,239         1,298         59        (121

Consumer:

        

Home equity lines and loans

        

Principal deferral

     6         1,946         1,946         —          —     

Combination of concession types

     41         3,555         3,555         —          (424

Automobile

        

Principal deferral

     133         1,234         1,234         —          —     

Interest rate reduction

     7         137         137         —          (10

Other

     38         134         134         —          —     

Combination of concession types

     42         693         693         —          (28

Other

        

Principal deferral

     73         1,418         1,418         —          —     

Other

     12         113         113         —          —     

Combination of concession types

     35         384         384         —          (44
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     613       $ 139,888       $ 137,646       $ (2,242   $ (1,406
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

-23-


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
 

Nine months ended September 30, 2014

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

Commercial, financial, leasing, etc.

        

Principal deferral

     66       $ 20,673       $ 20,499       $ (174   $ —     

Other

     1         19,593         19,593         —          —     

Combination of concession types

     5         9,836         9,766         (70     (14

Real estate:

        

Commercial

        

Principal deferral

     32         17,452         17,384         (68     —     

Other

     1         650         —           (650     —     

Interest rate reduction

     1         255         252         (3     (48

Combination of concession types

     6         892         940         48        (208

Residential builder and developer

        

Principal deferral

     2         1,639         1,639         —          —     

Other commercial construction

        

Principal deferral

     4         6,703         6,611         (92     —     

Residential

        

Principal deferral

     19         1,842         1,926         84        —     

Interest rate reduction

     1         98         104         6        (32

Other

     1         188         188         —          —     

Combination of concession types

     30         4,211         4,287         76        (483

Residential Alt-A

        

Principal deferral

     5         828         900         72        —     

Combination of concession types

     19         3,101         3,134         33        (345

Consumer:

        

Home equity lines and loans

        

Principal deferral

     3         280         280         —          —     

Interest rate reduction

     5         341         341         —          (76

Combination of concession types

     41         4,147         4,147         —          (443

Automobile

        

Principal deferral

     168         2,599         2,599         —          —     

Interest rate reduction

     6         90         90         —          (5

Other

     26         204         204         —          —     

Combination of concession types

     65         939         939         —          (83

Other

        

Principal deferral

     21         141         141         —          —     

Interest rate reduction

     4         293         293         —          (63

Other

     1         45         45         —          —     

Combination of concession types

     57         1,883         1,883         —          (585
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     590       $ 98,923       $ 98,185       $ (738   $ (2,385
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 September 30, 2015 and 2014 and for which there was a subsequent payment default during the nine-month periods ended September 30, 2015 and 2014, respectively, were not material.

 

-24-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Effective January 1, 2015, the Company adopted amended accounting and disclosure guidance for reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amended guidance clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The adoption resulted in an insignificant increase in other real estate owned. The amount of foreclosed residential real estate property held by the Company was $43 million and $44 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, there were $151 million in loans secured by residential real estate that were in the process of foreclosure.

5. Borrowings

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

M&T had $513 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at September 30, 2015 which are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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.

 

-25-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings, continued

 

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

Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of September 30, 2015 and December 31, 2014. The agreements reflect various repurchase dates in 2016 and 2017 and are subject to legally enforceable master netting arrangements, however, the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $1.5 billion at each of September 30, 2015 and December 31, 2014.

6. Shareholders’ equity

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

Issued and outstanding preferred stock of M&T as of September 30, 2015 and December 31, 2014 is presented below:

 

     Shares
issued and
outstanding
     Carrying
value
 
     (dollars in thousands)  

Series A (a)

     

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

     230,000       $ 230,000   

Series C (a)

     

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

     151,500       $ 151,500   

Series D (b)

     

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

     50,000       $ 500,000   

Series E (c)

     

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

     350,000       $ 350,000   

 

(a) Dividends, if declared, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 719,175 at September 30, 2015 and 721,490 at December 31, 2014.

 

-26-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

(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 London Interbank Offered Rate (“LIBOR”) plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 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 September 30, 2015 and December 31, 2014. The obligation under that warrant was assumed by M&T in an acquisition.

7. Pension plans and other postretirement benefits

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

 

     Pension benefits      Other
postretirement
benefits
 
     Three months ended September 30  
     2015      2014      2015      2014  
     (in thousands)  

Service cost

   $ 5,916         5,130         188         151   

Interest cost on projected benefit obligation

     17,754         17,290         651         695   

Expected return on plan assets

     (23,527      (22,892      —           —     

Amortization of prior service credit

     (1,501      (1,638      (340      (340

Amortization of net actuarial loss

     11,207         3,624         26         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 9,849         1,514         525         506   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pension benefits      Other
postretirement
benefits
 
     Nine months ended September 30  
     2015      2014      2015      2014  
     (in thousands)  

Service cost

   $ 17,748         15,390         562         453   

Interest cost on projected benefit obligation

     53,261         51,871         1,953         2,084   

Expected return on plan assets

     (70,578      (68,676      —           —     

Amortization of prior service credit

     (4,504      (4,914      (1,019      (1,019

Amortization of net actuarial loss

     33,619         10,871         79         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 29,546         4,542         1,575         1,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-27-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

7. Pension plans and other postretirement benefits, continued

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $14,281,000 and $13,558,000 for the three months ended September 30, 2015 and 2014, respectively, and $44,377,000 and $41,963,000 for the nine months ended September 30, 2015 and 2014, respectively.

8. Earnings per common share

The computations of basic earnings per common share follow:

 

    

Three months ended

September 30

    

Nine months ended

September 30

 
     2015      2014      2015      2014  
     (in thousands, except per share)  

Income available to common shareholders:

           

Net income

   $ 280,401         275,344       $ 808,702         788,697   

Less: Preferred stock dividends (a)

     (20,318      (20,443      (60,953      (55,560
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common equity

     260,083         254,901         747,749         733,137   

Less: Income attributable to unvested stock-based compensation awards

     (2,746      (2,996      (8,122      (8,830
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 257,337         251,905       $ 739,627         724,307   

Weighted-average shares outstanding:

           

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

     134,049         132,832         133,805         132,372   

Less: Unvested stock-based compensation awards

     (1,419      (1,567      (1,458      (1,590
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding

     132,630         131,265         132,347         130,782   

Basic earnings per common share

   $ 1.94         1.92       $ 5.59         5.54   

 

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

 

-28-


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

September 30

    

Nine months ended

September 30

 
     2015      2014      2015      2014  
     (in thousands, except per share)  

Net income available to common equity

   $ 260,083         254,901       $ 747,749         733,137   

Less: Income attributable to unvested stock-based compensation awards

     (2,737      (2,984      (8,093      (8,793
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 257,346         251,917       $ 739,656         724,344   

Adjusted weighted-average shares outstanding:

           

Common and unvested stock-based compensation awards

     134,049         132,832         133,805         132,372   

Less: Unvested stock-based compensation awards

     (1,419      (1,567      (1,458      (1,590

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

     746         863         742         916   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted-average shares outstanding

     133,376         132,128         133,089         131,698   

Diluted earnings per common share

   $ 1.93         1.91       $ 5.56         5.50   

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

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 1.5 million and 1.7 million common shares during the three-month periods ended September 30, 2015 and 2014, respectively, and 1.9 million and 2.1 million common shares during the nine-month periods ended September 30, 2015 and 2014, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

-29-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income

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

 

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

Balance – January 1, 2015

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

Other comprehensive income before reclassifications:

           

Unrealized holding gains (losses), net

     9,699         (11,139     —          —          (1,440     952        (488

Foreign currency translation adjustment

     —           —          —          (735     (735     214        (521

Gains on cash flow hedges

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     9,699         (11,139     —          718        (722     598        (124
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

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

     —           2,417        —          —          2,417 (b)      (944     1,473   

Losses realized in net income

     —           108        —          —          108 (c)      (40     68   

Accretion of net gain on terminated cash flow hedges

     —           —          —          (102     (102 )(d)      40        (62

Amortization of prior service credit

     —           —          (5,523     —          (5,523 )(e)      2,359        (3,164

Amortization of actuarial losses

     —           —          33,698        —          33,698 (e)      (14,368     19,330   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     —           2,525        28,175        (102     30,598        (12,953     17,645   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     9,699         (8,614     28,175        616        29,876        (12,355     17,521   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2015

   $ 17,137         193,214        (474,852     (3,466   $ (267,967     104,494      $ (163,473
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-30-


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

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

Balance – January 1, 2014

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

Other comprehensive income before reclassifications:

           

Unrealized holding gains, net

     12,038         109,263         —          —          121,301        (47,615     73,686   

Foreign currency translation adjustment

     —           —           —          (2,314     (2,314     810        (1,504

Unrealized losses on cash flow hedges

     —           —           —          (162     (162     64        (98
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     12,038         109,263         —          (2,476     118,825        (46,741     72,084   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

Accretion of unrealized holding losses on HTM securities

     1         2,539         —          —          2,540 (b)      (997     1,543   

Amortization of prior service credit

     —           —           (5,933     —          (5,933 )(e)      2,328        (3,605

Amortization of actuarial losses

     —           —           10,871        —          10,871 (e)      (4,267     6,604   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     1         2,539         4,938        —          7,478        (2,936     4,542   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     12,039         111,802         4,938        (2,476     126,303        (49,677     76,626   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2014

   $ 49,294         130,252         (156,679     (2,361   $ 20,506        (8,039   $ 12,467   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

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

Balance – December 31, 2014

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

Net gain (loss) during period

     5,926         (4,873     16,166        302        17,521   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2015

   $ 10,444         117,810        (289,423     (2,304   $ (163,473
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 September 30, 2015.

The net effect of interest rate swap agreements was to increase net interest income by $11 million for each of the three-month periods ended September 30, 2015 and 2014 and $33 million and $34 million for the nine-month periods ended September 30, 2015 and 2014, respectively.

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

 

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

September 30, 2015

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         1.9         4.42     1.29
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2014

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         2.7         4.42     1.19
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

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

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

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $17.6 billion at each of September 30, 2015 and December 31, 2014. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.6 billion and $1.3 billion at September 30, 2015 and December 31, 2014, respectively.

 

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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  
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements (a)

   $ 60,782         73,251       $ —           —     

Commitments to sell real estate loans (a)

     899         728         5,142         4,217   
  

 

 

    

 

 

    

 

 

    

 

 

 
     61,681         73,979         5,142         4,217   

Derivatives not designated and qualifying as hedging instruments

           

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

     17,832         17,396         185         49   

Commitments to sell real estate loans (a)

     26         754         4,162         4,330   

Trading:

           

Interest rate contracts (b)

     268,332         215,614         221,626         173,513   

Foreign exchange and other option and futures contracts (b)

     13,404         31,112         11,380         29,950   
  

 

 

    

 

 

    

 

 

    

 

 

 
     299,594         264,876         237,353         207,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 361,275         338,855       $ 242,495         212,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

     Amount of gain (loss) recognized  
     Three months ended
September 30, 2015
     Three months ended
September 30, 2014
 
   Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

        

Interest rate swap agreements:

        

Fixed rate long-term borrowings (a)

   $ (2,719      2,382       $ (16,792      16,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

        

Trading:

        

Interest rate contracts (b)

   $ 4,120          $ 132      

Foreign exchange and other option and futures contracts (b)

     2,441            (781   
  

 

 

       

 

 

    

Total

   $ 6,561          $ (649   
  

 

 

       

 

 

    

 

     Amount of gain (loss) recognized  
     Nine months ended
September 30, 2015
     Nine months ended
September 30, 2014
 
   Derivative      Hedged item      Derivative      Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

        

Interest rate swap agreements:

        

Fixed rate long-term borrowings (a)

   $ (12,469      11,495       $ (26,627      25,658   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

        

Trading:

        

Interest rate contracts (b)

   $ 6,552          $ 1,214      

Foreign exchange and other option and futures contracts (b)

     1,563            (6,597   
  

 

 

       

 

 

    

Total

   $ 8,115          $ (5,383   
  

 

 

       

 

 

    

 

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans 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 $23 million and $28 million at September 30, 2015 and December 31, 2014, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

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

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $96 million and $161 million at September 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $91 million and $103 million at September 30, 2015 and December 31, 2014, respectively. The Company was required to post collateral relating to those positions of $81 million and $90 million at September 30, 2015 and December 31, 2014, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings, 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 September 30, 2015 was $17 million, for which the Company had posted collateral of $11 million in the normal course of business. If the credit-risk-related contingent features had been triggered on September 30, 2015, the maximum amount of additional collateral the Company would have been required to post to 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 $40 million and $104 million at September 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $35 million and $46 million at September 30, 2015 and December 31, 2014, respectively. Counterparties posted collateral relating to those positions of $35 million and $46 million at September 30, 2015 and December 31, 2014, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative financial instruments

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

cleared through clearinghouses was a net liability position of $96 million and $35 million at September 30, 2015 and December 31, 2014, respectively. Collateral posted with clearinghouses was $143 million and $61 million at September 30, 2015 and December 31, 2014, respectively.

11. Variable interest entities and asset securitizations

During the three and nine months ended September 30, 2015, the Company securitized approximately $15 million and $51 million, respectively, of one-to-four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with the Government National Mortgage Association (Ginnie Mae) and retained the resulting securities in its investment securities portfolio. In similar transactions for the three months and nine months ended September 30, 2014, the Company securitized $35 million and $110 million, respectively, of one-to-four family residential real estate loans. Gains associated with those transactions were not significant.

In accordance with GAAP, the Company determined that it was the primary beneficiary of a residential mortgage loan securitization trust considering its role as servicer and its retained subordinated interests in the trust. As a result, the Company has included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. At September 30, 2015 and December 31, 2014, the carrying values of the loans in the securitization trust were $84 million and $98 million, respectively. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to M&T at September 30, 2015 and December 31, 2014 was $13 million and $15 million, respectively. Because the transaction was non-recourse, the Company’s maximum exposure to loss as a result of its association with the trust at September 30, 2015 is limited to realizing the carrying value of the loans less the amount of the mortgage-backed securities held by the third parties.

As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Company’s consolidated financial statements. At September 30, 2015 and December 31, 2014, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet and recognized $24 million and $34 million, respectively, in other assets for its “investment” in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 5.

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.2 billion at September 30, 2015 and December 31, 2014, respectively. 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 $301 million, including $85 million of unfunded commitments, at September 30, 2015 and $243 million, including $56

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

11. Variable interest entities and asset securitizations, continued

 

million of unfunded commitments, at December 31, 2014. Contingent commitments to provide additional capital contributions to these partnerships were not material at September 30, 2015. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements. As described in note 1, effective January 1, 2015 the Company retrospectively adopted for all periods presented amended accounting guidance on the accounting for investments in qualified affordable housing projects whereby the Company’s investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company amortized $10 million and $31 million of its investments in qualified affordable housing projects to income tax expense during the three months and nine months ended September 30, 2015, respectively, and recognized $15 million and $44 million of tax credits and other tax benefits during those respective periods. Similarly, for the three months and nine months ended September 30, 2014, the Company amortized $14 million and $39 million, respectively, of its investments in qualified affordable housing projects to income tax expense, and recognized $18 million and $53 million of tax credits and other tax benefits during those respective periods.

12. Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at September 30, 2015.

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

 

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

 

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

 

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

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

a description of the valuation methodologies used for the Company’s assets and liabilities that are measured on a recurring basis at estimated fair value.

Trading account assets and liabilities

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

Investment securities available for sale

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

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at September 30, 2015 and December 31, 2014. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR ranging from 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 September 30, 2015, 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 $50 million, respectively, and at December 31, 2014 were $30 million and $50 million, respectively. Securities backed by trust preferred securities issued by financial institutions and other entities constituted all of the available-for-sale investment securities classified as Level 3 valuations.

The Company ensures an appropriate control framework is in place over the valuation processes and techniques used for 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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

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

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

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

Interest rate swap agreements used for interest rate risk management

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

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The following tables present assets and liabilities at September 30, 2015 and December 31, 2014 measured at estimated fair value on a recurring basis:

 

     Fair value
measurements at
September 30,
2015
     Level 1 (a)      Level 2 (a)      Level 3  
     (in thousands)  

Trading account assets

   $ 340,710         48,006         292,704         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     199,394         —           199,394         —     

Obligations of states and political subdivisions

     6,296         —           6,296         —     

Mortgage-backed securities:

           

Government issued or guaranteed

     10,714,048         —           10,714,048         —     

Privately issued

     82         —           —           82   

Collateralized debt obligations

     49,876         —           —           49,876   

Other debt securities

     120,468         —           120,468         —     

Equity securities

     69,345         40,370         28,975         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,159,509         40,370         11,069,181         49,958   
  

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

     493,453         —           493,453         —     

Other assets (b)

     79,539         —           61,707         17,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 12,073,211         88,376         11,917,045         67,790   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

   $ 233,006         —           233,006         —     

Other liabilities (b)

     9,489         —           9,304         185   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 242,495         —           242,310         185   
  

 

 

    

 

 

    

 

 

    

 

 

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

Trading account assets

   $ 308,175         51,416         256,759         —     

Investment securities available for sale:

           

U.S. Treasury and federal agencies

     161,947         —           161,947         —     

Obligations of states and political subdivisions

     8,198         —           8,198         —     

Mortgage-backed securities:

           

Government issued or guaranteed

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

Privately issued

     103         —           —           103   

Collateralized debt obligations

     50,316         —           —           50,316   

Other debt securities

     121,488         —           121,488         —     

Equity securities

     83,757         64,841         18,916         —     
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Real estate loans held for sale

     742,249         —           742,249         —     

Other assets (b)

     92,129         —           74,733         17,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

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

 

 

    

 

 

    

 

 

    

 

 

 

Trading account liabilities

   $ 203,464         —           203,464         —     

Other liabilities (b)

     8,596         —           8,547         49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 212,060         —           212,011         49   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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12. Fair value measurements, continued

 

(a) There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2015 and the year ended December 31, 2014.
(b) Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3).

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended September 30, 2015 were as follows:

 

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

Balance – June 30, 2015

   $ 88       $ 50,483      $ 11,206   

Total gains (losses) realized/unrealized:

       

Included in earnings

     —           —          21,709 (a) 

Included in other comprehensive income

     —           (472 )(d)      —     

Settlements

     (6      (135     —     

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

     —           —          (15,268 )(c) 
  

 

 

    

 

 

   

 

 

 

Balance – September 30, 2015

   $ 82       $ 49,876      $ 17,647   
  

 

 

    

 

 

   

 

 

 

Changes in unrealized gains included in earnings related to assets still held at September 30, 2015

   $ —         $ —        $ 15,488 (a) 
  

 

 

    

 

 

   

 

 

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended September 30, 2014 were as follows:

 

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

Balance – June 30, 2014

   $ 119       $ 56,200      $ 22,023   

Total gains (losses) realized/unrealized:

       

Included in earnings

     —           —          9,657 (a) 

Included in other comprehensive income

     —           2,201 (d)      —     

Settlements

     (7      (3,593     —     

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

     —           —          (15,188 )(c) 
  

 

 

    

 

 

   

 

 

 

Balance – September 30, 2014

   $ 112       $ 54,808      $ 16,492   
  

 

 

    

 

 

   

 

 

 

Changes in unrealized gains included in earnings related to assets still held at September 30, 2014

   $ —         $ —        $ 12,421 (a) 
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12. Fair value measurements, continued

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the nine months ended September 30, 2015 were as follows:

 

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

Balance – January 1, 2015

   $ 103       $ 50,316      $ 17,347   

Total gains (losses) realized/unrealized:

       

Included in earnings

     —           —          67,611 (a) 

Included in other comprehensive income

     —           5,153 (d)      —     

Settlements

     (21      (5,593     —     

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

     —           —          (67,311 )(c) 
  

 

 

    

 

 

   

 

 

 

Balance – September 30, 2015

   $ 82       $ 49,876      $ 17,647   
  

 

 

    

 

 

   

 

 

 

Changes in unrealized gains included in earnings related to assets still held at September 30, 2015

   $ —         $ —        $ 15,965 (a) 
  

 

 

    

 

 

   

 

 

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the nine months ended September 30, 2014 were as follows:

 

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

Balance – January 1, 2014

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

Total gains (losses) realized/unrealized:

      

Included in earnings

     —          —          63,557 (a) 

Included in other comprehensive income

     272 (d)      11,333 (d)      —     

Settlements

     (2,010     (19,608