10-Q 1 d605947d10q.htm FORM 10-Q Form 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, 2013

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

One M & T Plaza

Buffalo, New York

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

 

(716) 842-5445

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on October 31, 2013: 130,229,189 shares.

 

 

 


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2013

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements.

  
 

CONSOLIDATED BALANCE SHEET - September 30, 2013 and December 31, 2012

     3   
 

CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2013 and 2012

     4   
 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three and nine months ended September 30, 2013 and 2012

     5   
 

CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2013 and 2012

     6   
 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Nine months ended September 30, 2013 and 2012

     7   
 

NOTES TO FINANCIAL STATEMENTS

     8   

Item 2.

 

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

     57   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

     104   

Item 4.

 

Controls and Procedures.

     104   

Part II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings.

     104   

Item 1A.

 

Risk Factors.

     105   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

     106   

Item 3.

 

Defaults Upon Senior Securities.

     106   

Item 4.

 

Mine Safety Disclosures.

     106   

Item 5.

 

Other Information.

     106   

Item 6.

 

Exhibits.

     107   

SIGNATURES

     107   

EXHIBIT INDEX

     108   

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share

   September 30,
2013
    December 31,
2012
 

Assets

       
  

Cash and due from banks

   $ 1,941,944        1,983,615   
  

Interest-bearing deposits at banks

     1,925,811        129,945   
  

Federal funds sold

     117,809        3,000   
  

Trading account

     371,370        488,966   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,707,437 at September 30, 2013; $1,801,842 at December 31, 2012)

    
  

Available for sale (cost: $4,555,109 at September 30, 2013; $4,643,070 at December 31, 2012)

     4,692,180        4,739,437   
  

Held to maturity (fair value: $3,277,386 at September 30, 2013; $976,883 at December 31, 2012)

     3,319,114        1,032,276   
  

Other (fair value: $298,479 at September 30, 2013; $302,648 at December 31, 2012)

     298,479        302,648   
     

 

 

   

 

 

 
  

Total investment securities

     8,309,773        6,074,361   
     

 

 

   

 

 

 
  

Loans and leases

     63,914,772        66,790,186   
  

Unearned discount

     (255,730     (219,229
     

 

 

   

 

 

 
  

Loans and leases, net of unearned discount

     63,659,042        66,570,957   
  

Allowance for credit losses

     (916,370     (925,860
     

 

 

   

 

 

 
  

Loans and leases, net

     62,742,672        65,645,097   
     

 

 

   

 

 

 
  

Premises and equipment

     614,795        594,652   
  

Goodwill

     3,524,625        3,524,625   
  

Core deposit and other intangible assets

     79,290        115,763   
  

Accrued interest and other assets

     4,799,396        4,448,779   
     

 

 

   

 

 

 
  

Total assets

   $ 84,427,485        83,008,803   
     

 

 

   

 

 

 

Liabilities

       
  

Noninterest-bearing deposits

   $ 24,150,771        24,240,802   
  

NOW accounts

     1,716,511        1,979,619   
  

Savings deposits

     36,536,906        33,783,947   
  

Time deposits

     3,831,443        4,562,366   
  

Deposits at Cayman Islands office

     316,510        1,044,519   
     

 

 

   

 

 

 
  

Total deposits

     66,552,141        65,611,253   
     

 

 

   

 

 

 
  

Federal funds purchased and agreements to repurchase securities

     246,019        1,074,482   
  

Accrued interest and other liabilities

     1,491,797        1,512,717   
  

Long-term borrowings

     5,121,326        4,607,758   
     

 

 

   

 

 

 
  

Total liabilities

     73,411,283        72,806,210   
     

 

 

   

 

 

 

Shareholders’ equity

  

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 381,500 shares at September 30, 2013 and December 31, 2012; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2013 and December 31, 2012

     879,010        872,500   
  

Common stock, $.50 par, 250,000,000 shares authorized, 130,194,232 shares issued at September 30, 2013; 128,176,912 shares issued at December 31, 2012

     65,097        64,088   
  

Common stock issuable, 47,048 shares at September 30, 2013; 57,409 shares at December 31, 2012

     2,889        3,473   
  

Additional paid-in capital

     3,192,981        3,025,520   
  

Retained earnings

     7,074,287        6,477,276   
  

Accumulated other comprehensive income (loss), net

     (198,062     (240,264
     

 

 

   

 

 

 
  

Total shareholders’ equity

     11,016,202        10,202,593   
     

 

 

   

 

 

 
  

Total liabilities and shareholders’ equity

   $ 84,427,485        83,008,803   
     

 

 

   

 

 

 

 

- 3 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

          Three months ended September 30     Nine months ended September 30  

In thousands, except per share

   2013     2012     2013     2012  

Interest income

  

Loans and leases, including fees

   $ 683,482        687,466      $ 2,071,332        2,010,529   
  

Deposits at banks

     1,650        139        3,372        1,119   
  

Federal funds sold

     22        6        84        17   
  

Agreements to resell securities

     —          —          10        —     
  

Trading account

     169        214        1,048        849   
  

Investment securities

        
  

Fully taxable

     55,746        54,959        141,799        177,647   
  

Exempt from federal taxes

     1,617        2,067        5,223        6,171   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest income

     742,686        744,851        2,222,868        2,196,332   
     

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

  

NOW accounts

     333        327        976        1,034   
  

Savings deposits

     13,733        16,510        41,560        51,633   
  

Time deposits

     6,129        10,843        21,809        36,706   
  

Deposits at Cayman Islands office

     213        336        801        781   
  

Short-term borrowings

     58        365        385        1,016   
  

Long-term borrowings

     49,112        53,748        150,592        174,068   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total interest expense

     69,578        82,129        216,123        265,238   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net interest income

     673,108        662,722        2,006,745        1,931,094   
  

Provision for credit losses

     48,000        46,000        143,000        155,000   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net interest income after provision for credit losses

     625,108        616,722        1,863,745        1,776,094   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other income

  

Mortgage banking revenues

     64,731        106,812        249,096        232,518   
  

Service charges on deposit accounts

     113,839        114,463        336,505        334,334   
  

Trust income

     123,801        115,709        370,132        354,937   
  

Brokerage services income

     16,871        14,114        49,840        44,187   
  

Trading account and foreign exchange gains

     8,987        8,469        27,138        25,278   
  

Gain on bank investment securities

     —          372        56,457        9   
  

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

     —          (2,134     (1,884     (26,246
  

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

     —          (3,538     (7,916     (7,085
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net OTTI losses recognized in earnings

     —          (5,672     (9,800     (33,331
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Equity in earnings of Bayview Lending Group LLC

     (3,881     (5,183     (9,990     (16,570
  

Other revenues from operations

     153,040        96,649        349,581        272,744   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other income

     477,388        445,733        1,418,959        1,214,106   
     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

  

Salaries and employee benefits

     339,332        321,746        1,019,019        991,530   
  

Equipment and net occupancy

     66,220        64,248        195,657        194,667   
  

Printing, postage and supplies

     9,752        8,272        30,749        31,512   
  

Amortization of core deposit and other intangible assets

     10,628        14,085        36,473        46,766   
  

FDIC assessments

     14,877        23,801        52,010        77,712   
  

Other costs of operations

     217,817        183,875        558,905        540,927   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total other expense

     658,626        616,027        1,892,813        1,883,114   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Income before taxes

     443,870        446,428        1,389,891        1,107,086   
  

Income taxes

     149,391        152,966        472,833        373,781   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net income

   $ 294,479        293,462      $ 917,058        733,305   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net income available to common shareholders

        
  

Basic

   $ 275,336        273,885      $ 858,944        676,821   
  

Diluted

     275,356        273,896        859,000        676,842   
  

Net income per common share

        
  

Basic

   $ 2.13        2.18      $ 6.69        5.39   
  

Diluted

     2.11        2.17        6.64        5.37   
  

Cash dividends per common share

   $ .70        .70      $ 2.10        2.10   
  

Average common shares outstanding

        
  

Basic

     129,171        125,818        128,369        125,510   
  

Diluted

     130,265        126,292        129,312        125,936   

 

- 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

   2013      2012      2013      2012  

Net income

   $ 294,479         293,462       $ 917,058         733,305   

Other comprehensive income, net of tax and reclassification adjustments:

           

Net unrealized gains on investment securities

     23,367         42,560         26,724         111,931   

Reclassification to income for amortization of gains on terminated cash flow hedges

     —           —           —           (112

Foreign currency translation adjustment

     1,251         482         205         351   

Defined benefit plans liability adjustment

     5,091         4,732         15,273         14,196   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     29,709         47,774         42,202         126,366   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 324,188         341,236       $ 959,260         859,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 5 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Nine months ended September 30  

In thousands

        2013     2012  

Cash flows from operating activities

  

Net income

   $ 917,058        733,305   
  

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

    
  

Provision for credit losses

     143,000        155,000   
  

Depreciation and amortization of premises and equipment

     66,547        63,344   
  

Amortization of capitalized servicing rights

     46,966        44,678   
  

Amortization of core deposit and other intangible assets

     36,473        46,766   
  

Provision for deferred income taxes

     93,229        108,699   
  

Asset write-downs

     16,204        46,505   
  

Net gain on sales of assets

     (124,375     (5,070
  

Net change in accrued interest receivable, payable

     (2,819     (10,712
  

Net change in other accrued income and expense

     115,400        (204,876
  

Net change in loans originated for sale

     (808,778     (528,606
  

Net change in trading account assets and liabilities

     4,772       24,743   
     

 

 

   

 

 

 
  

Net cash provided by operating activities

     503,677        473,776   
     

 

 

   

 

 

 

Cash flows from investing activities

  

Proceeds from sales of investment securities

    
  

Available for sale

     1,081,747        49,430   
  

Other

     12,994        61,648   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     887,092        1,155,603   
  

Held to maturity

     216,627        237,933   
  

Purchases of investment securities

    
  

Available for sale

     (41,358     (26,115
  

Held to maturity

     (1,586,425     (282,704
  

Other

     (8,825     (13,563
  

Net (increase) decrease in loans and leases

     905,491        (3,572,339
  

Net increase in interest-bearing deposits at banks

     (1,795,866     (257,034
  

Other investments, net

     (16,947     (7,447
  

Capital expenditures, net

     (85,964     (65,947
  

Proceeds from sales of real estate acquired in settlement of loans

     48,929        80,762   
  

Other, net

     (179,629 )     (86,649
     

 

 

   

 

 

 
  

Net cash used by investing activities

     (562,134     (2,726,422
     

 

 

   

 

 

 

Cash flows from financing activities

  

Net increase in deposits

     604,311        4,624,134   
  

Net decrease in short-term borrowings

     (828,463     (189,906
  

Proceeds from long-term borrowings

     799,760        —     
  

Payments on long-term borrowings

     (258,937     (1,727,313
  

Dividends paid - common

     (273,518     (267,481
  

Dividends paid - preferred

     (31,494     (31,494
  

Other, net

     119,936       15,237   
     

 

 

   

 

 

 
  

Net cash provided by financing activities

     131,595       2,423,177   
     

 

 

   

 

 

 
  

Net increase in cash and cash equivalents

     73,138        170,531   
  

Cash and cash equivalents at beginning of period

     1,986,615        1,452,397   
     

 

 

   

 

 

 
  

Cash and cash equivalents at end of period

   $ 2,059,753       1,622,928   
     

 

 

   

 

 

 

Supplemental disclosure of cash flow information

  

Interest received during the period

   $ 2,184,128        2,187,027   
  

Interest paid during the period

     226,335        280,983   
  

Income taxes paid during the period

     331,117       272,502   
     

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

  

Securitization of residential mortgage loans allocated to

    
  

Available for sale investment securities

   $ 1,807,180        —     
  

Held to maturity investment securities

     917,045        —     
  

Capitalized servicing rights

     29,264        —     
  

Real estate acquired in settlement of loans

     35,865        36,881   

 

- 6 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share

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

2012

             

Balance - January 1, 2012

  $ 864,585        62,842        4,072        2,828,986        5,867,165        (356,441     9,271,209   

Total comprehensive income

    —          —          —          —          733,305        126,366        859,671   

Preferred stock cash dividends

    —          —          —          —          (40,088     —          (40,088

Amortization of preferred stock discount

    5,831        —          —          —          (5,831     —          —     

Stock-based compensation plans:

             

Compensation expense, net

    —          228        —          37,655        —          —          37,883   

Exercises of stock options, net

    —          545        —          71,939        —          —          72,484   

Stock purchase plan

    —          75        —          10,026        —          —          10,101   

Directors’ stock plan

    —          7        —          1,114        —          —          1,121   

Deferred compensation plans, net, including dividend equivalents

    —          5        (621     576        (120     —          (160

Other

    —          —          —          952        —          —          952   

Common stock cash dividends - $2.10 per share

    —          —          —          —          (267,646     —          (267,646
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - September 30, 2012

  $ 870,416       63,702        3,451       2,951,248        6,286,785       (230,075     9,945,527   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2013

             

Balance - January 1, 2013

  $ 872,500        64,088        3,473        3,025,520        6,477,276        (240,264     10,202,593   

Total comprehensive income

    —          —          —          —          917,058        42,202        959,260   

Preferred stock cash dividends

    —          —          —          —          (40,088     —          (40,088

Amortization of preferred stock discount

    6,510        —          —          —          (6,510     —          —     

Exercise of 407,542 Series C stock warrants into 186,589 shares of common stock

    —          93        —          (93     —          —          —     

Exercise of 57,327 Series A stock warrants into 21,130 shares of common stock

    —          11        —          (11     —          —          —     

Stock-based compensation plans:

             

Compensation expense, net

    —          147        —          29,826        —          —          29,973   

Exercises of stock options, net

    —          747        —          133,981        —          —          134,728   

Directors’ stock plan

    —          6        —          1,223        —          —          1,229   

Deferred compensation plans, net, including dividend equivalents

    —          5        (584     568        (98     —          (109

Other

    —          —          —          1,967        —          —          1,967   

Common stock cash dividends - $2.10 per share

    —          —          —          —          (273,351     —          (273,351
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - September 30, 2013

  $ 879,010       65,097        2,889       3,192,981        7,074,287       (198,062     11,016,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 7 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS

 

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2012 Annual Report. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

 

2. Acquisitions

On 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, 2013, total consideration to be paid was valued at approximately $4.8 billion. At September 30, 2013, Hudson City had $39.2 billion of assets, including $24.7 billion of loans and $10.0 billion of investment securities, and $34.5 billion of liabilities, including $22.1 billion of deposits. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals.

On April 12, 2013, M&T announced that additional time would be required to obtain a regulatory determination on the applications for the proposed merger with Hudson City. M&T learned that the Federal Reserve Bank of New York (“Federal Reserve Bank”) identified certain concerns with the Company’s procedures, systems and processes related to the Company’s Bank Secrecy Act and anti-money-laundering compliance program. On June 17, 2013, M&T and Manufacturers and Traders Trust Company (“M&T Bank”), M&T’s principal banking subsidiary, entered into a written agreement with the Federal Reserve Bank. Under the terms of the agreement, M&T and M&T Bank are required to submit to the Federal Reserve Bank a revised compliance risk management program designed to ensure compliance with anti-money-laundering laws and regulations and to take certain other steps to enhance their compliance practices. M&T has commenced a major initiative, including the hiring of outside consulting firms, intended to fully address the Federal Reserve Bank’s concerns. In view of the potential timeframe required to implement this initiative, demonstrate its efficacy to the satisfaction of the Federal Reserve Bank and otherwise meet any other regulatory requirements that may be imposed in connection with these matters, M&T and Hudson City extended the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed from August 27, 2013 to January 31, 2014. There can be no assurances that the merger will be completed by that date.

 

- 8 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

In connection with the pending acquisition, the Company incurred merger-related expenses related to preparing for systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with planning for the conversion of systems and/or integration of operations; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; travel costs; and printing, postage, supplies and other costs of planning for the transaction and commencing operations in new markets and offices.

A summary of merger-related expenses in 2013 associated with the pending Hudson City acquisition and in 2012 associated with the May 16, 2011 acquisition of Wilmington Trust Corporation (“Wilmington Trust”) included in the consolidated statement of income is presented below. There were no merger-related expenses during the three-month periods ended September 30, 2013 or 2012.

 

     Nine months ended  
     September 30,
2013
     September 30,
2012
 
     (in thousands)  

Salaries and employee benefits

   $ 836         4,997   

Equipment and net occupancy

     690         15   

Printing, postage and supplies

     1,825         —     

Other costs of operations

     9,013         4,867   
  

 

 

    

 

 

 
   $ 12,364         9,879   
  

 

 

    

 

 

 

 

- 9 -


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, 2013

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 37,432         480         25       $ 37,887   

Obligations of states and political subdivisions

     17,614         355         6         17,963   

Mortgage-backed securities:

           

Government issued or guaranteed

     4,214,895         116,758         1,254         4,330,399   

Privately issued

     2,789         1,032         5         3,816   

Collateralized debt obligations

     42,686         17,724         1,107         59,303   

Other debt securities

     137,661         1,758         20,015         119,404   

Equity securities

     102,032         22,221         845         123,408   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,555,109         160,328         23,257         4,692,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     170,370         4,279         88         174,561   

Mortgage-backed securities:

           

Government issued or guaranteed

     2,914,687         39,987         29,015         2,925,659   

Privately issued

     224,767         —           56,891         167,876   

Other debt securities

     9,290         —           —           9,290   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,319,114         44,266         85,994         3,277,386   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     298,479         —           —           298,479   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,172,702         204,594         109,251       $ 8,268,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 38,422         922         —         $ 39,344   

Obligations of states and political subdivisions

     20,375         534         8         20,901   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,163,210         208,060         229         3,371,041   

Privately issued

     1,142,287         7,272         125,673         1,023,886   

Collateralized debt obligations

     43,228         19,663         1,022         61,869   

Other debt securities

     136,603         2,247         26,900         111,950   

Equity securities

     98,945         14,921         3,420         110,446   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,643,070         253,619         157,252         4,739,437   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     182,103         7,647         27         189,723   

Mortgage-backed securities:

           

Government issued or guaranteed

     597,340         31,727         —           629,067   

Privately issued

     242,378         160         94,900         147,638   

Other debt securities

     10,455         —           —           10,455   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,032,276         39,534         94,927         976,883   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     302,648         —           —           302,648   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,977,994         293,153         252,179       $ 6,018,968   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

Gross realized gains on investment securities were $116 million for the nine-month period ended September 30, 2013. During the second quarter of 2013, the Company sold its holdings of Visa Class B shares for a gain of approximately $90 million and its holdings of MasterCard Class B shares for a gain of $13 million. Gross realized losses on investment securities were $60 million for the nine-month period ended September 30, 2013. During the second quarter of 2013, the Company sold substantially all of its privately issued mortgage-backed securities held in the available-for-sale investment securities portfolio. In total, $1.0 billion of such securities were sold for a net loss of approximately $46 million. Gross realized gains and losses from sales of investment securities were not significant for the three-month period ended September 30, 2013 and for the three-month and nine-month periods ended September 30, 2012.

The Company recognized $10 million of pre-tax other-than-temporary impairment (“OTTI”) losses during the nine months ended September 30, 2013 and $6 million and $33 million during the three months and nine months ended September 30, 2012, respectively, related to privately issued mortgage-backed securities. There were no other-than-temporary impairment losses during the third quarter of 2013. The impairment charges were recognized in light of deterioration of real estate values and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The OTTI losses represented management’s estimate of credit losses inherent in the debt securities considering projected cash flows using assumptions for delinquency rates, loss severities, and other estimates for future collateral performance.

Changes in credit losses associated with debt securities for which OTTI losses have been recognized in earnings for the three months and nine months ended September 30, 2013 and 2012 follows:

 

     Three months ended
September 30
 
           2013                 2012        
     (in thousands)  

Beginning balance

   $ 794        264,197   

Additions for credit losses not previously recognized

     —          5,672   

Reductions for realized losses

     (626     (67,926
  

 

 

   

 

 

 

Ending balance

   $ 168        201,943   
  

 

 

   

 

 

 

 

     Nine months ended
September 30
 
           2013                 2012        
     (in thousands)  

Beginning balance

   $ 197,809        285,399   

Additions for credit losses not previously recognized

     9,800        33,331   

Reductions for realized losses

     (207,441     (116,787
  

 

 

   

 

 

 

Ending balance

   $ 168        201,943   
  

 

 

   

 

 

 

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

At September 30, 2013, 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

   $ 24,886         24,971   

Due after one year through five years

     21,212         22,016   

Due after five years through ten years

     8,282         8,553   

Due after ten years

     181,013         179,017   
  

 

 

    

 

 

 
     235,393         234,557   

Mortgage-backed securities available for sale

     4,217,684         4,334,215   
  

 

 

    

 

 

 
   $ 4,453,077         4,568,772   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 18,617         18,751   

Due after one year through five years

     65,392         67,400   

Due after five years through ten years

     86,361         88,410   

Due after ten years

     9,290         9,290   
  

 

 

    

 

 

 
     179,660         183,851   

Mortgage-backed securities held to maturity

     3,139,454         3,093,535   
  

 

 

    

 

 

 
   $ 3,319,114         3,277,386   
  

 

 

    

 

 

 

A summary of investment securities that as of September 30, 2013 and December 31, 2012 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, 2013

          

Investment securities available for sale:

          

U.S. Treasury and federal agencies

   $ 6,346         (25     —           —     

Obligations of states and political subdivisions

     577         (2     559         (4

Mortgage-backed securities:

          

Government issued or guaranteed

     174,503         (1,126     5,731         (128

Privately issued

     —           —          107         (5

Collateralized debt obligations

     —           —          5,995         (1,107

Other debt securities

     1,576         (7     102,898         (20,008

Equity securities

     2,777         (845     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     185,779         (2,005        115,290         (21,252
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     14,751         (70     1,558         (18

Mortgage-backed securities:

          

Government issued or guaranteed

     1,259,353         (29,015     —           —     

Privately issued

     —           —          167,876         (56,891
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,274,104         (29,085     169,434         (56,909
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,459,883         (31,090     284,724         (78,161
  

 

 

    

 

 

   

 

 

    

 

 

 

 

- 12 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

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

December 31, 2012

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ 166         (1     683         (7

Mortgage-backed securities:

          

Government issued or guaranteed

     12,107         (65     8,804         (164

Privately issued

     121,487         (692     774,328         (124,981

Collateralized debt obligations

     —           —          6,043         (1,022

Other debt securities

     —           —          95,685         (26,900

Equity securities

     5,535         (1,295     2,956         (2,125
  

 

 

    

 

 

   

 

 

    

 

 

 
     139,295         (2,053     888,499         (155,199
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     1,026         (5     3,558         (22

Privately issued mortgage-backed securities

     —           —          147,273         (94,900
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,026         (5     150,831         (94,922
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $    140,321         (2,058     1,039,330         (250,121
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company owned 299 individual investment securities with aggregate gross unrealized losses of $109 million at September 30, 2013. Approximately $57 million of the unrealized losses pertained to privately issued mortgage-backed securities with a cost basis of $225 million. The Company also had $21 million of unrealized losses on trust preferred securities issued by financial institutions and securities backed by trust preferred securities having a cost basis of $132 million. Based on a review of each of the remaining securities in the investment securities portfolio at September 30, 2013, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 30, 2013, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities. At September 30, 2013, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $298 million of cost method investment securities.

 

4. Loans and leases and the allowance for credit losses

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

 

     September 30,
2013
     December 31,
2012
 
     (in thousands)  

Outstanding principal balance

   $ 5,274,466         6,705,120   

Carrying amount:

     

Commercial, financial, leasing, etc.

     730,743         928,107   

Commercial real estate

     1,875,842         2,567,050   

Residential real estate

     598,820         707,309   

Consumer

     1,357,847         1,637,887   
  

 

 

    

 

 

 
   $ 4,563,252         5,840,353   
  

 

 

    

 

 

 

 

- 13 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Purchased impaired loans included in the table above totaled $357 million at September 30, 2013 and $447 million at December 31, 2012, 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, 2013 and 2012 follows:

 

     Three months ended September 30  
     2013     2012  
     Purchased
impaired
    Other
acquired
    Purchased
impaired
    Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 55,149        622,093      $ 55,599        733,161   

Interest income

     (10,428       (60,786     (12,436       (74,936

Reclassifications from nonaccretable balance, net

     172        —          542        —     

Other (a)

     —          6,254        —          1,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 44,893        567,561      $ 43,705        659,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine months ended September 30  
     2013     2012  
     Purchased
impaired
    Other
acquired
    Purchased
impaired
    Other
acquired
 
     (in thousands)  

Balance at beginning of period

   $ 42,252        638,272      $ 30,805        807,960   

Interest income

     (28,879     (190,072     (29,721     (228,908

Reclassifications from nonaccretable balance, net

     31,520        122,519        42,621        98,165   

Other (a)

     —          (3,158     —          (17,610
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 44,893        567,561      $ 43,705        659,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

A summary of current, past due and nonaccrual loans as of September 30, 2013 and December 31, 2012 were as follows:

 

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

September 30, 2013

           

Commercial, financial, leasing, etc.

  $ 17,678,290        91,757        2,582        11,147        16,257        111,116         17,911,149   

Real estate:

             

Commercial

    21,447,385        179,972        12,859        50,853        101,049        198,397        21,990,515   

Residential builder and developer

    921,728        10,622        52        12,353        138,651        113,096        1,196,502   

Other commercial construction

    3,029,504        16,903        1,888        5,090        68,539        36,326        3,158,250   

Residential

    7,884,094        301,564        317,660        44,489        30,201        252,987        8,830,995   

Residential Alt-A

    297,840        18,263        —          —          —          80,905        397,008   

Consumer:

             

Home equity lines and loans

    6,027,315        32,428        —          29,472        2,640        77,537        6,169,392   

Automobile

    1,144,216        39,221        —          181        —          22,087        1,205,705   

Other

    2,736,469        34,886        4,751        —          —          23,420        2,799,526   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 61,166,841        725,616        339,792        153,585        357,337           915,871        63,659,042   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

December 31, 2012

             

Commercial, financial, leasing, etc.

  $ 17,511,052        62,479        23,490        10,587        17,437        151,908      $ 17,776,953   

Real estate:

             

Commercial

    21,759,997        118,249        13,111        54,995        132,962        193,859        22,273,173   

Residential builder and developer

    757,311        35,419        3,258        23,909        187,764        181,865        1,189,526   

Other commercial construction

    2,379,953        35,274        509        9,572        68,971        36,812        2,531,091   

Residential

    9,811,956        337,969        313,184        45,124        36,769        249,314        10,794,316   

Residential Alt-A

    331,021        19,692        —          —          —          95,808        446,521   

Consumer:

             

Home equity lines and loans

    6,199,591        40,759        —          20,318        3,211        58,071        6,321,950   

Automobile

    2,442,502        40,461        —          251        —          25,107        2,508,321   

Other

    2,661,432        40,599        4,845        1,798        —          20,432        2,729,106   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 63,854,815        730,901        358,397        166,554        447,114        1,013,176      $ 66,570,957   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

One-to-four family residential mortgage loans held for sale were $667 million and $1.2 billion at September 30, 2013 and December 31, 2012, respectively. Commercial mortgage loans held for sale were $152 million at September 30, 2013 and $200 million at December 31, 2012.

Changes in the allowance for credit losses for the three months ended September 30, 2013 were as follows:

 

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

Beginning balance

   $ 268,867        324,264        85,311        174,291        74,332       $ 927,065   

Provision for credit losses

     20,209        12,139        315        14,935        402         48,000   

Allowance related to loans securitized and sold

     —          —          —          (11,000     —           (11,000

Net charge-offs

             

Charge-offs

     (30,931     (7,701     (5,320     (20,242     —           (64,194

Recoveries

     5,150        4,751        2,399        4,199        —           16,499   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (25,781     (2,950     (2,921     (16,043     —           (47,695
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 263,295        333,453        82,705        162,183        74,734       $ 916,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Changes in the allowance for credit losses for the three months ended September 30, 2012 were as follows:

 

    

Commercial,

Financial,

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

Beginning balance

   $ 244,728        341,521        93,269        164,352        73,158       $ 917,028   

Provision for credit losses

     439        9,891        8,247        26,962        461         46,000   

Net charge-offs

             

Charge-offs

     (8,874     (7,982     (8,687     (24,553     —           (50,096

Recoveries

     1,174        1,421        1,139        4,557        —           8,291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (7,700     (6,561     (7,548     (19,996     —           (41,805
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 237,467        344,851        93,968        171,318        73,619       $ 921,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in the allowance for credit losses for the nine months ended September 30, 2013 were as follows:

 

    

Commercial,

Financial,

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

Beginning balance

   $ 246,759        337,101        88,807        179,418        73,775       $ 925,860   

Provision for credit losses

     93,736        914        3,913        43,478        959         143,000   

Allowance related to loans securitized and sold

     —          —          —          (11,000     —           (11,000

Net charge-offs

             

Charge-offs

     (86,787     (21,493     (18,583     (62,905     —           (189,768

Recoveries

     9,587        16,931        8,568        13,192        —           48,278   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (77,200     (4,562     (10,015     (49,713     —           (141,490
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 263,295        333,453        82,705        162,183        74,734       $ 916,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in the allowance for credit losses for the nine months ended September 30, 2012 were as follows:

 

    

Commercial,

Financial,

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

Beginning balance

   $ 234,022        367,637        91,915        143,121        71,595       $ 908,290   

Provision for credit losses

     29,663        4,322        30,064        88,927        2,024         155,000   

Net charge-offs

             

Charge-offs

     (32,989     (31,578     (32,812     (77,155     —           (174,534

Recoveries

     6,771        4,470        4,801        16,425        —           32,467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (26,218     (27,108     (28,011     (60,730     —           (142,067
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 237,467        344,851        93,968        171,318        73,619       $ 921,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

- 17 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The following tables provide information with respect to loans and leases that were considered impaired as of September 30, 2013 and December 31, 2012 and for the three months and nine months ended September 30, 2013 and September 30, 2012.

 

                                                                                                                 
     September 30, 2013      December 31, 2012  
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

                 

Commercial, financial, leasing, etc.

   $ 93,568         114,572         25,530         127,282         149,534         33,829   

Real estate:

                 

Commercial

     127,921         152,885         24,104         121,542         143,846         23,641   

Residential builder and developer

     61,947         102,395         7,374         115,306         216,218         25,661   

Other commercial construction

     74,116         77,180         3,104         73,544         76,869         6,836   

Residential

     100,287         118,572         6,537         103,451         121,819         3,521   

Residential Alt-A

     115,695         128,446         15,000         128,891         141,940         17,000   

Consumer:

                 

Home equity lines and loans

     13,258         14,372         3,408         12,360         13,567         2,254   

Automobile

     42,106         42,106         12,060         49,210         49,210         14,273   

Other

     16,057         16,057         4,169         14,408         14,408         5,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     644,955         766,585         101,286         745,994         927,411         132,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     24,945         30,551         —           32,631         42,199         —     

Real estate:

                 

Commercial

     77,284         99,461         —           78,380         100,337         —     

Residential builder and developer

     56,015         84,852         —           74,307         105,438         —     

Other commercial construction

     19,960         24,051         —           23,018         23,532         —     

Residential

     83,041         93,898         —           86,342         96,448         —     

Residential Alt-A

     28,397         52,565         —           31,354         58,768         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     289,642         385,378         —           326,032         426,722         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     118,513         145,123         25,530         159,913         191,733         33,829   

Real estate:

                 

Commercial

     205,205         252,346         24,104         199,922         244,183         23,641   

Residential builder and developer

     117,962         187,247         7,374         189,613         321,656         25,661   

Other commercial construction

     94,076         101,231         3,104         96,562         100,401         6,836   

Residential

     183,328         212,470         6,537         189,793         218,267         3,521   

Residential Alt-A

     144,092         181,011         15,000         160,245         200,708         17,000   

Consumer:

                 

Home equity lines and loans

     13,258         14,372         3,408         12,360         13,567         2,254   

Automobile

     42,106         42,106         12,060         49,210         49,210         14,273   

Other

     16,057         16,057         4,169         14,408         14,408         5,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 934,597         1,151,963         101,286         1,072,026         1,354,133         132,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 18 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

                                                                                                                 
     Three months ended
September 30, 2013
     Three months ended
September 30, 2012
 
            Interest income
recognized
            Interest income
recognized
 
     Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 149,357         516         516         141,166         1,507         1,507   

Real estate:

                 

Commercial

     205,971         716         716         180,009         531         531   

Residential builder and developer

     130,855         213         188         237,847         476         370   

Other commercial construction

     95,486         208         208         84,604         9         9   

Residential

     180,995         1,391         865         131,114         1,269         765   

Residential Alt-A

     147,056         1,763         692         167,780         1,836         593   

Consumer:

                 

Home equity lines and loans

     12,810         167         49         11,949         172         48   

Automobile

     42,957         710         127         51,138         863         185   

Other

     15,791         161         50         11,996         121         52   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $    981,278           5,845           3,411         1,017,603           6,784           4,060   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                                 
     Nine months ended
September 30, 2013
     Nine months ended
September 30, 2012
 
            Interest income
recognized
            Interest income
recognized
 
     Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 164,877         6,358         6,358         155,627         2,659         2,659   

Real estate:

                 

Commercial

     200,354         1,428         1,428         179,524         2,087         2,087   

Residential builder and developer

     159,308         871         637         260,858         1,202         801   

Other commercial construction

     97,268         3,322         3,322         100,242         5,019         5,019   

Residential

     184,719         4,795         3,188         128,646         3,926         2,453   

Residential Alt-A

     151,992         5,173         1,799         174,390         5,432         1,666   

Consumer:

                 

Home equity lines and loans

     12,633         499         127         11,024         502         136   

Automobile

     45,075         2,226         404         52,249         2,632         553   

Other

     15,438         468         153         10,097         320         138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,031,664         25,140         17,416         1,072,657         23,779         15,512   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

- 19 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

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

September 30, 2013

     

Pass

   $ 17,022,772         20,978,696         1,005,932         3,066,941   

Criticized accrual

     777,261         813,422         77,474         54,983   

Criticized nonaccrual

     111,116         198,397         113,096         36,326   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,911,149         21,990,515         1,196,502         3,158,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

     

Pass

   $ 16,889,753         21,275,182         922,141         2,307,436   

Criticized accrual

     735,292         804,132         85,520         186,843   

Criticized nonaccrual

     151,908         193,859         181,865         36,812   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,776,953         22,273,173         1,189,526         2,531,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

- 20 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

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

 

    

Commercial,

Financial,

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

September 30, 2013

              

Individually evaluated for impairment

   $ 25,530         34,139         21,517         19,637       $ 100,823   

Collectively evaluated for impairment

     234,912         298,579         59,645         141,202         734,338   

Purchased impaired

     2,853         735         1,543         1,344         6,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 263,295         333,453         82,705         162,183         841,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 74,734   
              

 

 

 

Total

               $ 916,370   
              

 

 

 

December 31, 2012

              

Individually evaluated for impairment

   $ 33,669         55,291         20,502         22,194       $ 131,656   

Collectively evaluated for impairment

     212,930         280,789         66,684         156,661         717,064   

Purchased impaired

     160         1,021         1,621         563         3,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 246,759         337,101         88,807         179,418         852,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 73,775   
              

 

 

 

Total

               $ 925,860   
              

 

 

 

 

- 21 -


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, 2013

              

Individually evaluated for impairment

   $ 118,513         413,443         326,860         71,421       $ 930,237   

Collectively evaluated for impairment

     17,776,379         25,623,585         8,870,942         10,100,562         62,371,468   

Purchased impaired

     16,257         308,239         30,201         2,640         357,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,911,149         26,345,267         9,228,003         10,174,623       $ 63,659,042   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

        

Individually evaluated for impairment

   $ 159,761         480,335         349,477         75,978       $ 1,065,551   

Collectively evaluated for impairment

     17,599,755         25,123,758         10,854,591         11,480,188         65,058,292   

Purchased impaired

     17,437         389,697         36,769         3,211         447,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,776,953         25,993,790         11,240,837         11,559,377       $ 66,570,957   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

- 22 -


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, 2013 and 2012:

 

            Recorded investment      Financial effects of
modification
 

Three months ended September 30, 2013

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

Commercial, financial, leasing, etc.

             

Principal deferral

     14       $ 2,407       $ 2,266       $ (141   $ —     

Other

     2         1,773         2,067         294        —     

Combination of concession types

     3         374         374         —          (25

Real estate:

             

Commercial

             

Principal deferral

     10         4,160         4,134         (26     —     

Other

     2         449         475         26        —     

Combination of concession types

     6         1,868         2,264         396        (156

Residential builder and developer

             

Principal deferral

     1         249         241         (8     —     

Other commercial construction

             

Principal deferral

     1         226         158         (68     —     

Residential

             

Principal deferral

     6         860         912         52        —     

Combination of concession types

     14         1,258         1,308         50        (197

Residential Alt-A

             

Principal deferral

     5         764         773         9        —     

Combination of concession types

     4         332         496         164        (252

Consumer:

             

Home equity lines and loans

             

Principal deferral

     2         179         179         —          —     

Combination of concession types

     9         682         682         —          (79

Automobile

             

Principal deferral

     121         1,718         1,718         —          —     

Interest rate reduction

     2         19         19         —          (2

Other

     20         42         42         —          —     

Combination of concession types

     61         551         551         —          (33

Other

             

Principal deferral

     9         60         60         —          —     

Combination of concession types

     18         470         470         —          (86
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     310       $ 18,441       $ 19,189       $ 748      $ (830
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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
 

Three months ended September 30, 2012

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

Commercial, financial, leasing, etc.

             

Principal deferral

     21       $ 7,823       $ 7,653       $ (170   $ —     

Combination of concession types

     2         327         322         (5     (39

Real estate:

             

Commercial

             

Principal deferral

     8         5,951         6,238         287        —     

Combination of concession types

     1         214         214         —          (49

Residential builder and developer

             

Principal deferral

     11         17,383         16,275         (1,108     —     

Combination of concession types

     1         2,486         2,486         —          —     

Other commercial construction

             

Principal deferral

     2         5,429         4,702         (727     —     

Residential

             

Principal deferral

     5         738         772         34        —     

Combination of concession types

     18         5,490         5,553         63        (150

Residential Alt-A

             

Principal deferral

     1         218         220         2        —     

Combination of concession types

     13         2,771         2,795         24        —     

Consumer:

             

Home equity lines and loans

             

Principal deferral

     5         434         434         —          —     

Combination of concession types

     11         976         976         —          (125

Automobile

             

Principal deferral

     135         1,721         1,721         —          —     

Interest rate reduction

     9         157         157         —          (11

Other

     20         68         68         —          —     

Combination of concession types

     109         2,329         2,329         —          (319

Other

             

Principal deferral

     14         336         336         —          —     

Other

     1         1         1         —          —     

Combination of concession types

     22         339         339         —          (97
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     409       $ 55,191       $ 53,591       $ (1,600   $ (790
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

- 24 -


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, 2013 and 2012:

 

            Recorded investment      Financial effects of
modification
 

Nine months ended September 30, 2013

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

Commercial, financial, leasing, etc.

             

Principal deferral

     53       $ 9,283       $ 9,070       $ (213   $ —     

Other

     4         50,433         50,924         491        —     

Combination of concession types

     6         2,206         1,696         (510     (25

Real estate:

        

Commercial

        

Principal deferral

     23         38,187         38,027         (160     —     

Other

     2         449         475         26        —     

Combination of concession types

     8         2,450         2,845         395        (212

Residential builder and developer

        

Principal deferral

     16         19,102         18,303         (799     —     

Other

     1         4,039         3,888         (151     —     

Combination of concession types

     3         15,580         15,514         (66     (535

Other commercial construction

        

Principal deferral

     3         590         521         (69     —     

Residential

        

Principal deferral

     21         2,642         2,877         235        —     

Other

     1         195         195         —          —     

Combination of concession types

     52         72,917         69,734         (3,183     (754

Residential Alt-A

        

Principal deferral

     6         863         875         12        —     

Combination of concession types

     17         2,426         2,715         289        (640

Consumer:

        

Home equity lines and loans

        

Principal deferral

     6         359         361         2        —     

Interest rate reduction

     1         99         99         —          (8

Other

     1         106         106         —          —     

Combination of concession types

     19         1,299         1,299         —          (176

Automobile

        

Principal deferral

     359         4,933         4,933         —          —     

Interest rate reduction

     11         159         159         —          (17

Other

     65         274         274         —          —     

Combination of concession types

     184         2,148         2,148         —          (162

Other

        

Principal deferral

     29         290         290         —          —     

Interest rate reduction

     1         12         12         —          (2

Other

     1         12         12         —          —     

Combination of concession types

     90         2,394         2,394         —          (587
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     983       $ 233,447       $ 229,746       $ (3,701   $ (3,118
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

- 25 -


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, 2012

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

Commercial, financial, leasing, etc.

             

Principal deferral

     39       $ 21,027       $ 19,668       $ (1,359   $ —     

Other

     3         2,967         3,052         85        —     

Combination of concession types

     3         372         366         (6     (72

Real estate:

        

Commercial

        

Principal deferral

     11         10,387         10,642         255        —     

Interest rate reduction

     1         383         430         47        (89

Combination of concession types

     5         1,424         1,445         21        (305

Residential builder and developer

        

Principal deferral

     19         26,708         24,812         (1,896     —     

Combination of concession types

     3         4,836         5,212         376        —     

Other commercial construction

        

Principal deferral

     5         66,317         65,600         (717     —     

Residential

        

Principal deferral

     27         3,302         3,447         145        —     

Combination of concession types

     47         10,475         10,658         183        (415

Residential Alt-A

        

Principal deferral

     5         768         785         17        —     

Combination of concession types

     28         5,640         5,732         92        (49

Consumer:

        

Home equity lines and loans

        

Principal deferral

     15         1,285         1,285         —          —     

Interest rate reduction

     1         144         144         —          (6

Combination of concession types

     17         1,691         1,691         —          (272

Automobile

        

Principal deferral

     484         6,306         6,306         —          —     

Interest rate reduction

     16         234         234         —          (16

Other

     51         239         239         —          —     

Combination of concession types

     298         5,108         5,108         —          (601

Other

        

Principal deferral

     73         1,117         1,117         —          —     

Interest rate reduction

     3         23         23         —          (3

Other

     10         50         50         —          —     

Combination of concession types

     74         700         700         —          (155
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     1,238       $ 171,503       $ 168,746       $ (2,757   $ (1,983
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

- 26 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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, 2013 and 2012 for which there was a subsequent payment default during the nine-month periods ended September 30, 2013 and 2012, were $20 million (largely commercial real estate loans) and $13 million (largely residential builder and developer loans), respectively.

 

5. Borrowings

M&T had $1.2 billion of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at September 30, 2013 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.

Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in M&T’s Tier 1 capital. However, in July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a final rule to comprehensively revise the capital framework for the U.S. banking sector. Under that rule, trust preferred capital securities will be phased out from inclusion in Tier 1 capital such that in 2015 only 25% of then-outstanding securities will be included in Tier 1 capital and beginning in 2016 none of the securities will be included in Tier 1 capital.

Holders of the Capital Securities receive preferential cumulative cash distributions unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures as allowed by the terms of each such debenture, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. In the event of an extended interest period exceeding twenty quarterly periods for $350 million of Junior Subordinated Debentures due January 31, 2068, M&T must fund the payment of accrued and unpaid interest through an alternative payment mechanism, which requires M&T to issue common stock, non-cumulative perpetual preferred stock or warrants to purchase common stock until M&T has raised an amount of eligible proceeds at least equal to the aggregate amount of accrued and unpaid deferred interest on the Junior Subordinated Debentures due January 31, 2068. 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.

 

- 27 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings, continued

 

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 2068) 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.

During the first quarter of 2013, M&T Bank instituted a Bank Note Program whereby M&T Bank may offer up to $5 billion of unsecured senior and subordinated notes. During March 2013, three-year floating rate senior notes due March 2016 were issued for $300 million and five-year 1.45% fixed rate senior notes due March 2018 were issued for $500 million.

Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of September 30, 2013 and December 31, 2012. The agreements are subject to legally enforceable master netting arrangements, however the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral of $1.6 billion at each of September 30, 2013 and December 31, 2012.

 

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 is presented below:

 

     Shares
issued and
outstanding
     Carrying
value
September 30, 2013
     Carrying
value
December 31, 2012
 
            (dollars in thousands)  

Series A (a)

        

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

     230,000       $ 229,236       $ 226,965   

Series C (a) (b)

        

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

     151,500         149,774         145,535   

Series D (c)

        

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

     50,000         500,000         500,000   

 

- 28 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

(a) Shares were originally issued as part of the Troubled Asset Relief Program – Capital Purchase Program (“TARP”) of the U.S. Department of Treasury (“U.S. Treasury”). Cash proceeds were allocated between the preferred stock and a ten-year warrant to purchase M&T common stock (Series A – 1,218,522 common shares at $73.86 per share, Series C – 407,542 common shares at $55.76 per share). The U.S. Treasury sold all of the shares of M&T preferred stock that it held in August 2012. In connection with that sale, the terms of the preferred stock were modified such that dividends, if declared, will accrue and be paid quarterly at a rate of 5% per year through November 14, 2013 and at 6.375% thereafter, and that M&T will not redeem the preferred shares until on or after November 15, 2018. In December 2012, the U.S. Treasury sold to other investors the Series A warrants for $26.50 per warrant. In March 2013, the U.S. Treasury exercised the Series C warrants in a “cashless” exercise, resulting in the issuance of 186,589 common shares. During the third quarter of 2013, 57,327 of the Series A warrants were exercised in a “cashless” exercise, resulting in the issuance of 21,130 common shares. Remaining outstanding Series A warrants were 1,161,195 at September 30, 2013.
(b) Shares were assumed in an acquisition and a new Series C Preferred Stock was designated.
(c) Dividends, if declared, will be 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.

A warrant expiring on May 16, 2021 providing for the purchase of 95,383 shares of M&T common stock at $518.96 per share was outstanding at September 30, 2013 and December 31, 2012. 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  
     2013     2012     2013     2012  
     (in thousands)  

Service cost

   $ 6,090        7,387        186        167   

Interest cost on projected benefit obligation

     15,032        15,509        673        934   

Expected return on plan assets

     (21,838     (17,627     —          —     

Amortization of prior service cost

     (1,639     (1,640     (340     5   

Amortization of net actuarial loss

     10,269        9,291        90        133   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 7,914        12,920        609        1,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

- 29 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

7. Pension plans and other postretirement benefits, continued

 

     Pension
benefits
    Other
postretirement
benefits
 
     Nine months ended September 30  
     2013     2012     2013     2012  
     (in thousands)  

Service cost

   $ 18,270        22,162        557        501   

Interest cost on projected benefit obligation

     45,097        46,527        2,018        2,803   

Expected return on plan assets

     (65,515     (52,883     —          —     

Amortization of prior service cost

     (4,917     (4,919     (1,019     15   

Amortization of net actuarial loss

     30,807        27,874        270        398   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 23,742        38,761        1,826        3,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $12,440,000 and $11,289,000 for the three months ended September 30, 2013 and 2012, respectively, and $40,757,000 and $37,304,000 for the nine months ended September 30, 2013 and 2012, 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
 
     2013     2012     2013     2012  
     (in thousands, except per share)  

Income available to common shareholders:

        

Net income

   $ 294,479        293,462      $ 917,058        733,305   

Less: Preferred stock dividends (a)

     (13,363     (13,363     (40,088     (40,088

 Amortization of preferred stock discount (a)

     (2,235     (2,033     (6,575     (5,921
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common equity

     278,881        278,066        870,395        687,296   

Less: Income attributable to unvested stock-based compensation awards

     (3,545     (4,181     (11,451     (10,475
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 275,336        273,885      $ 858,944        676,821   

Weighted-average shares outstanding:

        

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

     130,836        127,741        130,088        127,449   

Less: Unvested stock-based compensation awards

     (1,665     (1,923     (1,719     (1,939
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding

     129,171        125,818        128,369        125,510   

Basic earnings per common share

   $ 2.13        2.18      $ 6.69        5.39   

 

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

 

- 30 -


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
 
     2013     2012     2013     2012  
     (in thousands, except per share)  

Net income available to common equity

   $ 278,881        278,066      $ 870,395        687,296   

Less: Income attributable to unvested stock-based compensation awards

     (3,525     (4,170     (11,395     (10,454
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 275,356        273,896      $ 859,000        676,842   

Adjusted weighted-average shares outstanding:

        

Common and unvested stock-based compensation awards

     130,836        127,741        130,088        127,449   

Less: Unvested stock-based compensation awards

     (1,665     (1,923     (1,719     (1,939

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

     1,094        474        943        426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted-average shares outstanding

     130,265        126,292        129,312        125,936   

Diluted earnings per common share

   $ 2.11        2.17      $ 6.64        5.37   

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 3.1 million and 9.7 million common shares during the three-month periods ended September 30, 2013 and 2012, respectively, and 4.1 million and 9.9 million common shares during the nine-month periods ended September 30, 2013 and 2012, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income

The following 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
    All
other
    Defined
benefit
plans
    Other     Total
amount
before tax
    Income
tax
    Net  
     (in thousands)  

Balance – January 1, 2013

   $ (91,835     152,199        (455,590     (431   $ (395,657     155,393      $ (240,264

Other comprehensive income before reclassifications:

              

Unrealized holding gains (losses), net

     59,523        (61,706     —          —          (2,183     814        (1,369

Foreign currency translation adjustment

     —          —          —          296        296        (91     205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     59,523        (61,706     —          296        (1,887     723        (1,164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

              

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

     230        3,127        —          —          3,357  (a)      (1,318     2,039   

OTTI charges recognized in net income

     9,800        —          —          —          9,800  (b)      (3,847     5,953   

Losses (gains) realized in net income

     41,217        (8,129     —          —          33,088  (c)      (12,987     20,101   

Amortization of prior service credit

     —          —          (5,936     —          (5,936 ) (e)      2,330        (3,606

Amortization of actuarial losses

     —          —          31,077        —          31,077  (e)      (12,198     18,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     51,247        (5,002     25,141        —          71,386        (28,020     43,366   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     110,770        (66,708     25,141        296        69,499        (27,297     42,202   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2013

   $ 18,935        85,491        (430,449     (135   $ (326,158     128,096      $ (198,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 32 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income, continued

 

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

Balance – January 1, 2012

   $ (138,319     9,757        (457,145     (1,062   $ (586,769     230,328      $ (356,441

Other comprehensive income before reclassifications:

              

Unrealized holding gains (losses), net

     (8,099     153,908        —          —          145,809        (57,183     88,626   

Foreign currency translation adjustment

     —          —          —          552        552        (201     351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income before reclassifications

     (8,099     153,908        —          552        146,361        (57,384     88,977   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

              

Accretion of unrealized holding losses on HTM securities

     1,544        3,495        —          —          5,039  (a)      (1,978     3,061   

OTTI charges recognized in net income

     33,331        —          —          —          33,331  (b)      (13,082     20,249   

Gains realized in net income

     —          (9     —          —          (9 ) (c)      4        (5

Amortization of gains on terminated cash flow hedges

     —          —          —          (178     (178 ) (d)      66        (112

Amortization of prior service credit

     —          —          (4,904     —          (4,904 ) (e)      1,925        (2,979

Amortization of actuarial losses

     —          —          28,272        —          28,272  (e)      (11,097     17,175   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

     34,875        3,486        23,368        (178     61,551        (24,162     37,389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss) during the period

     26,776        157,394        23,368        374        207,912        (81,546     126,366   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30,2012

   $ (111,543     167,151        (433,777     (688   $ (378,857     148,782      $ (230,075
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Included in interest income
(b) Included in OTTI losses recognized in earnings
(c) Included in gain (loss) on bank investment securities
(d) Included in interest expense
(e) Included in salaries and employee benefits expense

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

 

     Investment securities     Defined
benefit
plans
    Other     Total  
     With
OTTI
    All
other
       

Balance – December 31, 2012

   $ (55,790     92,581        (276,771     (284   $ (240,264

Net gain (loss) during period

     67,293        (40,569     15,273        205        42,202   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2013

   $ 11,503        52,012        (261,498     (79   $ (198,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts is not significant as of September 30, 2013.

The net effect of interest rate swap agreements was to increase net interest income by $11 million and $9 million for the three-month periods ended September 30, 2013 and 2012, respectively, and $30 million and $27 million for the nine months ended September 30, 2013 and 2012, 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, 2013

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 1,400,000         3.9         4.42     1.22
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Fair value hedges:

          

Fixed rate long-term borrowings (a)

   $ 900,000         4.4         6.07     1.85
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

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

Derivative financial instruments used for trading 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 purposes had notional values of $15.9 billion and $15.5 billion at September 30, 2013 and December 31, 2012, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $904 million and $869 million at September 30, 2013 and December 31, 2012, respectively.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

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

 

     Asset derivatives      Liability derivatives  
     Fair value      Fair value  
     September 30,
2013
     December 31,
2012
     September 30,
2013
     December 31,
2012
 
     (in thousands)  

Derivatives designated and qualifying as hedging instruments

           

Fair value hedges:

           

Interest rate swap agreements (a)

   $ 114,083         143,179       $ —           —     

Commitments to sell real estate loans (a)

     2,477         1,114         11,665         3,825   
  

 

 

    

 

 

    

 

 

    

 

 

 
     116,560         144,293         11,665         3,825   

Derivatives not designated and qualifying as hedging instruments

           

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

     18,185         48,056         5,110         197   

Commitments to sell real estate loans (a)

     6,880         1,982         7,435         6,570   

Trading:

           

Interest rate contracts (b)

     285,442         399,963         248,311         365,616   

Foreign exchange and other option and futures contracts (b)

     13,451         8,725         13,138         8,658   
  

 

 

    

 

 

    

 

 

    

 

 

 
     323,958         458,726         273,994         381,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 440,518         603,019       $ 285,659         384,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

- 35 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10. Derivative financial instruments, continued

 

     Amount of unrealized gain (loss) recognized  
     Three months ended
September 30, 2013
    Three months ended
September 30, 2012
 
     Derivative     Hedged item     Derivative     Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

        

Interest rate swap agreements:

        

Fixed rate long-term borrowings (a)

   $ (86     (20   $  3,273        (3,252
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedging instruments

        

Trading:

        

Interest rate contracts (b)

   $  2,778        $ 777     

Foreign exchange and other option and futures contracts (b)

     (862       74     
  

 

 

     

 

 

   

Total

   $ 1,916        $ 851     
  

 

 

     

 

 

   

 

     Amount of unrealized gain (loss) recognized  
     Nine months ended
September 30, 2013
    Nine months ended
September 30, 2012
 
     Derivative     Hedged item     Derivative     Hedged item  
     (in thousands)  

Derivatives in fair value hedging relationships

        

Interest rate swap agreements:

        

Fixed rate long-term borrowings (a)

   $ (29,097     27,733      $ 5,918        (5,876
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedging instruments

        

Trading:

        

Interest rate contracts (b)

   $ 5,974        $ 3,996     

Foreign exchange and other option and futures contracts (b)

     (2,469       (3,071