UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31,June 30, 2016

or

 

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

Commission File Number 1-9861

 

 

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York 16-0968385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One M & T Plaza

Buffalo, New York

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

(716) 842-5445

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 22,July 29, 2016: 158,999,014156,769,164 shares.

 

 

 


M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31,June 30, 2016

 

Table of Contents of Information Required in Report

  Page 

Part I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements.  
  

CONSOLIDATED BALANCE SHEET - March 31,June 30, 2016 and December 31, 2015

   3  
  

CONSOLIDATED STATEMENT OF INCOME - Three and six months ended March  31,June 30, 2016 and 2015

   4  
  

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three and six months ended March 31,June 30, 2016 and 2015

   5  
  

CONSOLIDATED STATEMENT OF CASH FLOWS - ThreeSix months ended March  31,June 30, 2016 and 2015

   6  
  

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - ThreeSix months ended March 31,June 30, 2016 and 2015

   7  
  

NOTES TO FINANCIAL STATEMENTS

   8  

Item 2.

  Item 2.

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

   5157  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk.

   93103  

Item 4.

  

Controls and Procedures.

   93103  

Part II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings.

   93103  

Item 1A.

  Item 1A.

Risk Factors.

   94105  

Item 2.

  Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

   95105  

Item 3.

  

Defaults Upon Senior Securities.

   95105  

Item 4.

  

Mine Safety Disclosures.

   95105  

Item 5.

  

Other Information.

   95105  

Item 6.

  

Exhibits.

   96106  

SIGNATURES

  97106  

EXHIBIT INDEX

   97107  

 

- 2 --2-


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share

Dollars in thousands, except per share

  March 31,
2016
 December 31,
2015
 

Dollars in thousands, except per share

  June 30,
2016
 December 31,
2015
 

Assets

 

Cash and due from banks

  $1,178,175   1,368,040    Cash and due from banks  $1,284,442   1,368,040  
 

Interest-bearing deposits at banks

   9,545,181   7,594,350    

Interest-bearing deposits at banks

   8,474,839   7,594,350  
 

Trading account

   467,987   273,783    

Trading account

   506,131   273,783  
 

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

     

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

   
 

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

   12,200,647   12,242,671    

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

   11,918,974   12,242,671  
 

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

   2,730,611   2,859,709    

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

   2,574,421   2,859,709  
 

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

   536,062   554,059    

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

   469,689   554,059  
   

 

  

 

     

 

  

 

 
 

Total investment securities

   15,467,320   15,656,439    

Total investment securities

   14,963,084   15,656,439  
   

 

  

 

     

 

  

 

 
 

Loans and leases

   88,104,830   87,719,234    

Loans and leases

   88,754,824   87,719,234  
 

Unearned discount

   (232,364 (229,735  

Unearned discount

   (232,826 (229,735
   

 

  

 

     

 

  

 

 
 

Loans and leases, net of unearned discount

   87,872,466   87,489,499    

Loans and leases, net of unearned discount

   88,521,998   87,489,499  
 

Allowance for credit losses

   (962,752 (955,992  

Allowance for credit losses

   (970,496 (955,992
   

 

  

 

     

 

  

 

 
 

Loans and leases, net

   86,909,714   86,533,507    

Loans and leases, net

   87,551,502   86,533,507  
   

 

  

 

     

 

  

 

 
 

Premises and equipment

   662,891   666,682    

Premises and equipment

   658,216   666,682  
 

Goodwill

   4,593,112   4,593,112    

Goodwill

   4,593,112   4,593,112  
 

Core deposit and other intangible assets

   127,949   140,268    

Core deposit and other intangible assets

   116,531   140,268  
 

Accrued interest and other assets

   5,673,303   5,961,703    

Accrued interest and other assets

   5,672,727   5,961,703  
   

 

  

 

     

 

  

 

 
 

Total assets

  $124,625,632   122,787,884    

Total assets

  $123,820,584   122,787,884  
   

 

  

 

     

 

  

 

 

Liabilities

 

Noninterest-bearing deposits

  $29,709,218   29,110,635    Noninterest-bearing deposits  $30,700,066   29,110,635  
 

Interest-checking deposits

   2,848,126   2,939,274    

Interest-checking deposits

   2,672,524   2,939,274  
 

Savings deposits

   48,649,114   46,627,370    

Savings deposits

   48,453,713   46,627,370  
 

Time deposits

   12,841,331   13,110,392    

Time deposits

   12,630,277   13,110,392  
 

Deposits at Cayman Islands office

   166,787   170,170    

Deposits at Cayman Islands office

   193,523   170,170  
   

 

  

 

     

 

  

 

 
 

Total deposits

   94,214,576   91,957,841    

Total deposits

   94,650,103   91,957,841  
   

 

  

 

     

 

  

 

 
 

Federal funds purchased and agreements to repurchase securities

   206,709   150,546    

Federal funds purchased and agreements to repurchase securities

   206,943   150,546  
 

Other short-term borrowings

   1,560,117   1,981,636    

Other short-term borrowings

   200,180   1,981,636  
 

Accrued interest and other liabilities

   1,948,142   1,870,714    

Accrued interest and other liabilities

   1,963,093   1,870,714  
 

Long-term borrowings

   10,341,035   10,653,858    

Long-term borrowings

   10,328,751   10,653,858  
   

 

  

 

     

 

  

 

 
 

Total liabilities

   108,270,579   106,614,595    

Total liabilities

   107,349,070   106,614,595  
   

 

  

 

     

 

  

 

 

Shareholders’ equity

 

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

   1,231,500   1,231,500    

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

   1,231,500   1,231,500  
 

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

   79,982   79,782    

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

   79,979   79,782  
 

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

   2,180   2,364    

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

   2,201   2,364  
 

Additional paid-in capital

   6,683,499   6,680,768    

Additional paid-in capital

   6,690,671   6,680,768  
 

Retained earnings

   8,596,752   8,430,502    

Retained earnings

   8,801,305   8,430,502  
 

Accumulated other comprehensive income (loss), net

   (150,189 (251,627  

Accumulated other comprehensive income (loss), net

   (101,021 (251,627
 

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

   (88,671  —      

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

   (233,121  —    
   

 

  

 

     

 

  

 

 
 

Total shareholders’ equity

   16,355,053   16,173,289    

Total shareholders’ equity

   16,471,514   16,173,289  
   

 

  

 

     

 

  

 

 
 

Total liabilities and shareholders’ equity

  $124,625,632   122,787,884    

Total liabilities and shareholders’ equity

  $123,820,584   122,787,884  
   

 

  

 

     

 

  

 

 

 

- 3 --3-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

   Three months ended March 31    Three months ended June 30 Six months ended June 30 

In thousands, except per share

In thousands, except per share

  2016   2015 

In thousands, except per share

 2016   2015 2016   2015 

Interest income

 

Loans and leases, including fees

  $863,385     647,179    

Loans and leases, including fees

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

Investment securities

      

Investment securities

      
 

Fully taxable

   98,015     85,957    

Fully taxable

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

Exempt from federal taxes

   795     1,318    

Exempt from federal taxes

 663     1,062   1,458     2,380  
 

Deposits at banks

   10,337     3,118    

Deposits at banks

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

Other

   302     515    

Other

 303     164   605     679  
   

 

   

 

    

 

   

 

  

 

   

 

 
 

Total interest income

   972,834     738,087    

Total interest income

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

 

   

 

    

 

   

 

  

 

   

 

 

Interest expense

 

Interest-checking deposits

   414     311    

Interest-checking deposits

 400     349   814     660  
 

Savings deposits

   15,891     10,219    

Savings deposits

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

Time deposits

   24,322     3,740    

Time deposits

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

Deposits at Cayman Islands office

   193     147    

Deposits at Cayman Islands office

 181     150   374     297  
 

Short-term borrowings

   2,162     34    

Short-term borrowings

 1,143     36   3,305     70  
 

Long-term borrowings

   57,888     64,048    

Long-term borrowings

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Total interest expense

   100,870     78,499    

Total interest expense

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Net interest income

   871,964     659,588    

Net interest income

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

Provision for credit losses

   49,000     38,000    

Provision for credit losses

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Net interest income after provision for credit losses

   822,964     621,588    

Net interest income after provision for credit losses

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

 

   

 

    

 

   

 

  

 

   

 

 

Other income

 

Mortgage banking revenues

   82,063     101,601    

Mortgage banking revenues

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

Service charges on deposit accounts

   102,405     102,344    

Service charges on deposit accounts

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

Trust income

   111,077     123,734    

Trust income

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

Brokerage services income

   16,004     15,461    

Brokerage services income

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

Trading account and foreign exchange gains

   7,458     6,231    

Trading account and foreign exchange gains

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

Gain (loss) on bank investment securities

   4     (98  

Gain (loss) on bank investment securities

 264     (10 268     (108
 

Other revenues from operations

   101,922     90,930    

Other revenues from operations

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Total other income

   420,933     440,203    

Total other income

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

 

   

 

    

 

   

 

  

 

   

 

 

Other expense

 

Salaries and employee benefits

   431,785     389,893    

Salaries and employee benefits

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

Equipment and net occupancy

   74,178     66,470    

Equipment and net occupancy

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

Printing, postage and supplies

   11,986     9,590    

Printing, postage and supplies

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

Amortization of core deposit and other intangible assets

   12,319     6,793    

Amortization of core deposit and other intangible assets

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

FDIC assessments

   25,225     10,660    

FDIC assessments

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

Other costs of operations

   220,602     202,969    

Other costs of operations

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Total other expense

   776,095     686,375    

Total other expense

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Income before taxes

   467,802     375,416    

Income before taxes

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

Income taxes

   169,274     133,803    

Income taxes

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Net income

  $298,528     241,613    

Net income

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

 

   

 

    

 

   

 

  

 

   

 

 
 

Net income available to common shareholders

      

Net income available to common shareholders

      
 

Basic

  $275,744     218,830    

Basic

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

Diluted

   275,748     218,837    

Diluted

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

Net income per common share

      

Net income per common share

      
 

Basic

  $1.74     1.66    

Basic

 $1.98     1.99   $3.72     3.65  
 

Diluted

   1.73     1.65    

Diluted

 1.98     1.98   3.71     3.63  
 

Cash dividends per common share

  $.70     .70    

Cash dividends per common share

 $.70     .70   $1.40     1.40  
 

Average common shares outstanding

      

Average common shares outstanding

      
 

Basic

   158,734     132,049    

Basic

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

Diluted

   159,181     132,769    

Diluted

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

 

- 4 --4-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

  Three months ended March 31   Three months ended June 30 Six months ended June 30 

In thousands

  2016 2015   2016 2015 2016 2015 

Net income

  $298,528   $241,613    $336,031   286,688   $634,559   528,301  

Other comprehensive income, net of tax and reclassification adjustments:

   

Net unrealized gains on investment securities

   97,194   25,339  

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

     

Net unrealized gains (losses) on investment securities

   47,270   (72,618 144,464   (47,279

Cash flow hedges adjustments

   (24 871     (23 (24 (47 847  

Foreign currency translation adjustment

   (53 (2,384   (1,565 1,866   (1,618 (518

Defined benefit plans liability adjustments

   4,321   4,677     3,486   5,765   7,807   10,442  
  

 

  

 

   

 

  

 

  

 

  

 

 

Total other comprehensive income

   101,438   28,503  

Total other comprehensive income (loss)

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

 

  

 

   

 

  

 

  

 

  

 

 

Total comprehensive income

  $399,966   $270,116    $385,199   221,677   $785,165   491,793  
  

 

  

 

   

 

  

 

  

 

  

 

 

 

- 5 --5-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

     Three months ended March 31      Six months ended June 30 

In thousands

In thousands

  2016 2015      2016 2015 

Cash flows from operating activities

  

Net income

  $298,528   241,613    

Net income

  $634,559   528,301  
  

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

     

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

   
  

Provision for credit losses

   49,000   38,000    

Provision for credit losses

   81,000   68,000  
  

Depreciation and amortization of premises and equipment

   27,141   24,178    

Depreciation and amortization of premises and equipment

   53,514   48,199  
  

Amortization of capitalized servicing rights

   12,249   12,199    

Amortization of capitalized servicing rights

   24,648   24,572  
  

Amortization of core deposit and other intangible assets

   12,319   6,793    

Amortization of core deposit and other intangible assets

   23,737   12,758  
  

Provision for deferred income taxes

   50,075   37,052    

Provision for deferred income taxes

   94,458   29,884  
  

Asset write-downs

   8,940   2,379    

Asset write-downs

   7,737   4,076  
  

Net gain on sales of assets

   (5,399 (1,066  

Net gain on sales of assets

   (10,477 (48,637
  

Net change in accrued interest receivable, payable

   (16,530 (2,200  

Net change in accrued interest receivable, payable

   2,358   7,912  
  

Net change in other accrued income and expense

   70,766   (80,084  

Net change in other accrued income and expense

   (32,180 (39,503
  

Net change in loans originated for sale

   211   197,708    

Net change in loans originated for sale

   (188,771 (77,677
  

Net change in trading account assets and liabilities

   (59,080 (18,206  

Net change in trading account assets and liabilities

   (40,552 198  
    

 

  

 

     

 

  

 

 
  

Net cash provided by operating activities

   448,220   458,366    

Net cash provided by operating activities

   650,031   558,083  
    

 

  

 

     

 

  

 

 

Cash flows from investing activities

  

Proceeds from sales of investment securities

     

Proceeds from sales of investment securities

   
  

Available for sale

   518   693    

Available for sale

   4,970   2,539  
  

Other

   18,121   132    

Other

   85,389   254  
  

Proceeds from maturities of investment securities

     

Proceeds from maturities of investment securities

   
  

Available for sale

   511,549   369,649    

Available for sale

   1,067,100   859,904  
  

Held to maturity

   132,636   148,708    

Held to maturity

   291,917   351,110  
  

Purchases of investment securities

     

Purchases of investment securities

   
  

Available for sale

   (311,302 (1,871,491  

Available for sale

   (518,203 (3,013,384
  

Held to maturity

   (5,343 (7,442  

Held to maturity

   (10,456 (17,403
  

Other

   (124 (348  

Other

   (1,019 (7,686
  

Net increase in loans and leases

   (439,712 (666,220  

Net increase in loans and leases

   (930,426 (1,465,261
  

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

   (1,950,831 179,376    

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

   (880,489 2,425,015  
  

Capital expenditures, net

   (16,307 (9,598  

Capital expenditures, net

   (36,619 (23,395
  

Net decrease in loan servicing advances

   37,600   76,145    

Net decrease in loan servicing advances

   119,190   317,276  
  

Other, net

   7,920   (21,940  

Other, net

   (98,452 16,450  
    

 

  

 

     

 

  

 

 
  

Net cash used by investing activities

   (2,015,275 (1,802,336  

Net cash used by investing activities

   (907,098 (554,581
    

 

  

 

     

 

  

 

 

Cash flows from financing activities

  

Net increase (decrease) in deposits

   2,264,623   (4,543  

Net increase (decrease) in deposits

   2,705,332   (951,347
  

Net increase (decrease) in short-term borrowings

   (343,838 819    

Net decrease in short-term borrowings

   (1,693,603 (39,377
  

Proceeds from long-term borrowings

   —     1,500,000    

Proceeds from long-term borrowings

   —     1,500,000  
  

Payments on long-term borrowings

   (317,187 (1,797  

Payments on long-term borrowings

   (322,591 (323,025
  

Purchases of treasury stock

   (100,000  —      

Purchases of treasury stock

   (254,000  —    
  

Dividends paid - common

   (112,000 (93,631  

Dividends paid - common

   (223,179 (187,278
  

Dividends paid - preferred

   (17,368 (17,368  

Dividends paid - preferred

   (40,635 (40,635
  

Other, net

   2,960   (46,014  

Other, net

   2,145   15,661  
    

 

  

 

     

 

  

 

 
  

Net cash provided by financing activities

   1,377,190   1,337,466    

Net cash provided (used) by financing activities

   173,469   (26,001
    

 

  

 

     

 

  

 

 
  

Net decrease in cash and cash equivalents

   (189,865 (6,504  

Net decrease in cash and cash equivalents

   (83,598 (22,499
  

Cash and cash equivalents at beginning of period

   1,368,040   1,373,357    

Cash and cash equivalents at beginning of period

   1,368,040   1,373,357  
    

 

  

 

     

 

  

 

 
  

Cash and cash equivalents at end of period

  $1,178,175   1,366,853    

Cash and cash equivalents at end of period

  $1,284,442   1,350,858  
    

 

  

 

     

 

  

 

 

Supplemental disclosure of cash flow information

  

Interest received during the period

  $968,223   726,475    

Interest received during the period

  $1,947,027   1,478,848  
  

Interest paid during the period

   146,568   75,776    

Interest paid during the period

   257,222   149,255  
  

Income taxes paid (refunded) during the period

   (86,146 88,578    

Income taxes paid during the period

   105,361   225,107  
    

 

  

 

     

 

  

 

 

Supplemental schedule of noncash investing and financing activities

  

Real estate acquired in settlement of loans

  $33,737   10,846    

Real estate acquired in settlement of loans

  $66,286   23,273  
  

Securitization of residential mortgage loans allocated to

     

Securitization of residential mortgage loans allocated to

   
  

Available-for-sale investment securities

   8,452   12,920    

Available-for-sale investment securities

   13,923   36,645  
  

Capitalized servicing rights

   92   143    

Capitalized servicing rights

   143   368  

 

- 6 --6-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

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

In thousands, except per share

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

2015

                   

Balance - January 1, 2015

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

Total comprehensive income

  —      —      —      —     241,613   28,503    —     270,116     —       —       —      —     528,301   (36,508  —     491,793  

Preferred stock cash dividends

  —      —      —      —     (20,318  —      —     (20,318   —       —       —      —     (40,635  —      —     (40,635

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

  —     1    —     (1  —      —      —      —       —       1     —     (1  —      —      —      —    

Stock-based compensation plans:

                   

Compensation expense, net

  —     147    —     5,425    —      —      —     5,572     —       144     —     20,966    —      —      —     21,110  

Exercises of stock options, net

  —     101    —     19,378    —      —      —     19,479     —       179     —     34,937    —      —      —     35,116  

Stock purchase plan

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

Directors’ stock plan

  —     2    —     423    —      —      —     425     —       3     —     827    —      —      —     830  

Deferred compensation plans, net, including dividend equivalents

  —     2   (298 270   (25  —      —     (51   —       2     (276 274   (51  —      —     (51

Other

  —      —      —     405    —      —      —     405     —       —       —     801    —      —      —     801  

Common stock cash dividends - $.70 per share

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

Common stock cash dividends - $1.40 per share

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

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Balance - March 31, 2015

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

Balance - June 30, 2015

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

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

2016

                   

Balance - January 1, 2016

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

Total comprehensive income

  —      —      —      —     298,528   101,438    —     399,966     —       —       —      —     634,559   150,606    —     785,165  

Preferred stock cash dividends

  —      —      —      —     (20,318  —      —     (20,318   —       —       —      —     (40,635  —      —     (40,635

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

   —       —       —     (223  —      —     223    —    

Purchases of treasury stock

  —      —      —      —      —      —     (100,000 (100,000   —       —       —      —      —      —     (254,000 (254,000

Stock-based compensation plans:

                   

Compensation expense, net

  —     178    —     (978  —      —     745   (55   —       175     —     6,746    —      —     5,880   12,801  

Exercises of stock options, net

  —     18    —     2,335    —      —     265   2,618     —       18     —     1,642    —      —     3,902   5,562  

Stock purchase plan

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

Directors’ stock plan

  —     2    —     471    —      —      —     473     —       2     —     500    —      —     551   1,053  

Deferred compensation plans, net, including dividend equivalents

  —     2   (184 234   (23  —      —     29     —       2     (163 232   (47  —     4   28  

Other

  —      —      —     394    —      —      —     394     —       —       —     731    —      —      —     731  

Common stock cash dividends - $.70 per share

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

Common stock cash dividends - $1.40 per share

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

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Balance - March 31, 2016

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

Balance - June 30, 2016

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

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

- 7 --7-


NOTES TO FINANCIAL STATEMENTS

 

1.Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in Form 10-K for the year ended December 31, 2015 (“2015 Annual Report”). In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

 

2.AcquisitionAcquisitions

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

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

 

   (in thousands) 

Identifiable assets:

  

Cash and due from banks

  $131,688  

Interest-bearing deposits at banks

   7,568,934  

Investment securities

   7,929,014  

Loans

   19,015,013  

Goodwill

   1,079,787  

Core deposit intangible

   131,665  

Other assets

   843,219  
  

 

 

 

Total identifiable assets

   36,699,320  
  

 

 

 

Liabilities:

  

Deposits

   17,879,589  

Borrowings

   13,211,598  

Other liabilities

   405,025  
  

 

 

 

Total liabilities

   31,496,212  
  

 

 

 

Total consideration

  $5,203,108  
  

 

 

 

Cash paid

  $2,064,284  

Common stock issued (25,953,950 shares)

   3,110,581  

Common stock awards converted

   28,243  
  

 

 

 

Total consideration

  $5,203,108  
  

 

 

 

 

- 8 --8-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2.Acquisitions, continued

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

The following table presents certain pro forma information as if Hudson City had been included in the Company’s results of operations in the first quarter ofthree-month and six-month periods ended June 30, 2015. These results combine the historical results of Hudson City into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place as indicated. In particular, no adjustments have been made to eliminate the impact of gains on securities transactions of $7$67 million during the three months ended March 31,June 30, 2015 and $74 million during the six months ended June 30, 2015 that may not have been recognized had the investment securities been recorded at fair value. Additionally, the Company expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts that follow.

 

  Pro forma
Three months
ended
March 31,
2015
   Pro forma
Three months
ended
June 30,
2015
   Pro forma
Six months
ended
June 30,
2015
 
  (in thousands)   (in thousands) 

Total revenues(a)

  $1,253,445    $1,370,594     2,624,039  

Net income

   285,237     357,654     642,891  

 

(a)Represents net interest income plus other income.

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

- 9 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

2.Acquisitions, continued

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

 

  Three months
ended
March 31,
2016
   Three months
ended
June 30,
2016
   Six months
ended
June 30,
2016
 
  (in thousands)   (in thousands) 

Salaries and employee benefits

  $5,274    $60     5,334  

Equipment and net occupancy

   939     339     1,278  

Printing, postage and supplies

   937     545     1,482  

Other cost of operations

   16,012  

Other costs of operations

   11,649     27,661  
  

 

   

 

   

 

 

Total

  $23,162    $12,593     35,755  
  

 

   

 

   

 

 

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

-9-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3.Investment securities

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

 

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

March 31, 2016

        

June 30, 2016

        

Investment securities available for sale:

                

U.S. Treasury and federal agencies

  $201,002     1,197     7    $202,192    $397,825     2,537     14    $400,348  

Obligations of states and political subdivisions

   5,356     138     46     5,448     5,158     131     48     5,241  

Mortgage-backed securities:

                

Government issued or guaranteed

   11,490,181     265,879     5,998     11,750,062     10,944,676     323,828     1,226     11,267,278  

Privately issued

   65     2     2     65     58     —       1     57  

Collateralized debt obligations

   28,483     18,170     1,613     45,040     28,255     17,466     2,416     43,305  

Other debt securities

   136,968     1,407     25,667     112,708     135,170     1,271     21,670     114,771  

Equity securities

   75,271     10,225     364     85,132     67,687     20,448     161     87,974  
  

 

   

 

   

 

   

 

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

 

   

 

   

 

   

 

 
  

 

   

 

   

 

   

 

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

 

   

 

   

 

   

 

 

Investment securities held to maturity:

                

Obligations of states and political subdivisions

   103,408     886     332     103,962     84,614     712     240     85,086  

Mortgage-backed securities:

                

Government issued or guaranteed

   2,445,563     78,448     2,070     2,521,941     2,315,012     88,526     350     2,403,188  

Privately issued

   175,467     1,848     40,048     137,267     168,784     927     40,737     128,974  

Other debt securities

   6,173     —       —       6,173     6,011     —       —       6,011  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
   2,730,611     81,182     42,450     2,769,343     2,574,421     90,165     41,327     2,623,259  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other securities

   536,062     —       —       536,062     469,689     —       —       469,689  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $15,203,999     378,200     76,147    $15,506,052    $14,622,939     455,846     66,863    $15,011,922  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2015

        

Investment securities available for sale:

        

U.S. Treasury and federal agencies

  $299,890     294     187    $299,997  

Obligations of states and political subdivisions

   5,924     146     42     6,028  

Mortgage-backed securities:

        

Government issued or guaranteed

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

Privately issued

   74     2     2     74  

Collateralized debt obligations

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

Other debt securities

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

Equity securities

   73,795     10,230     354     83,671  
  

 

   

 

   

 

   

 

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

 

   

 

   

 

   

 

 

Investment securities held to maturity:

        

Obligations of states and political subdivisions

   118,431     1,003     421     119,013  

Mortgage-backed securities:

        

Government issued or guaranteed

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

Privately issued

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

Other debt securities

   6,575     —       —       6,575  
  

 

   

 

   

 

   

 

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

 

   

 

   

 

   

 

 

Other securities

   554,059     —       —       554,059  
  

 

   

 

   

 

   

 

 

Total

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

 

   

 

   

 

   

 

 

 

- 10 --10-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3.Investment securities, continued

 

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

December 31, 2015

        

Investment securities available for sale:

        

U.S. Treasury and federal agencies

  $299,890     294     187    $299,997  

Obligations of states and political subdivisions

   5,924     146     42     6,028  

Mortgage-backed securities:

        

Government issued or guaranteed

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

Privately issued

   74     2     2     74  

Collateralized debt obligations

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

Other debt securities

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

Equity securities

   73,795     10,230     354     83,671  
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities held to maturity:

        

Obligations of states and political subdivisions

   118,431     1,003     421     119,013  

Mortgage-backed securities:

        

Government issued or guaranteed

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

Privately issued

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

Other debt securities

   6,575     —       —       6,575  
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

Other securities

   554,059     —       —       554,059  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

There were no significant gross realized gains or losses from sales of investment securities for the quartersthree-month and six-month periods ended March 31,June 30, 2016 and 2015.2015, respectively.

At March 31,June 30, 2016, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:

 

  Amortized cost   Estimated
fair value
 
  Amortized cost   Estimated
fair value
   (in thousands) 
  (in thousands) 

Debt securities available for sale:

        

Due in one year or less

  $7,504     7,551    $6,147     6,176  

Due after one year through five years

   201,714     203,128     399,312     402,100  

Due after five years through ten years

   2,728     2,926     3,425     3,822  

Due after ten years

   159,863     151,783     157,524     151,567  
  

 

   

 

   

 

   

 

 
   371,809     365,388     566,408     563,665  

Mortgage-backed securities available for sale

   11,490,246     11,750,127     10,944,734     11,267,335  
  

 

   

 

   

 

   

 

 
  $11,862,055     12,115,515    $11,511,142     11,831,000  
  

 

   

 

   

 

   

 

 

Debt securities held to maturity:

        

Due in one year or less

  $32,387     32,542    $28,259     28,430  

Due after one year through five years

   64,484     64,760     51,414     51,611  

Due after five years through ten years

   6,537     6,660     4,941     5,045  

Due after ten years

   6,173     6,173     6,011     6,011  
  

 

   

 

   

 

   

 

 
   109,581     110,135     90,625     91,097  

Mortgage-backed securities held to maturity

   2,621,030     2,659,208     2,483,796     2,532,162  
  

 

   

 

   

 

   

 

 
  $2,730,611     2,769,343    $2,574,421     2,623,259  
  

 

   

 

   

 

   

 

 

 

- 11 --11-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3.Investment securities, continued

 

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

 

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

March 31, 2016

        

June 30, 2016

        

Investment securities available for sale:

                

U.S. Treasury and federal agencies

  $4,051     (7   —       —      $7,831     (14   —       —    

Obligations of states and political subdivisions

   —       —       1,706     (46   —       —       1,703     (48

Mortgage-backed securities:

                

Government issued or guaranteed

   337,672     (1,959   1,233,329     (4,039   245,977     (1,123   7,590     (103

Privately issued

   —       —       34     (2   —       —       40     (1

Collateralized debt obligations

   10,326     (527   1,858     (1,086   2,883     (1,078   4,285     (1,338

Other debt securities

   9,825     (1,203   88,715     (24,464   11,275     (409   91,997     (21,261

Equity securities

   2,115     (210   146     (154   —       —       140     (161
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
   363,989     (3,906   1,325,788     (29,791   267,966     (2,624   105,755     (22,912
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Investment securities held to maturity:

                

Obligations of states and political subdivisions

   28,707     (215   8,813     (117   15,813     (89   12,057     (151

Mortgage-backed securities:

                

Government issued or guaranteed

   812     (12   232,432     (2,058   —       —       125,116     (350

Privately issued

   —       —       105,355     (40,048   17,436     (3,075   94,454     (37,662
  

 

   

 

   

 

   

 

 
  

 

   

 

   

 

   

 

 
   29,519     (227   346,600     (42,223   33,249     (3,164   231,627     (38,163
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $393,508     (4,133   1,672,388     (72,014  $301,215     (5,788   337,382     (61,075
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2015

                

Investment securities available for sale:

                

U.S. Treasury and federal agencies

  $147,508     (187   —       —      $147,508     (187   —       —    

Obligations of states and political subdivisions

   865     (2   1,335     (40   865     (2   1,335     (40

Mortgage-backed securities:

                

Government issued or guaranteed

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

Privately issued

   —       —       43     (2   —       —       43     (2

Collateralized debt obligations

   5,711     (335   2,063     (853   5,711     (335   2,063     (853

Other debt securities

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

Equity securities

   18,073     (207   153     (147   18,073     (207   153     (147
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Investment securities held to maturity:

                

Obligations of states and political subdivisions

   42,913     (335   5,853     (86   42,913     (335   5,853     (86

Mortgage-backed securities:

                

Government issued or guaranteed

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

Privately issued

   —       —       112,155     (41,367   —       —       112,155     (41,367
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

- 12 --12-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3.Investment securities, continued

The Company owned 538428 individual investment securities with aggregate gross unrealized losses of $76$67 million at March 31,June 30, 2016. Based on a review of each of the securities in the investment securities portfolio at March 31,June 30, 2016, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31,June 30, 2016, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At March 31,June 30, 2016, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $536$470 million of cost method investment securities.

 

4.Loans and leases and the allowance for credit losses

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

 

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

Outstanding principal balance

  $2,918,333     3,122,935    $2,735,024     3,122,935  

Carrying amount:

        

Commercial, financial, leasing, etc.

   71,577     78,847     68,648     78,847  

Commercial real estate

   588,983     644,284     548,485     644,284  

Residential real estate

   964,893     1,016,129  ��  903,891     1,016,129  

Consumer

   681,535     725,807     650,456     725,807  
  

 

   

 

   

 

   

 

 
  $2,306,988     2,465,067    $2,171,480     2,465,067  
  

 

   

 

   

 

   

 

 

Purchased impaired loans included in the table above totaled $716$662 million at March 31,June 30, 2016 and $768 million at December 31, 2015, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for loans acquired at a discount for the three-month periodsthree months and six months ended March 31,June 30, 2016 and 2015 follows:

 

  Three months ended June 30 
  Three months ended March 31, 2016   2016   2015 
  Purchased
impaired
   Other
acquired
   Total   Purchased
impaired
   Other
acquired
   Purchased
impaired
   Other
acquired
 
  (in thousands)   (in thousands) 

Balance at beginning of period

  $184,618     296,434     481,052    $171,185     269,017    $71,422     357,895  

Interest income

   (14,062   (37,862   (51,924   (14,060   (32,898   (5,772   (40,024

Reclassifications from nonaccretable balance, net

   629     5,664     6,293     4,898     2,933     11,974     26,840  

Other (a)

   —       4,781     4,781     —       6,143     —       278  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Balance at end of period

  $171,185     269,017     440,202    $162,023     245,195    $77,624     344,989  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

- 13 --13-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

  Six months ended June 30 
  Three months ended March 31, 2015   2016   2015 
  Purchased
impaired
   Other
acquired
   Total   Purchased
impaired
   Other
acquired
   Purchased
impaired
   Other
acquired
 
  (in thousands)   (in thousands) 

Balance at beginning of period

  $76,518     397,379     473,897    $184,618     296,434    $76,518     397,379  

Interest income

   (5,206   (41,277   (46,483   (28,122   (70,760   (10,978   (81,301

Reclassifications from nonaccretable balance, net

   110     183     293     5,527     8,597     12,084     27,023  

Other (a)

   —       1,610     1,610     —       10,924     —       1,888  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Balance at end of period

  $71,422     357,895     429,317    $162,023     245,195    $77,624     344,989  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

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

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

 

  Current   30-89
Days
past due
   Accruing
loans past
due 90
days or
more(a)
   Accruing
loans
acquired at
a discount
past due
90 days
or more(b)
   Purchased
impaired(c)
   Nonaccrual   Total   Current   30-89 Days
past due
   Accruing
loans past
due 90
days or
more(a)
   Accruing
loans
acquired at
a discount
past due
90 days
or more(b)
   Purchased
impaired(c)
   Nonaccrual   Total 
March 31, 2016          (in thousands)             
June 30, 2016  (in thousands) 

Commercial, financial, leasing, etc.

  $20,911,645     30,495     2,358     524     1,765     279,790     21,226,577    $21,157,606     63,069     6,665     452     766     240,684    $21,469,242  

Real estate:

                            

Commercial

   23,740,729     149,108     41,776     6,818     39,840     171,256     24,149,527     23,390,039     125,657     16,487     13,935     36,111     172,670     23,754,899  

Residential builder and developer

   1,747,261     15,304     195     3,493     23,516     32,458     1,822,227     1,819,984     14,892     —       4,847     19,972     24,263     1,883,958  

Other commercial construction

   3,663,835     28,336     9,068     280     19,239     20,781     3,741,539     4,993,493     41,297     —       280     16,009     21,294     5,072,373  

Residential

   19,747,097     500,241     278,640     15,790     463,871     186,452     21,192,091     19,208,724     470,646     270,845     13,087     433,192     202,949     20,599,443  

Residential-limited documentation

   3,757,924     107,679     275     —       165,404     76,265     4,107,547     3,584,715     112,743     —       —       154,320     79,028     3,930,806  

Consumer:

                        

Home equity lines and loans

   5,720,342     40,054     —       15,898     2,239     78,722     5,857,255     5,658,417     34,735     —       14,608     1,689     86,870     5,796,319  

Automobile

   2,580,241     33,439     —       2     —       14,817     2,628,499     2,669,708     39,139     —       1     —       12,390     2,721,238  

Other

   3,083,495     24,739     3,858     18,962     —       16,150     3,147,204     3,232,679     26,501     4,452     21,381     —       8,707     3,293,720  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $84,952,569     929,395     336,170     61,767     715,874     876,691     87,872,466    $85,715,365     928,679     298,449     68,591     662,059     848,855    $88,521,998  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

- 14 --14-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

Commercial, financial, leasing, etc.

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

Real estate:

                            

Commercial(d)

   23,645,354     172,439     12,963     8,790     46,790     179,606     24,065,942     23,111,673     172,439     12,963     8,790     46,790     179,606     23,532,261  

Residential builder and developer

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

Other commercial construction(d)

   3,428,939     65,932     7,936     2,001     24,525     16,363     3,545,696     3,962,620     65,932     7,936     2,001     24,525     16,363     4,079,377  

Residential

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

Residential-limited documentation

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

Consumer:

                        

Home equity lines and loans

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

Automobile

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

Other

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

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

One-to-four family residential mortgage loans held for sale were $269$374 million and $353 million at March 31,June 30, 2016 and December 31, 2015, respectively. Commercial mortgage loans held for sale were $128$228 million at March 31,June 30, 2016 and $39 million at December 31, 2015.

Changes in the allowance for credit losses for the three months ended March 31,June 30, 2016 were as follows:

 

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

Beginning balance

  $300,404   326,831   72,238   178,320   78,199   955,992    $323,866   331,985   68,371   160,819   77,711    $962,752  

Provision for credit losses

   24,364   4,013   1,218   19,893   (488 49,000     (10,919 15,823   4,404   22,681   11     32,000  

Net charge-offs

               

Charge-offs

   (6,149 (1,272 (6,972 (44,319  —     (58,712   (7,487 (733 (5,090 (33,560  —       (46,870

Recoveries

   5,247   2,413   1,887   6,925    —     16,472     10,619   2,599   1,975   7,421    —       22,614  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

   

 

 

Net charge-offs

   (902 1,141   (5,085 (37,394  —     (42,240   3,132   1,866   (3,115 (26,139  —       (24,256
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

   

 

 

Ending balance

  $323,866   331,985   68,371   160,819   77,711   962,752    $316,079   349,674   69,660   157,361   77,722    $970,496  
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

   

 

 

 

- 15 --15-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Changes in the allowance for credit losses for the three months ended March 31,June 30, 2015 were as follows:

 

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

Beginning balance

  $288,038   307,927   61,910   186,033   75,654     919,562    $281,069   317,375   60,741   186,052   76,136    $921,373  

Provision for credit losses

   1,442   15,542   960   19,574   482     38,000     9,737   (3,652 1,624   21,016   1,275     30,000  

Net charge-offs

                

Charge-offs

   (12,350 (6,679 (3,118 (25,329  —       (47,476   (7,728 (3,470 (3,309 (18,455  —       (32,962

Recoveries

   3,939   585   989   5,774    —       11,287     3,672   1,041   1,238   5,625    —       11,576  
  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

   

 

 

Net charge-offs

   (8,411 (6,094 (2,129 (19,555  —       (36,189   (4,056 (2,429 (2,071 (12,830  —       (21,386
  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

   

 

 

Ending balance

  $281,069   317,375   60,741   186,052   76,136     921,373    $286,750   311,294   60,294   194,238   77,411    $929,987  
  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

   

 

 

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

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

       

Charge-offs

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

Recoveries

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

Beginning balance

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

Provision for credit losses

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

Net charge-offs

        

Charge-offs

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

Recoveries

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net charge-offs

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

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

-16-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

- 16 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

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

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

With an allowance recorded:

            

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential-limited documentation

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

Consumer:

            

Home equity lines and loans

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

Automobile

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With no related allowance recorded:

            

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential-limited documentation

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total:

            

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential-limited documentation

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

Consumer:

            

Home equity lines and loans

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

Automobile

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

- 17 --17-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

   Three months ended
March 31, 2016
   Three months ended
March 31, 2015
 
       Interest income
recognized
       Interest income
recognized
 
   Average
recorded
investment
   Total   Cash
basis
   Average
recorded
investment
   Total   Cash
basis
 
   (in thousands) 

Commercial, financial, leasing, etc.

  $296,584     611     611     214,618     604     604  

Real estate:

            

Commercial

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

Residential builder and developer

   33,750     42     42     73,151     63     63  

Other commercial construction

   16,868     38     38     25,540     55     55  

Residential

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

Residential-limited documentation

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

Consumer:

            

Home equity lines and loans

   26,019     246     85     19,683     201     48  

Automobile

   21,962     339     36     29,013     450     54  

Other

   17,717     178     27     18,861     174     33  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

With an allowance recorded:

            

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential-limited documentation

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

Consumer:

            

Home equity lines and loans

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

Automobile

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With no related allowance recorded:

            

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential-limited documentation

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total:

            

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

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

Other commercial construction

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

Residential

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

Residential-limited documentation

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

Consumer:

            

Home equity lines and loans

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

Automobile

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

-18-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

   31,751     41     41     66,334     131     131  

Other commercial construction

   20,955     335     335     23,614     168     168  

Residential

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

Residential-limited documentation

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

Consumer:

            

Home equity lines and loans

   34,234     323     98     20,221     224     65  

Automobile

   20,542     322     28     26,123     416     43  

Other

   11,169     121     36     19,058     185     30  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Commercial, financial, leasing, etc.

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

Real estate:

            

Commercial

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

Residential builder and developer

   32,750     83     83     69,742     194     194  

Other commercial construction

   18,911     373     373     24,577     223     223  

Residential

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

Residential-limited documentation

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

Consumer:

            

Home equity lines and loans

   30,127     569     183     19,952     425     113  

Automobile

   21,252     661     64     27,568     866     97  

Other

   14,443     299     63     18,960     359     63  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

-19-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

 

- 18 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

March 31, 2016

        

June 30, 2016

        

Pass

  $20,155,277     23,138,987     1,700,088     3,631,947    $20,409,928     22,785,132     1,704,457     4,847,810  

Criticized accrual

   791,510     839,284     89,681     88,811     818,630     797,097     155,238     203,269  

Criticized nonaccrual

   279,790     171,256     32,458     20,781     240,684     172,670     24,263     21,294  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $21,226,577     24,149,527     1,822,227     3,741,539    $21,469,242     23,754,899     1,883,958     5,072,373  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2015

                

Pass

  $19,442,183     23,098,856     1,497,465     3,432,679    $19,442,183     22,697,398     1,497,465     3,834,137  

Criticized accrual

   738,238     787,480     59,779     96,654     738,238     655,257     59,779     228,877  

Criticized nonaccrual

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $20,422,338     24,065,942     1,585,673     3,545,696    $20,422,338     23,532,261     1,585,673     4,079,377  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. The carrying value of residential real estate loans and home equity loans and lines of credit for which a partial charge-off has been recognized aggregated $52 million and $24$31 million, respectively, at March 31,June 30, 2016 and $55 million and $21 million,

-20-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

respectively, at December 31, 2015. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance totaled $20$18 million and $32$39 million, respectively, at March 31,June 30, 2016 and $20 million and $28 million, respectively, at December 31, 2015.

The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors

- 19 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

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

 

   Commercial,
Financial,
Leasing, etc.
   

 

Real Estate

         
     Commercial   Residential   Consumer   Total 
   (in thousands) 

March 31, 2016

          

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated

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

 

 

   

 

 

   

 

 

   

 

 

   

Unallocated

           77,711  
          

 

 

 

Total

          $962,752  
          

 

 

 

December 31, 2015

          

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

   37     656     1,887     1,503     4,083  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allocated

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

 

 

   

 

 

   

 

 

   

 

 

   

Unallocated

           78,199  
          

 

 

 

Total

          $955,992  
          

 

 

 

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

  Commercial,
Financial,
Leasing, etc.
   

 

Real Estate

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

March 31, 2016

          

June 30, 2016

          

Individually evaluated for impairment

  $310,128     235,039     200,306     66,709    $812,182    $50,010     18,292     10,037     12,383    $90,722  

Collectively evaluated for impairment

   20,914,684     29,395,659     24,470,057     11,564,010     86,344,410     266,069     328,919     57,666     143,891     796,545  

Purchased impaired

   1,765     82,595     629,275     2,239     715,874     —       2,463     1,957     1,087     5,507  
  

 

   

 

   

 

   

 

   

 

 

Allocated

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

 

   

 

   

 

   

 

   

Unallocated

           77,722  
  

 

   

 

   

 

   

 

   

 

           

 

 

Total

  $21,226,577     29,713,293     25,299,638     11,632,958    $87,872,466            $970,496  
  

 

   

 

   

 

   

 

   

 

           

 

 

December 31, 2015

                

Individually evaluated for impairment

  $272,227     234,132     207,949     65,365    $779,673    $44,752     19,175     12,727     13,306    $89,960  

Collectively evaluated for impairment

   20,148,209     28,863,130     25,398,037     11,532,121     85,941,497     255,615     307,000     57,624     163,511     783,750  

Purchased impaired

   1,902     100,049     664,117     2,261     768,329     37     656     1,887     1,503     4,083  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Allocated

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

 

   

 

   

 

   

 

   

Unallocated

           78,199  
          

 

 

Total

  $20,422,338     29,197,311     26,270,103     11,599,747    $87,489,499            $955,992  
  

 

   

 

   

 

   

 

   

 

           

 

 

 

- 20 --21-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

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

June 30, 2016

          

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

          

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased impaired

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

-22-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The tables belowthat follow summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31,June 30, 2016 and 2015:

 

      Recorded investment   Financial effects of
modification
       Recorded investment   Financial effects of
modification
 

Three months ended March 31, 2016

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

Three months ended June 30, 2016

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

Commercial, financial, leasing, etc.

                  

Principal deferral

   24    $11,571    $12,721    $1,150   $—       33    $45,733    $45,657    $(76 $—    

Combination of concession types

   7     6,157     5,952     (205  —       5     15,257     14,217     (1,040  —    

Real estate:

                  

Commercial

                  

Principal deferral

   16     3,483     3,448     (35  —       10     2,726     2,710     (16  —    

Interest rate reduction

   1     129     129     —     (25

Other

   1     4,723     4,447     (276  —    

Combination of concession types

   4     7,065     7,008     (57 (31

Residential builder and developer

         

Principal deferral

   3     23,905     22,958     (947  —    

Other commercial construction

         

Principal deferral

   1     250     250     —      —    

Combination of concession types

   5     3,933     3,924     (9 (35   1     124     124     —      —    

Residential

                  

Principal deferral

   17     1,981     2,191     210    —       8     963     1,040     77    —    

Combination of concession types

   10     2,321     2,369     48    —       8     1,043     1,122     79    —    

Residential-limited documentation

                  

Principal deferral

   1     125     138     13    —       2     151     195     44    —    

Combination of concession types

   5     1,312     1,379     67   (339

Consumer:

                  

Home equity lines and loans

                  

Principal deferral

   3     335     335     —      —       1     69     69     —      —    

Combination of concession types

   23     2,496     2,496     —     (283   31     3,737     3,737     —     (280

Automobile

                  

Principal deferral

   48     521     521     —      —       44     158     158     —      —    

Other

   16     38     38     —      —       22     17     17     —      —    

Combination of concession types

   8     85     85     —     (3

Other

                  

Principal deferral

   26     374     374     —      —       29     551     551     —      —    

Other

   2     25     25     —      —       3     20     20     —      —    

Combination of concession types

   8     147     147     —     (27   9     49     49     —     (5
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total

   219    $34,904    $36,143    $1,239   $(687   216    $106,670    $104,458    $(2,212 $(341
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

 

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

 

- 21 --23-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

      Recorded investment   Financial effects of
modification
       Recorded investment   Financial effects of
modification
 

Three months ended March 31, 2015

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

Three months ended June 30, 2015

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

Commercial, financial, leasing, etc.

                  

Principal deferral

   21    $1,572    $1,557    $(15 $—       30    $16,018    $15,355    $(663 $—    

Interest rate reduction

   1     99     99     —     (19

Other

   2     8,991     8,883     (108  —    

Combination of concession types

   3     9,155     6,989     (2,166  —       2     15,889     17,864     1,975   (239

Real estate:

                  

Commercial

                  

Principal deferral

   7     3,792     3,776     (16  —       15     38,983     37,585     (1,398  —    

Combination of concession types

   4     1,646     1,637     (9 (52   1     436     436     —     (53

Residential builder and developer

                  

Principal deferral

   1     1,398     1,398     —      —       1     9,252     9,200     (52  —    

Residential

                  

Principal deferral

   7     721     742     21    —       12     693     754     61    —    

Combination of concession types

   3     294     349     55   (34   9     961     1,066     105   (144

Residential-limited documentation

                  

Principal deferral

   1     161     161     —      —    

Combination of concession types

   1     210     210     —     (4   2     424     426     2   (26

Consumer:

                  

Home equity lines and loans

                  

Principal deferral

   1     21     21     —      —       1     1,198     1,198     —      —    

Combination of concession types

   5     196     196     —     (13   14     1,356     1,356     —     (212

Automobile

                  

Principal deferral

   35     303     303     —      —       63     615     615     —      —    

Interest rate reduction

   3     42     42     —     (3   4     95     95     —     (7

Other

   10     20     20     —      —       13     21     21     —      —    

Combination of concession types

   8     84     84     —     (7   9     138     138     —     (4

Other

                  

Principal deferral

   22     296     296     —      —       27     770     770     —      —    

Other

   5     59     59     —      —       2     21     21     —      —    

Combination of concession types

   13     224     224     —     (25   10     43     43     —     (7
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

Total

   150    $20,132    $18,002    $(2,130 $(157   218    $96,065    $95,987    $(78 $(692
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

  

 

 

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

-24-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

       Recorded investment   Financial effects of
modification
 

Six months ended June 30, 2016

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

Commercial, financial, leasing, etc.

         

Principal deferral

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

Combination of concession types

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

Real estate:

         

Commercial

         

Principal deferral

   26     6,209     6,158     (51  —    

Interest rate reduction

   1     129     129     —      (25

Other

   1     4,723     4,447     (276  —    

Combination of concession types

   9     10,998     10,932     (66  (66

Residential builder and developer

         

Principal deferral

   3     23,905     22,958     (947  —    

Other commercial construction

         

Principal deferral

   1     250     250     —      —    

Combination of concession types

   1     124     124     —      —    

Residential

         

Principal deferral

   25     2,944     3,231     287    —    

Combination of concession types

   18     3,364     3,491     127    —    

Residential-limited documentation

         

Principal deferral

   3     276     333     57    —    

Combination of concession types

   5     1,312     1,379     67    (339

Consumer:

         

Home equity lines and loans

         

Principal deferral

   4     404     404     —      —    

Combination of concession types

   54     6,233     6,233     —      (563

Automobile

         

Principal deferral

   92     679     679     —      —    

Other

   38     55     55     —      —    

Combination of concession types

   8     85     85     —      (3

Other

         

Principal deferral

   55     925     925     —      —    

Other

   5     45     45     —      —    

Combination of concession types

   17     196     196     —      (32
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

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

-25-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

       Recorded investment   Financial effects of
modification
 

Six months ended June 30, 2015

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

Commercial, financial, leasing, etc.

         

Principal deferral

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

Interest rate reduction

   1     99     99     —      (19

Other

   2     8,991     8,883     (108  —    

Combination of concession types

   5     25,044     24,853     (191  (239

Real estate:

         

Commercial

         

Principal deferral

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

Combination of concession types

   5     2,082     2,073     (9  (105

Residential builder and developer

         

Principal deferral

   2     10,650     10,598     (52  —    

Residential

         

Principal deferral

   19     1,414     1,496     82    —    

Combination of concession types

   12     1,255     1,415     160    (178

Residential-limited documentation

         

Principal deferral

   1     161     161     —      —    

Combination of concession types

   3     634     636     2    (30

Consumer:

         

Home equity lines and loans

         

Principal deferral

   2     1,219     1,219     —      —    

Combination of concession types

   19     1,552     1,552     —      (225

Automobile

         

Principal deferral

   98     918     918     —      —    

Interest rate reduction

   7     137     137     —      (10

Other

   23     41     41     —      —    

Combination of concession types

   17     222     222     —      (11

Other

         

Principal deferral

   49     1,066     1,066     —      —    

Other

   7     80     80     —      —    

Combination of concession types

   23     267     267     —      (32
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

 

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31,June 30, 2016 and 2015 and for which there was a subsequent payment default during the three-monthsix-month periods ended March 31,June 30, 2016 and 2015, respectively, were not material.

The amount of foreclosed residential real estate property held by the Company was $169$158 million and $172 million at March 31,June 30, 2016 and December 31, 2015, respectively. There were $309$305 million and $315 million at March 31,June 30, 2016 and December 31, 2015, respectively, ofin loans secured by residential real estate that were in the process of foreclosure.

 

- 22 --26-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5.Borrowings

M&T had $515 million of fixed and variable rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31,June 30, 2016 that are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust. Under the Federal Reserve Board’s risk-based capital guidelines, beginning in 2016 none of the securities are includable in M&T’s Tier 1 regulatory capital, but do qualify for inclusion in Tier 2 regulatory capital.

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

The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2033) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval. On April 15, 2015, M&T redeemed all of the issued and outstanding Capital Securities issued by M&T Capital Trust I, M&T Capital Trust II and M&T Capital Trust III, and the related Junior Subordinated Debentures held by those respective trusts. In the aggregate, $323 million of Junior Subordinated Debentures were redeemed.

Also included in long-term borrowings are agreements to repurchase securities of $1.9 billion at each of March 31,June 30, 2016 and December 31, 2015. The agreements reflect various repurchase dates through 2020, however, the contractual maturities of the underlying investment securities extend beyond such repurchase dates. The agreements are subject to legally enforceable master netting arrangements, however, the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $2.1 billion and $2.0 billion at March 31,each of June 30, 2016 and December 31, 2015, respectively.

- 23 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

2015.

 

6.Shareholders’ equity

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

-27-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

6.Shareholders’ equity, continued

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

 

  Shares
issued and
outstanding
   Carrying value   Shares
issued and
outstanding
   Carrying value 
  (dollars in thousands)   (dollars in thousands) 

Series A (a)

        

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

   230,000    $230,000     230,000    $230,000  

Series C (a)

        

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

   151,500    $151,500     151,500    $151,500  

Series D (b)

        

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

   50,000    $500,000     50,000    $500,000  

Series E (c)

        

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

   350,000    $350,000  

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

   350,000    $350,000  

 

(a)Dividends, if declared, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 713,855 at June 30, 2016 and 719,175 at March 31, 2016 and December 31, 2015, respectively.2015.
(b)Dividends, if declared, are paid semi-annually at a rate of 6.875% per year. The shares arebecame redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.
(c)Dividends, if declared, are paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month LIBOR plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.

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

 

- 24 --28-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

7.Pension plans and other postretirement benefits

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

 

  Pension
benefits
   Other
postretirement
benefits
   Pension
benefits
   Other
postretirement
benefits
 
  Three months ended March 31   Three months ended June 30 
  2016   2015   2016   2015   2016   2015   2016   2015 
  (in thousands)   (in thousands) 

Service cost

  $6,382     6,000     458     200    $6,137     5,832     340     174  

Interest cost on projected benefit obligation

   20,883     17,775     1,205     650     20,822     17,732     1,281     652  

Expected return on plan assets

   (27,814   (23,575   — ��     —       (26,423   (23,476   —       —    

Amortization of prior service credit

   (825   (1,525   (350   (350   (789   (1,478   (330   (329

Amortization of net actuarial loss

   8,300     11,175     —       25     6,773     11,237     30     28  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net periodic benefit cost

  $6,926     9,850     1,313     525    $6,520     9,847     1,321     525  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

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

Service cost

  $12,519     11,832     798     374  

Interest cost on projected benefit obligation

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

Expected return on plan assets

   (54,237   (47,051   —       —    

Amortization of prior service credit

   (1,614   (3,003   (680   (679

Amortization of net actuarial loss

   15,073     22,412     30     53  
  

 

   

 

   

 

   

 

 

Net periodic benefit cost

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

 

   

 

   

 

   

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $17,690,000$15,274,000 and $16,750,000$13,346,000 for the three months ended March 31,June 30, 2016 and 2015, respectively, and $32,964,000 and $30,096,000 for the six months ended June 30, 2016 and 2015, respectively.

 

- 25 --29-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8.Earnings per common share

The computations of basic earnings per common share follow:

 

  

Three months ended

March 31

   

Three months ended

June 30

   

Six months ended

June 30

 
  2016   2015   2016   2015   2016   2015 
  

(in thousands,

except per share)

   (in thousands, except per share) 

Income available to common shareholders:

            

Net income

  $298,528     241,613    $336,031     286,688     634,559     528,301  

Less: Preferred stock dividends (a)

   (20,318   (20,318   (20,317   (20,317   (40,635   (40,635
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income available to common equity

   278,210     221,295     315,714     266,371     593,924     487,666  

Less: Income attributable to unvested stock-based compensation awards

   (2,466   (2,465   (2,746   (2,900   (5,227   (5,371
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income available to common shareholders

  $275,744     218,830    $312,968     263,471     588,697     482,295  

Weighted-average shares outstanding:

            

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

   160,220     133,542     159,164     133,818     159,692     133,680  

Less: Unvested stock-based compensation awards

   (1,486   (1,493   (1,362   (1,462   (1,424   (1,477
  

 

   

 

   

 

   

 

   

 

   

 

 

Weighted-average shares outstanding

   158,734     132,049     157,802     132,356     158,268     132,203  

Basic earnings per common share

  $1.74     1.66    $1.98     1.99     3.72     3.65  

 

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

 

- 26 --30-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8.Earnings per common share, continued

 

The computations of diluted earnings per common share follow:

 

  Three months ended
March 31
   

Three months ended

June 30

   

Six months ended

June 30

 
  2016   2015   2016   2015   2016   2015 
  

(in thousands,

except per share)

   (in thousands, except per share) 

Net income available to common equity

  $278,210     221,295    $315,714     266,371     593,924     487,666  

Less: Income attributable to unvested stock-based compensation awards

   (2,462   (2,458   (2,740   (2,890   (5,217   (5,353
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income available to common shareholders

  $275,748     218,837    $312,974     263,481     588,707     482,313  

Adjusted weighted-average shares outstanding:

            

Common and unvested stock-based compensation awards

   160,220     133,542     159,164     133,818     159,692     133,680  

Less: Unvested stock-based compensation awards

   (1,486   (1,493   (1,362   (1,462   (1,424   (1,477

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

   447     720     539     760     493     741  
  

 

   

 

   

 

   

 

   

 

   

 

 

Adjusted weighted-average shares outstanding

   159,181     132,769     158,341     133,116     158,761     132,944  

Diluted earnings per common share

  $1.73     1.65    $1.98     1.98     3.71     3.63  

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

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 2.82.7 million and 2.71.6 million common shares during the three-month periods ended March 31,June 30, 2016 and 2015, respectively, and 2.8 million and 2.1 million common shares during the six-month periods ended June 30, 2016 and 2015, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

- 27 --31-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9.Comprehensive income

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

 

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

Balance - January 1, 2016

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

Balance – January 1, 2016

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

Other comprehensive income before reclassifications:

                

Unrealized holding gains (losses), net

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

Unrealized holding gains, net

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

Foreign currency translation adjustment

  —      —      —     (83 (83 30   (53   —       —      —     (2,489 (2,489 871   (1,618
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total other comprehensive income (loss) before reclassifications

 (370 159,660    —     (83 159,207   (62,650 96,557     9,260     227,118    —     (2,489 233,889   (92,139 141,750  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

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

                

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

  —     968    —      —     968 (b)  (381 587     —       2,081    —      —     2,081(b)  (819 1,262  

Gains realized in net income

  —     (4  —      —     (4)(c)  1   (3   —       (268  —      —     (268)(c)  102   (166

Accretion of net gain on terminated cash flow hedges

  —      —      —     (39 (39)(d)  15   (24   —       —      —     (77 (77)(d)  30   (47

Amortization of prior service credit

  —      —     (1,175  —     (1,175)(e)  462   (713   —       —     (2,294  —     (2,294)(e)  902   (1,392

Amortization of actuarial losses

  —      —     8,300    —     8,300 (e)  (3,266 5,034     —       —     15,103    —     15,103(e)  (5,904 9,199  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total reclassifications

  —     964   7,125   (39 8,050   (3,169 4,881     —       1,813   12,809   (77 14,545   (5,689 8,856  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total gain (loss) during the period

 (370 160,624   7,125   (122 167,257   (65,819 101,438     9,260     228,931   12,809   (2,566 248,434   (97,828 150,606  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Balance - March 31, 2016

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

Balance – June 30, 2016

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

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

- 28 --32-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9.Comprehensive income, continued

 

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

Balance - January 1, 2015

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

Balance – January 1, 2015

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

Other comprehensive income before reclassifications:

                

Unrealized holding gains, net

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

Unrealized holding gains (losses), net

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

Foreign currency translation adjustment

  —      —      —     (3,732 (3,732 1,348   (2,384   —       —      —     (779 (779 261   (518

Gains on cash flow hedges

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

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total other comprehensive income(loss) before reclassifications

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

Total other comprehensive income (loss) before reclassifications

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

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

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

                

Amortization of unrealized holding losses on HTM securities

  —     739    —      —     739 (b)  (289 450  

Accretion of unrealized holding losses on HTM securities

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

Losses realized in net income

  —     98    —      —     98 (c)  (36 62     —       108    —      —     108(c)  (40 68  

Accretion of net gain on terminated cash flow hedges

  —      —      —     (24 (24)(d)  10   (14   —       —      —     (63 (63)(d)  25   (38

Amortization of prior service credit

  —      —     (1,875  —     (1,875)(e)  934   (941   —       —     (3,682  —     (3,682)(e)  1,640   (2,042

Amortization of actuarial losses

  —      —     11,200    —     11,200 (e)  (5,582 5,618     —       —     22,465    —     22,465(e)  (9,981 12,484  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total reclassifications

  —     837   9,325   (24 10,138   (4,963 5,175     —       1,697   18,783   (63 20,417   (8,977 11,440  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total gain (loss) during the period

 8,011   32,900   9,325   (2,303 47,933   (19,430 28,503     5,670     (83,905 18,783   611   (58,841 22,333   (36,508
 

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Balance - March 31, 2015

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

Balance – June 30, 2015

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

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

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

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

 

   

 

Investment securities

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

Balance - December 31, 2015

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

Net gain (loss) during period

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

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Balance - March 31, 2016

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

 

 

  

 

 

   

 

 

  

 

 

  

 

 

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

Balance – December 31, 2015

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

Net gain (loss) during period

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Balance – June 30, 2016

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

 

- 29 --33-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10.Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significantmaterial as of March 31,June 30, 2016.

The net effect of interest rate swap agreements was to increase net interest income by $10 million and $11 million for thethree-month periods ended March 31,June 30, 2016 and 2015, respectively, and $20 million and $22 million for the six-month periods ended June 30, 2016 and 2015, respectively.

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

 

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

March 31, 2016

       

June 30, 2016

       

Fair value hedges:

              

Fixed rate long-term borrowings (a)

  $1,400,000     1.4     4.42 1.59  $1,400,000     1.2     4.42 1.63
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

December 31, 2015

              

Fair value hedges:

              

Fixed rate long-term borrowings (a)

  $1,400,000     1.7     4.42 1.39  $1,400,000     1.7     4.42 1.39
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

 

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

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

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $18.9$20.1 billion and $18.4 billion at March 31,June 30, 2016 and December 31, 2015, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $2.8 billion$826 million and $1.6 billion at March 31,June 30, 2016 and December 31, 2015, respectively.

 

- 30 --34-


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   Asset derivatives   Liability derivatives 
  Fair value   Fair value   Fair value   Fair value 
  March 31,
2016
   December 31,
2015
   March 31,
2016
   December 31,
2015
   June 30,
2016
   December 31,
2015
   June 30,
2016
   December 31,
2015
 
  (in thousands)   (in thousands) 

Derivatives designated and qualifying as hedging instruments

                

Fair value hedges:

                

Interest rate swap agreements (a)

  $41,259     43,892    $—       —      $33,648     43,892     —       —    

Commitments to sell real estate loans (a)

   412     1,844     3,243     656     71     1,844     8,545     656  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
   41,671     45,736     3,243     656     33,719     45,736     8,545     656  

Derivatives not designated and qualifying as hedging instruments

                

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

   16,929     10,282     44     403     21,431     10,282     48     403  

Commitments to sell real estate loans (a)

   428     533     2,413     846     292     533     7,720     846  

Trading:

                

Interest rate contracts (b)

   329,739     203,517     278,981     153,723     401,512     203,517     345,681     153,723  

Foreign exchange and other option and futures contracts (b)

   17,807     8,569     16,888     7,022     7,975     8,569     6,860     7,022  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
   364,903     222,901     298,326     161,994     431,210     222,901     360,309     161,994  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total derivatives

  $406,574     268,637    $301,569     162,650    $464,929     268,637     368,854     162,650  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

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

 

- 31 --35-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

10.Derivative financial instruments, continued

 

  Amount of gain (loss) recognized   Amount of gain (loss) recognized 
  Three months ended
March 31, 2016
   Three months ended
March 31, 2015
   Three months ended
June 30, 2016
   Three months ended
June 30, 2015
 
  Derivative   Hedged item   Derivative   Hedged item   Derivative   Hedged item   Derivative   Hedged item 
  (in thousands)   (in thousands) 

Derivatives in fair value hedging relationships

          

Interest rate swap agreements:

                

Fixed rate long-term borrowings (a)

  $(2,633   1,870    $ (396   161    $(7,611   7,146     (9,354   8,952  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Derivatives not designated as hedging instruments

                

Trading:

                

Interest rate contracts (b)

  $974      $660      $5,782       1,772    

Foreign exchange and other option and futures contracts (b)

   1,212       2,789       2,457       1,621    
  

 

     

 

     

 

     

 

   

Total

  $2,186      $3,449      $8,239       3,393    
  

 

     

 

     

 

     

 

   

   Amount of gain (loss) recognized 
   Six months ended
June 30, 2016
   Six months ended
June 30, 2015
 
   Derivative   Hedged item   Derivative   Hedged item 
   (in thousands) 

Derivatives in fair value hedging relationships

        

Interest rate swap agreements:

        

Fixed rate long-term borrowings (a)

  $(10,244   9,016     (9,750   9,113  
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedging instruments

        

Trading:

        

Interest rate contracts (b)

  $6,756       2,432    

Foreign exchange and other option and futures contracts (b)

   3,669       4,410    
  

 

 

     

 

 

   

Total

  $10,425       6,842    
  

 

 

     

 

 

   

 

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

-36-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.Derivative financial instruments, continued

The Company has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $22$28 million and $18 million at March 31,June 30, 2016 and December 31, 2015, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

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

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $98$113 million and $59 million at March 31,June 30, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $95$108 million and $55 million at March 31,June 30, 2016 and December 31, 2015, respectively. The Company was required to post collateral relating to those positions of $84$102 million and $52 million at March 31,June 30, 2016 and December 31, 2015, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings,

- 32 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.Derivative financial instruments, continued

the counterparties toof the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on March 31,June 30, 2016 was $19$21 million, for which the Company had posted collateral of $13$17 million in the normal course of business. If the credit risk-related contingent features had been triggered on March 31,June 30, 2016, the maximum amount of additional collateral the Company would have been required to post withto counterparties was $6$4 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $24$14 million and $23 million at March 31,June 30, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $21$9 million and $19 million at March 31,June 30, 2016 and December 31, 2015, respectively. Counterparties posted collateral relating to those positions of $21$9 million and $22 million at March 31,June 30, 2016 and December 31, 2015, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative financial instruments cleared through clearinghouses at March 31,June 30, 2016 was a net liability position of $156$212 million and at December 31, 2015 was a net liability position of $50 million.

-37-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.Derivative financial instruments, continued

Collateral posted with clearinghouses was $204$280 million and $99 million at March 31,June 30, 2016 and December 31, 2015, respectively.

 

11.Variable interest entities and asset securitizations

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

As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Company’s consolidated financial statements. At each of March 31,June 30, 2016 and December 31, 2015, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet and recognized $24 million in other assets for its “investment”investment in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 5.

- 33 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

11.Variable interest entities and asset securitizations, continued

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.1 billion at each of March 31,June 30, 2016 and December 31, 2015. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Company’s maximum exposure to loss of its investments in such partnerships was $290$279 million, including $80$70 million of unfunded commitments, at March 31,June 30, 2016 and $295 million, including $78 million of unfunded commitments, at December 31, 2015. Contingent commitments to provide additional capital contributions to these partnerships were not material at March 31,June 30, 2016. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as a limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements. The Company’s investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company amortized $11 million and $10$22 million of its investments in qualified affordable housing projects to income tax expense during the three-month periodsthree months and six months ended March 31,June 30, 2016, and 2015, respectively, and recognized $14 million and $28

-38-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

11.Variable interest entities and asset securitizations, continued

million of tax credits and other tax benefits during eachthose respective periods. Similarly, for the three months and six months ended June 30, 2015, the Company amortized $11 million and $21 million, respectively, of its investments in qualified affordable housing projects to income tax expense and recognized $15 million and $29 million of tax credits and other tax benefits during those respective periods.

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

 

12.Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at March 31,June 30, 2016.

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

 

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

 

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

- 34 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

 

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

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

Trading account assets and liabilities

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

-39-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

same or similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.

Investment securities available for sale

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

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at March 31,June 30, 2016 and December 31, 2015. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR ranging from 4% to 10%, with a weighted-average of 8%, was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At March 31,June 30, 2016, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $28 million and $45$43 million, respectively, and at December 31, 2015 were $28 million and $47 million, respectively. Privately issued mortgage-backed securities and securities backed by trust preferred securities issued by financial institutions and other entities constituted all of the available-for-sale investment securities classified as Level 3 valuations.

- 35 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

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

Real estate loans held for sale

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

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

The Company enters into various commitments to originate real estate loans for sale and commitments to sell real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value on the consolidated balance sheet. The estimated fair values of such commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans to certain government-sponsored entities and other parties. The fair valuations of commitments to sell

-40-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

real estate loans generally result in a Level 2 classification. The estimated fair value of commitments to originate real estate loans for sale are adjusted to reflect the Company’s anticipated commitment expirations. The estimated commitment expirations are considered significant unobservable inputs contributing to the Level 3 classification of commitments to originate real estate loans for sale. Significant unobservable inputs used in the determination of estimated fair value of commitments to originate real estate loans for sale are included in the accompanying table of significant unobservable inputs to Level 3 measurements.

Interest rate swap agreements used for interest rate risk management

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

The following tables present assets and liabilities at June 30, 2016 and December 31, 2015 measured at estimated fair value on a recurring basis:

- 36 -

   Fair value
measurements at
June 30,
2016
   Level 1 (a)   Level 2 (a)   Level 3 
   (in thousands) 

Trading account assets

  $506,131     62,167     443,964     —    

Investment securities available for sale:

        

U.S. Treasury and federal agencies

   400,348     —       400,348     —    

Obligations of states and political subdivisions

   5,241     —       5,241     —    

Mortgage-backed securities:

        

Government issued or guaranteed

   11,267,278     —       11,267,278     —    

Privately issued

   57     —       —       57  

Collateralized debt obligations

   43,305     —       —       43,305  

Other debt securities

   114,771     —       114,771     —    

Equity securities

   87,974     59,647     28,327     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
   11,918,974     59,647     11,815,965     43,362  
  

 

 

   

 

 

   

 

 

   

 

 

 

Real estate loans held for sale

   602,019     —       602,019     —    

Other assets (b)

   55,442     —       34,011     21,431  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $13,082,566     121,814     12,895,959     64,793  
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading account liabilities

  $352,541     —       352,541     —    

Other liabilities (b)

   16,313     —       16,265     48  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $368,854     —       368,806     48  
  

 

 

   

 

 

   

 

 

   

 

 

 

-41-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

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

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

Trading account assets

  $467,987     69,689     398,298     —    

Investment securities available for sale:

        

U.S. Treasury and federal agencies

   202,192     —       202,192     —    

Obligations of states and political subdivisions

   5,448     —       5,448     —    

Mortgage-backed securities:

        

Government issued or guaranteed

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

Privately issued

   65     —       —       65  

Collateralized debt obligations

   45,040     —       —       45,040  

Other debt securities

   112,708     —       112,708     —    

Equity securities

   85,132     67,150     17,982     —    
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

Real estate loans held for sale

   396,764     —       396,764     —    

Other assets (b)

   59,028     —       42,099     16,929  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

 

Trading account liabilities

  $295,869     —       295,869     —    

Other liabilities (b)

   5,700     —       5,656     44  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $301,569     —       301,525     44  
  

 

 

   

 

 

   

 

 

   

 

 

 

- 37 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

 

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

Trading account assets

  $273,783     56,763     217,020     —    

Investment securities available for sale:

        

U.S. Treasury and federal agencies

   299,997     —       299,997     —    

Obligations of states and political subdivisions

   6,028     —       6,028     —    

Mortgage-backed securities:

        

Government issued or guaranteed

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

Privately issued

   74     —       —       74  

Collateralized debt obligations

   47,393     —       —       47,393  

Other debt securities

   118,880     —       118,880     —    

Equity securities

   83,671     65,178     18,493     —    
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

Real estate loans held for sale

   392,036     —       392,036     —    

Other assets (b)

   56,551     —       46,269     10,282  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

 

Trading account liabilities

  $160,745     —       160,745     —    

Other liabilities (b)

   1,905     —       1,502     403  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $162,650     —       162,247     403  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the threesix months ended March 31,June 30, 2016 and the year ended December 31, 2015.
(b)Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3).

 

- 38 --42-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31,June 30, 2016 were as follows:

 

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

Balance – January 1, 2016

  $74    $47,393   $9,879  

Balance – March 31, 2016

  $65     45,040   16,885  

Total gains (losses) realized/unrealized:

          

Included in earnings

   —       —      23,898(b)    —       —     35,430(b) 

Included in other comprehensive income

   —       (2,148)(c)   —       —       (1,070)(c)   —    

Sales

   —       —      —    

Settlements

   (9   (205  —       (8   (665  —    

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

   —       —      (16,892)(d)    —       —     (30,932)(d) 
  

 

   

 

  

 

   

 

   

 

  

 

 

Balance – March 31, 2016

  $65    $ 45,040   $16,885  

Balance – June 30, 2016

  $57     43,305   21,383  
  

 

   

 

  

 

   

 

   

 

  

 

 

Changes in unrealized gains included in earnings related to assets still held at March 31, 2016

  $ —      $—     $ 14,539(b) 

Changes in unrealized gains included in earnings related to assets still held at June 30, 2016

  $—       —     19,882(b) 
  

 

   

 

  

 

   

 

   

 

  

 

 

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

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

Balance – March 31, 2015

  $95     47,278    26,230  

Total gains realized/unrealized:

     

Included in earnings

   —       —      16,132(b) 

Included in other comprehensive income

   —       7,629(c)   —    

Sales

   —       —      —    

Settlements

   (7   (4,424  —    

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

   —       —      (31,156)(d) 
  

 

 

   

 

 

  

 

 

 

Balance – June 30, 2015

  $88     50,483    11,206  
  

 

 

   

 

 

  

 

 

 

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

  $—       —      6,330(b) 
  

 

 

   

 

 

  

 

 

 

 

- 39 --43-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

 

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the threesix months ended March 31,June 30, 2016 were as follows:

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

Balance – January 1, 2016

  $74     47,393    9,879  

Total gains (losses) realized/unrealized:

     

Included in earnings

   —       —      59,328(b) 

Included in other comprehensive income

   —       (3,218)(c)   —    

Settlements

   (17   (870  —    

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

   —       —      (47,824)(d) 
  

 

 

   

 

 

  

 

 

 

Balance – June 30, 2016

  $57     43,305    21,383  
  

 

 

   

 

 

  

 

 

 

Changes in unrealized gains included in earnings related to assets still held at June 30, 2016

  $—       —      20,661(b) 
  

 

 

   

 

 

  

 

 

 

-44-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

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

 

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

Balance – January 1, 2015

  $103    $50,316   $17,347    $103     50,316   17,347  

Total gains (losses) realized/unrealized:

     

Total gains realized/unrealized:

     

Included in earnings

   —       —      29,770(b)    —       —     45,902(b) 

Included in other comprehensive income

   —       (2,004)(c)   —       —       5,625(c)   —    

Settlements

   (8   (1,034  —       (15   (5,458  —    

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

   —       —      (20,887)(d)    —       —     (52,043)(d) 
  

 

   

 

  

 

   

 

   

 

  

 

 

Balance – March 31, 2015

  $95    $ 47,278   $26,230  

Balance – June 30, 2015

  $88     50,483   11,206  
  

 

   

 

  

 

   

 

   

 

  

 

 

Changes in unrealized gains included in earnings related to assets still held at March 31, 2015

  $ —      $—     $ 22,636(b) 
  

 

   

 

  

 

 

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

  $—       —      8,763(b) 

 

(a)The Company’s policy for transfers between fair value levels is to recognize the transfer as of the actual date of the event or change in circumstances that caused the transfer.
(b)Reported as mortgage banking revenues in the consolidated statement of income and includes the fair value of commitment issuances and expirations.
(c)Reported as net unrealized lossesgains (losses) on investment securities in the consolidated statement of comprehensive income.
(d)Transfers out of Level 3 consist of interest rate locks transferred to closed loans.

 

- 40 --45-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

 

The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The more significant of those assets follow.

Loans

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 10%15% to 90% at March 31,June 30, 2016. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Automobile collateral is typically valued by reference to independent pricing sources based on recent sales transactions of similar vehicles, and the related non-recurring fair value measurement adjustments have been classified as Level 2. Collateral values for other consumer installment loans are generally estimated based on historical recovery rates for similar types of loans. As these recovery rates are not readily observable by market participants, such valuation adjustments have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $226$242 million at March 31,June 30, 2016 ($127141 million and $99$101 million of which were classified as Level 2 and Level 3, respectively), $210 million at December 31, 2015 ($106 million and $104 million of which were classified as Level 2 and Level 3, respectively) and $101$147 million at March 31,June 30, 2015 ($6789 million and $34$58 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on March 31,June 30, 2016 were decreases of $4 million and $31 million for the three- and six-month periods ended June 30, 2016, respectively. Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on June 30, 2015 were decreases of $27$34 million and $8$42 million for the three-monththree- and six-month periods ended March 31, 2016 andJune 30, 2015, respectively.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $62$33 million and $11$13 million at March 31,June 30, 2016 and March 31, 2015, respectively. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three-month and six-month periods ended March 31,June 30, 2016 and 2015.

 

- 41 --46-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

 

Significant unobservable inputs to Level 3 measurements

The following tables present quantitative information about significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at March 31,June 30, 2016 and December 31, 2015:

 

  Fair value at
June 30, 2016
   Valuation
technique
   Unobservable
input/assumptions
   Range
(weighted-
average)
 
  (in thousands)             

Recurring fair value measurements

        

Privately issued mortgage–backed securities

  $57     
 
 
 
Two
independent
pricing
quotes
  
  
  
  
   —       —    

Collateralized debt obligations

   43,305     
 
Discounted
cash flow
  
  
   
 
Probability
of default
  
  
   10%-55% (30%)  
       Loss severity     100%  

Net other assets (liabilities)(a)

   21,383     
 
Discounted
cash flow
  
  
   
 
Commitment
expirations
  
  
   0%-93% (36%)  
  Fair value at
March 31,
2016
   

Valuation

technique

  

Unobservable

input/assumptions

  Range
(weighted-
average)
  Fair value at
December 31,
2015
   Valuation
technique
   Unobservable
input/assumptions
   Range
(weighted-
average)
 
  (in thousands)            (in thousands)             

Recurring fair value measurements

                

Privately issued mortgage–backed securities

  $65    Two independent pricing quotes  —    —    $74     
 
 
 
Two
independent
pricing
quotes
  
  
  
  
   —       —    

Collateralized debt obligations

   45,040    Discounted cash flow  Probability of default  10%-56% (31%)   47,393     
 
Discounted
cash flow
  
  
   
 
Probability
of default
  
  
   10%-56% (31%)  
      Loss severity  100%       Loss severity     100%  

Net other assets (liabilities) (a)

   16,885    Discounted cash flow  Commitment expirations  0%-66% (31%)   9,879     
 
Discounted
cash flow
  
  
   
 
Commitment
expirations
  
  
   0%-60% (39%)  
  Fair value at
December 31,
2015
   

Valuation

technique

  

Unobservable

input/assumptions

  Range
(weighted-
average)
  (in thousands)          

Recurring fair value measurements

        

Privately issued mortgage–backed securities

  $74    Two independent pricing quotes  —    —  

Collateralized debt obligations

��  47,393    Discounted cash flow  Probability of default  10%-56% (31%)
      Loss severity  100%

Net other assets (liabilities) (a)

   9,879    Discounted cash flow  Commitment expirations  0%-60% (39%)

 

(a)Other Level 3 assets (liabilities) consist of commitments to originate real estate loans.

Sensitivity of fair value measurements to changes in unobservable inputs

An increase (decrease) in the probability of default and loss severity for collateralized debt securities would generally result in a lower (higher) fair value measurement.

An increase (decrease) in the estimate of expirations for commitments to originate real estate loans would generally result in a lower (higher) fair value measurement. Estimated commitment expirations are derived considering loan type, changes in interest rates and remaining length of time until closing.

 

- 42 --47-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

 

Disclosures of fair value of financial instruments

The carrying amounts and estimated fair value for financial instrument assets (liabilities) are presented in the following table:

 

  March 31, 2016   June 30, 2016 
  Carrying
amount
 Estimated
fair value
 Level 1   Level 2 Level 3   Carrying
amount
 Estimated
fair value
 Level 1   Level 2 Level 3 
    (in thousands)     (in thousands) 

Financial assets:

              

Cash and cash equivalents

  $1,178,175   $1,178,175   $1,112,933    $65,242   $—      $1,284,442   1,284,442   1,216,801     67,641    —    

Interest-bearing deposits at banks

   9,545,181   9,545,181    —       9,545,181    —       8,474,839   8,474,839    —       8,474,839    —    

Trading account assets

   467,987   467,987   69,689     398,298    —       506,131   506,131   62,167     443,964    —    

Investment securities

   15,467,320   15,506,052   67,150     15,256,530   182,372     14,963,084   15,011,922   59,647     14,779,939   172,336  

Loans and leases:

              

Commercial loans and leases

   21,226,577   20,875,827    —       —     20,875,827     21,469,242   21,119,041    —       —     21,119,041  

Commercial real estate loans

   29,713,293   29,569,740    —       127,736   29,442,004     30,711,230   30,553,720    —       227,929   30,325,791  

Residential real estate loans

   25,299,638   25,386,240    —       4,590,667   20,795,573     24,530,249   24,738,004    —       4,673,968   20,064,036  

Consumer loans

   11,632,958   11,553,135    —       —     11,553,135     11,811,277   11,713,181    —       —     11,713,181  

Allowance for credit losses

   (962,752  —      —       —      —       (970,496  —      —       —      —    
  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

  

 

 

Loans and leases, net

   86,909,714   87,384,942    —       4,718,403   82,666,539     87,551,502   88,123,946    —       4,901,897   83,222,049  

Accrued interest receivable

   318,486   318,486    —       318,486    —       299,158   299,158    —       299,158    —    

Financial liabilities:

              

Noninterest-bearing deposits

  $(29,709,218 $(29,709,218  —      $(29,709,218  —      $(30,700,066 (30,700,066  —       (30,700,066  —    

Savings and interest-checking deposits

   (51,497,240 (51,497,240  —       (51,497,240  —       (51,126,237 (51,126,237  —       (51,126,237  —    

Time deposits

   (12,841,331 (12,879,619  —       (12,879,619  —       (12,630,277 (12,677,606  —       (12,677,606  —    

Deposits at Cayman Islands office

   (166,787 (166,787  —       (166,787  —       (193,523 (193,523  —       (193,523  —    

Short-term borrowings

   (1,766,826 (1,766,826  —       (1,766,826  —       (407,123 (407,123  —       (407,123  —    

Long-term borrowings

   (10,341,035 (10,338,217  —       (10,338,217  —       (10,328,751 (10,382,523  —       (10,382,523  —    

Accrued interest payable

   (80,605 (80,605  —       (80,605  —       (80,165 (80,165  —       (80,165  —    

Trading account liabilities

   (295,869 (295,869  —       (295,869  —       (352,541 (352,541  —       (352,541  —    

Other financial instruments:

              

Commitments to originate real estate loans for sale

  $16,885   $16,885    —      $—     $16,885    $21,383  �� 21,383    —       —     21,383  

Commitments to sell real estate loans

   (4,816 (4,816  —       (4,816  —       (15,902 (15,902  —       (15,902  —    

Other credit-related commitments

   (118,521 (118,521  —       —     (118,521   (125,630 (125,630  —       —     (125,630

Interest rate swap agreements used for interest rate risk management

   41,259   41,259    —       41,259    —       33,648   33,648    —       33,648    —    

 

- 43 --48-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

 

  December 31, 2015   December 31, 2015 
  Carrying
amount
 Estimated
fair value
 Level 1   Level 2 Level 3   Carrying
amount
 Estimated
fair value
 Level 1   Level 2 Level 3 
    (in thousands)       (in thousands)   

Financial assets:

              

Cash and cash equivalents

  $1,368,040   $1,368,040   $1,276,678    $91,362   $—      $1,368,040   1,368,040   1,276,678     91,362    —    

Interest-bearing deposits at banks

   7,594,350   7,594,350    —       7,594,350    —       7,594,350   7,594,350    —       7,594,350    —    

Trading account assets

   273,783   273,783   56,763     217,020    —       273,783   273,783   56,763     217,020    —    

Investment securities

   15,656,439   15,660,877   65,178     15,406,404   189,295     15,656,439   15,660,877   65,178     15,406,404   189,295  

Loans and leases:

              

Commercial loans and leases

   20,422,338   20,146,201    —       —     20,146,201     20,422,338   20,146,201    —       —     20,146,201  

Commercial real estate loans

   29,197,311   29,044,244    —       38,774   29,005,470     29,197,311   29,044,244    —       38,774   29,005,470  

Residential real estate loans

   26,270,103   26,267,771    —       4,727,816   21,539,955     26,270,103   26,267,771    —       4,727,816   21,539,955  

Consumer loans

   11,599,747   11,550,270    —       —     11,550,270     11,599,747   11,550,270    —       —     11,550,270  

Allowance for credit losses

   (955,992  —      —       —      —       (955,992  —      —       —      —    
  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

  

 

 

Loans and leases, net

   86,533,507   87,008,486    —       4,766,590   82,241,896     86,533,507   87,008,486    —       4,766,590   82,241,896  

Accrued interest receivable

   306,496   306,496    —       306,496    —       306,496   306,496    —       306,496    —    

Financial liabilities:

              

Noninterest-bearing deposits

  $(29,110,635 $(29,110,635  —      $(29,110,635  —      $(29,110,635 (29,110,635  —       (29,110,635  —    

Savings and interest-checking deposits

   (49,566,644 (49,566,644  —       (49,566,644  —       (49,566,644 (49,566,644  —       (49,566,644  —    

Time deposits

   (13,110,392 (13,135,042  —       (13,135,042  —       (13,110,392 (13,135,042  —       (13,135,042  —    

Deposits at Cayman Islands office

   (170,170 (170,170  —       (170,170  —       (170,170 (170,170  —       (170,170  —    

Short-term borrowings

   (2,132,182 (2,132,182  —       (2,132,182  —       (2,132,182 (2,132,182  —       (2,132,182  —    

Long-term borrowings

   (10,653,858 (10,639,556  —       (10,639,556  —       (10,653,858 (10,639,556  —       (10,639,556  —    

Accrued interest payable

   (85,145 (85,145  —       (85,145  —       (85,145 (85,145  —       (85,145  —    

Trading account liabilities

   (160,745 (160,745  —       (160,745  —       (160,745 (160,745  —       (160,745  —    

Other financial instruments:

              

Commitments to originate real estate loans for sale

  $9,879   $9,879    —      $—     $9,879    $9,879   9,879    —       —     9,879  

Commitments to sell real estate loans

   875   875    —       875    —       875   875    —       875    —    

Other credit-related commitments

   (122,334 (122,334  —       —     (122,334   (122,334 (122,334  —       —     (122,334

Interest rate swap agreements used for interest rate risk management

   43,892   43,892    —       43,892    —       43,892   43,892    —       43,892    —    

With the exception of marketable securities, certain off-balance sheet financial instruments and one-to-four family residential mortgage loans originated for sale, the Company’s financial instruments are not readily marketable and market prices do not exist. The Company, in attempting to comply with the provisions of GAAP that require disclosures of fair value of financial instruments, has not attempted to market its financial instruments to potential buyers, if any exist. Since negotiated prices in illiquid markets depend greatly upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. The following assumptions, methods and calculations were used in determining the estimated fair value of financial instruments not measured at fair value in the consolidated balance sheet.

Cash and cash equivalents, interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable

Due to the nature of cash and cash equivalents and the near maturity of interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable, the Company estimated that the carrying amount of such instruments approximated estimated fair value.

 

- 44 --49-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

12.Fair value measurements, continued

 

Investment securities

Estimated fair values of investments in readily marketable securities were generally based on quoted market prices. Investment securities that were not readily marketable were assigned amounts based on estimates provided by outside parties or modeling techniques that relied upon discounted calculations of projected cash flows or, in the case of other investment securities, which include capital stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York, at an amount equal to the carrying amount.

Loans and leases

In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses. However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans and leases would seek.

Deposits

Pursuant to GAAP, the estimated fair value ascribed to noninterest-bearing deposits, savings deposits and interest-checking deposits must be established at carrying value because of the customers’ ability to withdraw funds immediately. Time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to time deposits were based on discounted cash flow calculations using prevailing market interest rates based on the Company’s pricing at the respective date for deposits with comparable remaining terms to maturity.

The Company believes that deposit accounts have a value greater than that prescribed by GAAP. The Company feels, however, that the value associated with these deposits is greatly influenced by characteristics of the buyer, such as the ability to reduce the costs of servicing the deposits and deposit attrition which often occurs following an acquisition.

Long-term borrowings

The amounts assigned to long-term borrowings were based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for borrowings of similar terms and credit risk.

Other commitments and contingencies

As described in note 13, in the normal course of business, various commitments and contingent liabilities are outstanding, such as loan commitments, credit guarantees and letters of credit. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide for relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments, credit guarantees and letters of credit are competitive with other financial institutions operating in markets served by the Company. The Company believes that the carrying amounts, which are included in other liabilities, are reasonable estimates of the fair value of these financial instruments.

The Company does not believe that the estimated information presented herein is representative of the earnings power or value of the Company. The preceding analysis, which is inherently limited in depicting fair value, also does not consider any value associated with existing customer relationships nor the ability of the Company to create value through loan origination, deposit gathering or fee generating activities.

- 45 -


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be

-50-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.Fair value measurements, continued

precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

 

13.Commitments and contingencies

In the normal course of business, various commitments and contingent liabilities are outstanding. The following table presents the Company’s significant commitments. Certain of these commitments are not included in the Company’s consolidated balance sheet.

 

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

Commitments to extend credit

        

Home equity lines of credit

  $5,604,610     5,631,680    $5,569,936     5,631,680  

Commercial real estate loans to be sold

   184,198     57,597     112,251     57,597  

Other commercial real estate

   5,727,946     5,949,933     6,325,178     5,949,933  

Residential real estate loans to be sold

   520,694     488,621     638,037     488,621  

Other residential real estate

   281,735     212,619     286,848     212,619  

Commercial and other

   12,077,612     11,802,850     11,898,046     11,802,850  

Standby letters of credit

   3,330,241     3,330,013     3,343,858     3,330,013  

Commercial letters of credit

   45,798     55,559     46,748     55,559  

Financial guarantees and indemnification contracts

   2,773,590     2,794,322     2,926,230     2,794,322  

Commitments to sell real estate loans

   958,337     782,885     1,155,969     782,885  

Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, whereas commercial letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and a third party. The credit risk associated with commitments to extend credit and standby and commercial letters

of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.

Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in financial guarantees and

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

13.Commitments and contingencies, continued

indemnification contracts are loan principal amounts sold with recourse in conjunction with the Company’s involvement in the Fannie Mae Delegated Underwriting and Servicing program. The Company’s maximum credit risk for

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

13.Commitments and contingencies, continued

recourse associated with loans sold under thisthat program totaled approximately $2.6 billion and $2.5 billion at March 31,June 30, 2016 and December 31, 2015, respectively.

Since many loan commitments, standby letters of credit, and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows.

The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the fair value of real estate loans held for sale. Such commitments are considered derivatives and along with commitments to originate real estate loans to be held for sale are generally recorded in the consolidated balance sheet at estimated fair market value.

The Company also has commitments under long-term operating leases.

The Company is contractually obligated to repurchase previously sold residential real estate loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan documentation. When required to do so, the Company may reimburse loan purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues by an estimate for losses related to its obligations to loan purchasers. The amount of those charges is based on the volume of loans sold, the level of reimbursement requests received from loan purchasers and estimates of losses that may be associated with previously sold loans. Subject toNevertheless, given the outcome of the matter discussed in the following paragraph, at March 31,June 30, 2016, management believes that any further liability arising out of the Company’s obligation to loan purchasers iswas not considered material to the Company’s consolidated financial position.

The Company iswas the subject of an investigation by government agencies relating to the origination of Federal Housing Administration (“FHA”) insured residential home loans and residential home loans sold to Freddie Mac and Fannie Mae. A number of other U.S. financial institutions have announced similar investigations. Regarding FHA loans, the U.S. Department of Housing and Urban Development (“HUD”) Office of Inspector General and the U.S. Department of Justice (collectively, the “Government”) are investigatinginvestigated whether the Company complied with underwriting guidelines concerning certain loans where HUD paid FHA insurance claims. The Company is fully cooperatingcooperated with the investigation. The Government has advised the Company that based upon its review of a sample of loans for which an FHA insurance claim was paid by HUD, some of the loans dodid not meet underwriting guidelines. The Company, based on its own review of the sample, doesdid not agree with the sampling methodology and loan analysis employed by the Government. Regarding loans originated by the Company and sold to Freddie Mac and Fannie Mae, the investigation concernsconcerned whether the mortgages sold to Freddie Mac and Fannie Mae complycomplied with applicable underwriting guidelines. The Company is also cooperatingcooperated with that portion of the investigation. The investigation could leadIn order to claims bybring those investigations to a close, M&T Bank entered into a settlement agreement with the Government under which M&T Bank paid $64 million on May 12, 2016, without admitting liability. As a result, on May 20, 2016, a Joint Stipulation of Dismissal was filed with the False Claims Act andUnited States District Court for the Financial Institutions Reform, Recovery, and Enforcement ActWestern District of 1989, which allow treble and other special damages substantially in excess of actual losses. Remedies in these proceedings or settlements may include restitution, fines, penalties, or alterations in the Company’s business practices.New York. The Company and the Government continue settlement discussions regarding the investigation and although progress has been made, the parties have not yet reached a definitive agreement. Based upon the current status of these negotiations, management expects that this potential settlement shoulddid not have a material impact on the Company’s consolidated financial condition or results of operations in future periods.the three-month or six-month periods ended June 30, 2016.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

13.Commitments and contingencies, continued

 

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Company’s liabilities and contingencies in connection with such proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

 

14.Segment information

Reportable segments have been determined based upon the Company’s internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.

The financial information of the Company’s segments was compiled utilizing the accounting policies described in note 22 of Notes to Financial Statements in the 2015 Annual Report. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. EffectiveAs disclosed in the 2015 Annual Report, effective July 1, 2015, the Company changed its internal profitability reporting to move a builder and developer lending unit from the Residential Mortgage Banking segment to the Commercial Real Estate segment. Accordingly, financial information presented herein for the three-month periodand six-month periods ended March 31,June 30, 2015 hashave been reclassified to conform to the current presentation. As a result, total revenues and net income decreased in the Residential Mortgage Banking segment and increased in the Commercial Real Estate segment by $6 million and $3 million, respectively, for the three-month period ended June 30, 2015 and by $12 million and $5 million, respectively, for the six-month period ended June 30, 2015 from that which was previously reported. During the second quarter of 2016, the Company revised its funds transfer pricing allocation related to the residential real estate loans obtained in the acquisition of Hudson City, retroactive to November 1, 2015. Accordingly, financial information for the three-month period ended March 31, 20152016 has been reclassified to conform to the current methodology. As a result, total revenues and net income increased in the Discretionary Portfolio segment and decreased in the “All Other” category by $25 million and $15 million, respectively, for the three months ended March 31, 2016 from that which was previously reported.

As also described in note 22 in the 2015 Annual Report, neither goodwill nor core deposit and other intangible assets (and the amortization charges associated with such assets) resulting from acquisitions of financial institutions have been allocated to the Company’s reportable segments, but are included in the “All Other” category. The Company does, however, assign such intangible assets to business units for purposes of testing for impairment.

 

- 48 --53-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

14.Segment information, continued

 

Information about the Company’s segments is presented in the following table:

 

  Three months ended June 30 
  Three months ended March 31   2016 2015 
  2016 2015   Total
revenues(a)
   Inter-
segment
revenues
 Net
income
(loss)
 Total
revenues(a)
   Inter-
segment
revenues
 Net
income
(loss)
 
  Total
revenues(a)
   Inter-
segment
revenues
 Net
income
(loss)
 Total
revenues(a)
   Inter-
segment
revenues
 Net
income
(loss)
   (in thousands) 
  (in thousands) 

Business Banking

  $113,689     991   25,448   $108,560     1,045   24,811    $114,360     1,197   22,747   111,131     1,122   25,354  

Commercial Banking

   253,617     1,056   101,327   246,581     1,085   96,423     265,481     911   105,392   257,257     1,099   108,081  

Commercial Real Estate

   177,380     387   80,529   169,021     82   82,591     192,175     449   84,088   185,410     427   82,598  

Discretionary Portfolio

   86,835     (14,323 39,988   15,474     (5,443 5,954     98,460     (14,608 46,225   20,477     (5,376 10,756  

Residential Mortgage Banking

   96,935     19,660   17,077   105,757     11,387   29,460     103,882     21,244   19,980   105,568     12,436   24,852  

Retail Banking

   339,046     3,014   63,288   300,391     3,137   68,888     345,665     3,132   71,497   305,573     3,259   68,806  

All Other

   225,395     (10,785 (29,129 154,007     (11,293 (66,514   192,050     (12,325 (13,898 194,739     (12,967 (33,759
  

 

   

 

  

 

  

 

   

 

  

 

 
  

 

   

 

  

 

  

 

   

 

  

 

 

Total

  $1,292,897     —     298,528   $1,099,791     —     241,613    $1,312,073     —     336,031   1,180,155     —     286,688  
  

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

 
  Six months ended June 30 
  2016 2015 
  Total
revenues(a)
   Inter-
segment
revenues
 Net
income
(loss)
 Total
revenues(a)
   Inter-
segment
revenues
 Net
income
(loss)
 
  (in thousands) 

Business Banking

  $228,049     2,188   48,195   219,691     2,167   50,165  

Commercial Banking

   519,098     1,967   206,719   503,838     2,184   204,504  

Commercial Real Estate

   369,555     836   164,617   354,431     509   165,189  

Discretionary Portfolio

   209,804     (28,931 100,749   35,951     (10,819 16,710  

Residential Mortgage Banking

   200,817     40,904   37,057   211,325     23,823   54,312  

Retail Banking

   684,711     6,146   134,785   605,964     6,396   137,694  

All Other

   392,936     (23,110 (57,563 348,746     (24,260 (100,273
  

 

   

 

  

 

  

 

   

 

  

 

 

Total

  $2,604,970     —     634,559   2,279,946     —     528,301  
  

 

   

 

  

 

  

 

   

 

  

 

 

 

   Average total assets 
   Three months ended
March 31
  Year ended
December 31
 
   2016   2015  2015 
   (in millions) 

Business Banking

  $5,424     5,300    5,339  

Commercial Banking

   24,838     23,683    24,143  

Commercial Real Estate

   19,839     18,334(b)   18,827  

Discretionary Portfolio

   42,509     22,714    26,648  

Residential Mortgage Banking

   2,647     3,197(b)   2,918  

Retail Banking

   11,568     10,788    11,035  

All Other

   16,427     11,876    12,870  
  

 

 

   

 

 

  

 

 

 

Total

  $123,252     95,892    101,780  
  

 

 

   

 

 

  

 

 

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14.Segment information, continued

   Average total assets 
   

Six months ended

June 30

  Year ended
December 31
2015
 
   2016   2015  
   (in millions) 

Business Banking

  $5,440     5,313    5,339  

Commercial Banking

   25,195     23,997    24,143  

Commercial Real Estate

   20,116     18,514(b)   18,827  

Discretionary Portfolio

   41,900     23,029    26,648  

Residential Mortgage Banking

   2,587     3,090(b)   2,918  

Retail Banking

   11,640     10,830    11,035  

All Other

   16,601     11,977    12,870  
  

 

 

   

 

 

  

 

 

 

Total

  $123,479     96,750    101,780  
  

 

 

   

 

 

  

 

 

 

 

(a)

Total revenues are comprised of net interest income and other income. Net interest income is the difference between taxable-equivalent interest earned on assets and interest paid on liabilities owed by a segment and a funding charge (credit) based on the Company’s internal funds transfer pricing and allocation methodology. Segments are charged a cost to fund any assets (e.g. loans) and are paid a funding credit for any funds provided

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14.Segment information, continued

(e.g. (e.g. deposits). The taxable-equivalent adjustment aggregated $6,332,000$6,522,000 and $5,838,000$6,020,000 for the three-month periods ended March 31,June 30, 2016 and 2015, respectively, and $12,854,000 and $11,858,000 for the six-month periods ended June 30, 2016 and 2015, respectively, and is eliminated in “All Other” total revenues. Intersegment revenues are included in total revenues of the reportable segments. The elimination of intersegment revenues is included in the determination of “All Other” total revenues.
(b)Average assets of the Commercial Real Estate and Residential Mortgage Banking segments for the three-monthsix-month period ended March 31,June 30, 2015 differ by approximately $315$323 million from the previously reported balances reflecting the noted change in the Company’s internal profitability reporting to move a builder and developer lending unit from the Residential Mortgage Banking segment to the Commercial Real Estate segment.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

15.Relationship with Bayview Lending Group LLC and Bayview Financial Holdings, L.P.

M&T holds a 20% minority interest in Bayview Lending Group LLC (“BLG”), a privately-held commercial mortgage company. M&T recognizes income or loss from BLG using the equity method of accounting. The carrying value of that investment was $20$17 million at March 31,June 30, 2016.

Bayview Financial Holdings, L.P. (together with its affiliates, “Bayview Financial”), a privately-held specialty mortgage finance company, is BLG’s majority investor. In addition to their common investment in BLG, the Company and Bayview Financial conduct other business activities with each other. The Company has obtained loan servicing rights for mortgage loans from BLG and Bayview Financial having outstanding principal balances of $4.0$3.8 billion and $4.1 billion at March 31,June 30, 2016 and December 31, 2015, respectively. Revenues from those servicing rights were $5 million and $6 million during the three-month periodsthree months ended March 31,June 30, 2016 and 2015, respectively, and $10 million and $12 million for the six months ended June 30, 2016 and 2015, respectively. The Company sub-services residential real estatemortgage loans for Bayview Financial having outstanding principal balances totaling $36.3$34.5 billion and $37.7 billion at March 31,June 30, 2016 and December 31, 2015, respectively. Revenues earned for sub-servicing loans for Bayview Financial were $23$25 million and $35$30 million for the three-month periods ended March 31,June 30, 2016 and 2015, respectively, and $48 million and $65 million for the six-month periods ended June 30, 2016 and 2015, respectively. In addition, the Company held $175$169 million and $181 million of mortgage-backed securities in its held-to-maturity portfolio at March 31,June 30, 2016 and December 31, 2015, respectively, that were securitized by Bayview Financial.

 

16.Sale of trust accounts

In April 2015, the Company sold the trade processing business within the retirement services division of its Institutional Client Services business. That sale resulted in an after-tax gain of $23 million ($45 million pre-tax) that reflected the allocation of approximately $11 million of previously recorded goodwill to the divested business. Revenues of the sold business had been included in “trust income” and were $9 million during the three months ended March 31, 2015. There were no revenues from the sold business recognized during the three months ended June 30, 2015 or thereafter. After considering related expenses, net income attributable to the business that was sold was not material to the consolidated results of operations of the Company during the first quarterin any of 2015.those periods.

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Net income for M&T Bank Corporation (“M&T”) in the firstsecond quarter of 2016 was $299$336 million, or $1.73 of dilutedcompared with $287 million in the year-earlier quarter. Diluted earnings per common share compared with $242 million or $1.65for each of diluted earnings per common share inthose periods were $1.98. During the initial 2015 quarter. During the fourth quarter of 2015,2016, net income totaled $271$299 million or $1.65$1.73 of diluted earnings per common share. Basic earnings per common share were $1.74$1.98 in the recent quarter, compared with $1.66$1.99 in the second quarter of 2015 and $1.65$1.74 in the first quarter of 2016. For the first half of 2016, net income totaled $635 million or $3.71 of diluted earnings per common share, compared with $528 million or $3.63 of diluted earnings per common share in the year-earlier period. Basic earnings per common share for the six-month periods ended June 30, 2016 and fourth quarters of 2015 were $3.72 and $3.65, respectively.

The annualized rate of return on average total assets for M&T and its consolidated subsidiaries (“the Company”) in the initial 2016recent quarter was .97%1.09%, compared with 1.02%1.18% in the year-earlier quarter and .93%.97% in the fourthfirst quarter of 2015.2016. The annualized rate of return on average common shareholders’ equity was 7.44%8.38% in the first three monthssecond quarter of 2016, compared with 7.99%9.37% and 7.22%7.44% in the three-month periods ended June 30, 2015 and March 31, 2016, respectively. During the six-month period ended June 30, 2016, the annualized rates of return on average assets and average common shareholders’ equity were 1.03% and 7.91%, respectively, compared with 1.10% and 8.69%, respectively, in the first half of 2015.

On June 29, 2016, M&T announced that the Federal Reserve did not object to M&T’s proposed 2016 Capital Plan. That capital plan includes the repurchase of up to $1.15 billion of common shares during the four-quarter period starting on July 1, 2016 and fourth quartersan increase in the quarterly common stock dividend in the first quarter of 2017 of up to $.05 per share to $.75 per share. M&T may also continue to pay dividends and interest on other equity and debt instruments included in regulatory capital, including preferred stock, trust preferred securities and subordinated debt that were outstanding at December 31, 2015, respectively.consistent with the contractual terms of those instruments. Dividends are subject to declaration by M&T’s Board of Directors. Furthermore, on July 19, 2016, M&T’s Board of Directors authorized a new stock repurchase program to repurchase up to $1.15 billion of shares of M&T’s common stock subject to all applicable regulatory limitations, including those set forth in M&T’s 2016 Capital Plan.

On November 1, 2015, M&T completed its acquisition of Hudson City Bancorp, Inc. (“Hudson City”). Immediately following completion of the merger, Hudson City Savings Bank merged with and into M&T Bank, the principal bank subsidiary of M&T. Pursuant to the merger agreement, M&T paid cash consideration of $2.1 billion and issued 25,953,950 shares of M&T common stock in exchange for Hudson City shares outstanding at the time of acquisition. Assets acquired totaled approximately $36.7 billion, including $19.0 billion of loans and leases (including approximately $234 million of commercial real estate loans, $18.6 billion of residential real estate loans and $162 million of consumer loans). Liabilities assumed aggregated $31.5 billion, including $17.9 billion of deposits and $13.2 billion of borrowings. Immediately following the acquisition, the Company restructured its balance sheet by selling $5.8 billion of investment securities obtained in the acquisition and repaying $10.6 billion of borrowings assumed in the transaction. The common stock issued added $3.1 billion to M&T’s common shareholders’ equity. In connection with the acquisition, the Company recorded $1.1 billion of goodwill and $132 million of core deposit intangible asset.

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Supplemental Reporting of Non-GAAP Results of Operations

M&T consistently provides supplemental reporting of its results on a “net operating” or “tangible” basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and expenses associated with merging acquired operations into the Company, since such items are considered by management to be “nonoperating” in nature. Those merger-related expenses generally consist of professional services and other temporary help fees associated with the actual or planned conversion of systems and/or integration of operations; costs related to branch and office consolidations; costs related to termination of existing contractual arrangements to purchase various services; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; severance; incentive compensation costs; travel costs; and printing, supplies and other costs of completing the transactions and commencing operations in new markets and offices. Those acquisition and integration-related expenses (herein referred to as merger-related expenses) totaled $13 million ($8 million after-tax effect) in the second quarter of 2016 ($.05 per diluted common share), compared with $23 million ($14 million after-tax effect) in the first quarter of 2016 ($.09 per diluted common share), compared with $97 million ($61 million after-tax effect) in the fourth quarter of 2015 ($.40 per diluted common share). There were no merger-related expenses in the first quarterhalf of 2015. Reflected in merger-related expenses in the fourth quarter of 2015 was a provision for credit losses of $21 million. GAAP

- 51 -


provides that an allowance for credit losses associated with probable incurred losses on loans acquired at a premium be recognized. Given the recognition of such losses above and beyond the impact of forecasted losses used in determining the fair value of acquired loans, the Company considers that provision to be a merger-related expense. Although “net operating income” as defined by M&T is not a GAAP measure, M&T’s management believes that this information helps investors understand the effect of acquisition activity in reported results.

Net operating income during the second quarter of 2016 aggregated $351 million, compared with $290 million in the second quarter of 2015 and $320 million in the initial quarter of 2016 compared with $246 million in the first quarter of 2015.quarter. Diluted net operating earnings per common share were $2.07 for the recent quarter, were $1.87, compared with $1.68$2.01 in the year-earlier quarter. Netquarter and $1.87 in the first quarter of 2016. For the first six months of 2016, net operating income and diluted net operating earnings per common share were $338$671 million and $2.09,$3.94, respectively, compared with $536 million and $3.69, respectively, in the finalsimilar 2015 quarter.period.

Net operating income in the firstsecond quarter of 2016 expressed as an annualized rate of return on average tangible assets was 1.09%1.18%, compared with 1.08%1.24% and 1.21%1.09% in the firstsecond quarter of 2015 and fourth quarters of 2015,the initial 2016 quarter, respectively. Net operating income represented an annualized return on average tangible common equity of 11.62%12.68% in the recent quarter, compared with 11.90%13.76% and 11.62% in the year-earlier quarterquarters ended June 30, 2015 and 13.26%March 31, 2016, respectively. For the first six months of 2016, net operating income represented an annualized return on average tangible assets and average tangible common shareholders’ equity of 1.14% and 12.15%, respectively, compared with 1.16% and 12.85%, respectively, in the fourth quarter of 2015.corresponding 2015 period.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in table 2.

Taxable-equivalent Net Interest Income

Taxable-equivalent net interest income was $878$870 million in the firstrecent quarter, of 2016, up 32%26% from $665$689 million in the year-earlier period.second quarter of 2015. That growth resulted predominantly from the impact of higher average earning assets, which rose $26.0$24.5 billion, or 31%28%, to $111.2$111.9 billion in the recent quarter from $85.2$87.3 billion in the firstsecond quarter of 2015. The higher level of average earning assets in the initialsecond quarter of 2016 quarter reflected a $21.0$20.5 billion increase in average loans and leases (due predominantly to the Hudson City acquisition, which added $18.1$17.2 billion to average loans), a $3.1$3.4 billion increase in average interest-bearing deposits at the Federal Reserve Bank of New York and a $2.0 billion$720 million rise in average balances of investment securities. As compared with 2015’s initialsecond quarter, there was a one4 basis point (hundredth

-58-


(hundredths of one percent) wideningnarrowing in the recent quarter of the Company’s net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets, was due, in part, to higher rates paid on interest-bearing deposits that reflect time deposits obtained in the recent quarter to 3.18%.acquisition of Hudson City. Taxable-equivalent net interest income in the recent quarter rose $65declined $8 million from the $813$878 million recorded in the fourthfirst quarter of 2015,2016, largely due to the full-quarter impact of the Hudson City transaction, and a 65 basis point wideningnarrowing of the net interest margin. Contributing to that widening wasnarrowing were lower yields earned on investment securities, higher rates paid on interest-bearing deposits, including the full-quarter impact of time deposits in the increase in interest rates initiated byformer Hudson City markets, and increased balances on deposit at the Federal Reserve Bank of New York. While those low-yield deposits add to interest income, they have the impact of lowering the reported net interest margin.

For the first half of 2016, taxable-equivalent net interest income was $1.75 billion, up 29% from $1.35 billion in mid-Decemberthe first six months of 2015. That increase was largely attributable to higher average earning assets, which rose $25.3 billion, or 29%, to $111.5 billion in the first six months of 2016 from $86.3 billion in the first half of 2015. Loans obtained in the acquisition of Hudson City added $17.6 billion of average earning assets in the first half of 2016. Partially offsetting the rise in earning assets was a 2 basis point narrowing of the net interest margin to 3.15% in 2016 from 3.17% in 2015. That narrowing reflected higher rates paid on interest-bearing time deposits, largely related to deposits obtained in the acquisition of Hudson City.

Average loans and leases rose $21.0$20.5 billion or 32%30% to $87.6 billion in the initial 2016 quarter from $66.6 billion in the first quarter of 2015. Commercial loans and leases averaged $20.7 billion in the first quarter of 2016, up $1.3 billion or 6% from $19.5 billion in the first quarter of 2015. Average commercial real estate loans increased 7% or $1.8 billion to $29.4$88.2 billion in the recent quarter from $27.6$67.7 billion in the initial 2015second quarter of 2015. Average commercial loans and leases were $21.4 billion in the second quarter of 2016, up $1.4 billion, or 7%, from $20.0 billion in the year-earlier quarter. Commercial real estate loans averaged $30.1 billion in the recent quarter, an increase of $1.9 billion, or 7%, from $28.2 billion in the second quarter of 2015. Reflecting average balances of $17.7$16.8 billion of loans obtained in the Hudson City acquisition, average residential real estate loans increased to $25.9$24.9 billion in the initialsecond quarter of 2016 from $8.6$8.4 billion in the first quarter of 2015. Included in those amounts were residentialsimilar 2015 quarter. Residential real estate loans held for sale which averaged $323$308 million in the recent quarter and $387$437 million in the year-earlier quarter. Average consumer loans and leases totaled $11.6$11.7 billion in the recent quarter, $671 million or 6% higher than $11.0 billion in the corresponding quarter of 2015. That growth reflects a $566 million increase in the average balance of automobile loans.

Average loan and lease balances in the recent quarter rose $572 million from the first quarter of 2016, up $620 million or 6% from $11.0 billion in the year-earlier quarter predominantly due to growth in average automobile loan balances.

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2016. Average loan balances in the first quarter of 2016 increased $6.5 billion from $81.1 billion in the fourth quarter of 2015. Average outstanding commercial loan and lease balances rose $497increased $733 million, or 4%, average commercial real estate loan balances increased $709 million, or 2%, and average balances of commercial real estateconsumer loans increased $452$131 million, or 2%1%, while average residential real estate loan balances were up $5.5loans declined $1.0 billion, or 27%4%, and average outstanding consumer loans increased $35 million from the final 20152016’s first quarter. The growthdecrease in theaverage residential real estate loan category resulted from the full-quarter impactloans was attributable to paydowns of loans obtained in the acquisition of Hudson City.City acquisition. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.

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AVERAGE LOANS AND LEASES

(net of unearned discount)

Dollars in millions

 

      Percent increase 
      

Percent increase

(decrease) from

       (decrease) from 
  1st Qtr.
2016
   1st Qtr.
2015
 4th Qtr.
2015
   2nd Qtr.
2016
   2nd Qtr.
2015
 1st Qtr.
2016
 

Commercial, financial, etc.

  $20,717     6 2  $21,450     7 4

Real estate - commercial

   29,426     7   2  

Real estate - consumer

   25,859     202   27  

Real estate – commercial

   30,134     7   2  

Real estate – consumer

   24,858     194   (4

Consumer

          

Automobile

   2,573     27   5     2,676     27   4  

Home equity lines and loans

   5,903     (1  —       5,823     (1 (1

Other

   3,106     5   (2   3,214     6   3  
  

 

   

 

  

 

   

 

   

 

  

 

 

Total consumer

   11,582     6    —       11,713     6   1  
  

 

   

 

  

 

   

 

   

 

  

 

 

Total

  $87,584     32 8  $88,155     30 1
  

 

   

 

  

 

   

 

   

 

  

 

 

For the first six months of 2016, average loans and leases totaled $87.9 billion, $20.7 billion, or 31%, higher than in the year-earlier period. The most significant factors contributing to that increase were the residential real estate loans obtained in the Hudson City acquisition and growth in the commercial real estate loan and commercial loan and lease portfolios.

The investment securities portfolio averaged $15.3$14.9 billion in the recentsecond quarter of 2016, up $2.0 billion$720 million, or 15%5%, from $13.4$14.2 billion in the initialyear-earlier quarter. Average balances of investment securities declined $434 million, or 3%, from $15.3 billion averaged in the first quarter of 2015. Investment2016. For the first six months of 2016 and 2015, investment securities averaged $15.8$15.1 billion in the fourth quarter of 2015.and $13.8 billion, respectively. The increaseincreases from the year-earlier quarter reflectsperiods reflect mortgage-backed securities retained from the acquisition of Hudson City and the net effect of purchases, partially offset by maturities and paydowns of mortgage-backed securities. The Company purchased approximately $3.5 billion of Fannie Mae and Ginnie Mae securities that were added to the investment securities portfolio during 2015, and another $305 million of Fannie Mae and Ginnie Maesimilar securities that were purchased during the first quarter of 2016, and $200 million of U.S. Treasury notes during the second quarter of 2016. Those purchases reflect increased holdings of investment securities to satisfy the requirements of the U.S. version of the Basel Committee’s Liquidity Coverage Ratio requirements (“LCR”) that became effective in January 2016.

The investment securities portfolio is largely comprised of residential mortgage-backed securities, debt securities issued by municipalities, trust preferred securities issued by certain financial institutions, and shorter-term U.S. Treasury and federal agency notes. When purchasing investment securities, the Company also considers its liquidity position and overall interest-rate risk profile as well as the adequacy of expected returns relative to risks assumed, including prepayments. In managing its investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio in connection with a business combination. The Hudson City acquisition added approximately $7.9 billion to the investment securities portfolio on the November 1, 2015 acquisition date. As noted earlier, immediately following the acquisition of Hudson City, the Company restructured its balance sheet by selling $5.8 billion of those securities.

The Company regularly reviews its investment securities for declines in value below amortized cost that might be characterized as “other than temporary.” There were no other-than-temporary impairment charges recognized in either of the first quarters ofsix-month periods ended June 30, 2016 and 2015 or in the final 2015 quarter.2015. Additional information about the investment securities portfolio is included in notes 3 and 12 of Notes to Financial Statements.

 

- 53 --60-


Other earning assets include interest-bearing deposits at the Federal Reserve Bank of New York and other banks, trading account assets and federal funds sold. Those other earning assets in the aggregate averaged $8.3$8.8 billion in the recently completed quarter, compared with $5.2$5.5 billion and $6.7$8.3 billion in the first and fourth quarterssecond quarter of 2015 and the first quarter of 2016, respectively. Interest-bearing deposits at banks averaged $8.7 billion in the second quarter of 2016, $5.3 billion in the year-earlier period and $8.2 billion $5.1 billion and $6.6 billion duringin the three-monthfirst quarter of 2016. For the six-month periods ended March 31,June 30, 2016 March 31,and 2015, and December 31, 2015, respectively. The rise in average balances of interest-bearing deposits at banks in the recent quarter as compared with the year-earlier quarterwere $8.5 billion and the fourth quarter of 2015 was due, in part, to the Company’s decision to maintain higher balances at the Federal Reserve Bank of New York rather than reinvesting in other highly liquid assets due to the current interest rate environment.$5.2 billion, respectively. The amounts of investment securities and other earning assets held by the Company are influenced by such factors as demand for loans, which generally yield more than investment securities and other earning assets, ongoing repayments, the levels of deposits, and management of liquidity (including the LCR) and balance sheet size and resulting capital ratios.

As a result of the changes described herein, average earning assets totaledaggregated $111.9 billion in the recent quarter, compared with $87.3 billion in the corresponding quarter of 2015 and $111.2 billion in the firstinitial quarter of 2016. Average earning assets totaled $111.5 billion and $86.3 billion during the six-month periods ended June 30, 2016 compared with $85.2 billion in the year-earlier quarter and $103.6 billion in the fourth quarter of 2015.2015, respectively.

The most significant source of funding for the Company is core deposits. The Company considers noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and time deposits of $250,000 or less as core deposits. The Company’s branch network is its principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Average core deposits totaled $91.5 billion in the second quarter of 2016, up 28% from $71.2 billion in the year-earlier quarter and 2% higher than $89.7 billion in the first quarter of 2016, compared with $70.1 billion in the year-earlier quarter and $83.3 billion in the fourth quarter of 2015.2016. The Hudson City acquisition added approximately $17.0 billion of core deposits on November 1, 2015, including $9.7 billion of time deposits, $6.6 billion of savings deposits and $691 million of noninterest-bearing deposits. The higher average core deposits in the two most recent quarters as compared with the second quarter of 2015 were predominantly reflective of the impact of the merger with Hudson City. The following table provides an analysis of quarterly changes in the components of average core deposits. For the six-month periods ended June 30, 2016 and 2015, core deposits averaged $90.6 billion and $70.7 billion, respectively.

AVERAGE CORE DEPOSITS

Dollars in millions

 

      Percent increase from       

Percent increase

(decrease) from

 
  1st Qtr.
2016
   1st Qtr.
2015
 4th Qtr.
2015
   2nd Qtr.
2016
   2nd Qtr.
2015
 1st Qtr.
2016
 

Interest-checking deposits

  $1,333     21 2  $1,308     —   (2)% 

Savings deposits

   47,805     18   7     49,508     22   4  

Time deposits

   11,709     339   35     11,419     345   (2

Noninterest-bearing deposits

   28,870     12   2     29,249     9   1  
  

 

   

 

  

 

   

 

   

 

  

 

 

Total

  $89,717     28 8  $91,484     28 2
  

 

   

 

  

 

   

 

   

 

  

 

 

The Company also receives funding from other deposit sources, including branch-related time deposits over $250,000, deposits associated with the Company’s Cayman Islands office, and brokered deposits. Time deposits over $250,000, excluding brokered certificates of deposit, averaged $1.3 billion in the second quarter of 2016, compared with $353 million and $1.2 billion in the recentyear-earlier quarter compared with $347 million and $948 million in the first and fourth quartersquarter of 2015,2016, respectively. The higher averages in the two most recent quarters as compared with the initialsecond quarter of 2015 quarter were predominantly due to deposits obtained in the acquisition of Hudson City. Cayman Islands office deposits averaged $187$183 million, $224$212 million and $223$187 million for the three-month periods ended June 30, 2016, June 30, 2015 and March 31, 2016, March 31, 2015 and December 31, 2015, respectively. Brokered time deposits averaged $59 million in each of the two most recent quarter and the fourth quarter of 2015. There were no brokered time depositsquarters,

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compared with $31 million in the firstsecond quarter of 2015. The Company also had brokered interest-bearing transaction and brokered money-market deposit

- 54 -


accounts, which in the aggregate averaged approximately $1.2$1.0 billion in each of the firstrecent quarter, of 2016 and$1.1 billion in the fourthsecond quarter of 2015 and $1.0$1.2 billion in the first quarter of 2015.2016. The levels of brokered deposit accounts reflect the demand for such deposits, largely resulting from the desire of brokerage firms to earn reasonable yields while ensuring that customer deposits are fully insured. The level of Cayman Islands office deposits are also reflective of customer demand. Additional amounts of Cayman Islands office deposits or brokered deposits may be added in the future depending on market conditions, including demand by customers and other investors for those deposits, and the cost of funds available from alternative sources at the time.

The Company also uses borrowings from banks, securities dealers, various Federal Home Loan Banks, the Federal Reserve Bank of New York and others as sources of funding. Short-term borrowings represent borrowing arrangements that at the time they were entered into had a contractual maturity of less than one year. Average short-term borrowings totaled $1.1 billion in the recent quarter, compared with $195 million in the second quarter of 2015 and $2.1 billion in the first quarter ofinitial 2016 compared with $196 million in the year-earlier quarter and $1.6 billion in the final quarter of 2015.quarter. The higher level of such borrowings in the two most recent quarters was predominantly due to short-term borrowings from the Federal Home Loan Bank of New York assumed in the Hudson City acquisition. Those short-term fixed-rate borrowings have various maturity dates throughout 2016. Included in short-term borrowings were unsecured federal funds borrowings, which generally mature on the next business day, that averaged $137$161 million and $147$153 million in the firstsecond quarters of 2016 and 2015, respectively, and $131$137 million in the finalfirst quarter of 2015.2016.

Long-term borrowings averaged $10.5$10.3 billion in the recent quarter, compared with $9.8$10.2 billion in the year-earliersecond quarter of 2015 and $10.7$10.5 billion in the fourth quarter of 2015.initial 2016 quarter. M&T Bank has a Bank Note Program whereby M&T Bank may offer unsecured senior and subordinated notes. Average balances of notes outstanding under that program were $5.4$5.2 billion, $4.9$5.5 billion and $5.5$5.4 billion during the three-month periods ended June 30, 2016, June 30, 2015 and March 31, 2016, March 31, 2015 and December 31, 2015, respectively. The proceeds of the issuances of borrowings under the Bank Note Program have been predominantly utilized to purchase high-quality liquid assets that meet the requirements of the LCR. Also included in average long-term borrowings were amounts borrowed from various Federal Home Loan Banks of $1.2 billion in each of the initialsecond quarters of 2016 and 2015 and in the fourthfirst quarter of 2015.2016. Subordinated capital notes included in long-term borrowings averaged $1.5 billion during each of the three-month periods ended June 30, 2016, June 30, 2015 and March 31, 2016, March 31, 2015 and December 31, 2015.2016. Junior subordinated debentures associated with trust preferred securities that were included in average long-term borrowings weretotaled $515 million in the recent quarter, compared with $562 million in the second quarter of 2015 and $514 million during the two most recent quarters and $835 million in the first quarter of 2015.2016. In accordance with its 2015 capital plan,Capital Plan, on April 15, 2015 M&T redeemed the junior subordinated debentures associated with the $310 million of trust preferred securities of M&T Capital Trusts I, II and III. Those borrowings had a weighted-average interest rate of 8.24%. Additional information regarding junior subordinated debentures is provided in note 5 of Notes to Financial Statements. Also included in long-term borrowings were agreements to repurchase securities, which averaged $1.9 billion during the two most recent quarters and $1.4 billion in the firstsecond quarter of 2015. The increaseincreases from the firstsecond quarter of 2015 reflectsreflect agreements to repurchase securities assumed in connection with the Hudson City acquisition. The repurchase agreements held at March 31,June 30, 2016 have various repurchase dates through 2020, however, the contractual maturities of the underlying securities extend beyond such repurchase dates. The Company has utilized interest rate swap agreements to modify the repricing characteristics of certain components of long-term debt. As of March 31,June 30, 2016, interest rate swap agreements were used to hedge approximately $1.4 billion of outstanding fixed rate long-term borrowings. Further

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information on interest rate swap agreements is provided in note 10 of Notes to Financial Statements.

- 55 -


Changes in the composition of the Company’s earning assets and interest-bearing liabilities, as discussed herein, as well as changes in interest rates and spreads, can impact net interest income. Net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities, was 3.01%2.95% in the recentsecond quarter andof 2016, compared with 2.97% in the firstsecond quarter of 2015. The yield on earning assets during eachthe recent quarter was 3.51%, down slightly from 3.52% during the second quarter of the initial quarters of 2016 and 2015, was 3.54%, while the rate paid on interest-bearing liabilities decreased 4 basis points to .53% induring the recentsecond quarter from .57%of 2016 was .56%, compared with .55% in the year-earlier period.quarter. In the fourthinitial 2016 quarter, of 2015, the net interest spread was 2.94%3.01%, the yield on earning assets was 3.48%3.54% and the rate paid on interest-bearing liabilities was ..54%.53%. The wideningFor the first half of 2016, the net interest spread was 2.98%, up 1 basis point from the corresponding 2015 period. The yield on earning assets and the rate paid on interest-bearing liabilities were 3.53% and .55%, respectively, during the first six months of 2016, compared with 3.53% and .56%, respectively, in the recent quarter asyear-earlier period. As compared with the first quarterthree-month and six-month periods of 2015, reflects a higher proportion of deposits and short-term borrowings as components of interest-bearing liabilities and lower rates paid on long-term borrowings. The 7 basis point improvement in the net interest spread as compared withsimilar 2016 periods reflect the final 2015 quarter was largely due to the full-quarter effectfavorable impact of the increase in short-term interest rates initiated by the Federal Reserve in mid-December 2015 that contributed to higher yields on loans and leases. Largely offsetting that benefit were lower yields on investment securities and higher rates paid on interest-bearing deposits. The narrowing of the net interest spread in the recent quarter as compared with the first quarter of 2016 reflects lower yields on investment securities and higher rates paid on interest-bearing deposits.

Net interest-free funds consist largely of noninterest-bearing demand deposits and shareholders’ equity, partially offset by bank owned life insurance and non-earning assets, including goodwill and core deposit and other intangible assets. Net interest-free funds averaged $35.1$35.7 billion in the firstsecond quarter of 2016, compared with $29.3 billion and $34.0$30.8 billion in the firstyear-earlier quarter and fourth quarters$35.1 billion in the initial quarter of 2015, respectively.2016. The increases in average net interest-free funds in the two most recent quarters as compared with the firstsecond quarter of 2015 reflect higher average balances of noninterest-bearing deposits and shareholders’ equity. Those deposits averaged $28.9$29.2 billion in the recent quarter, compared with $25.8$26.8 billion and $28.4$28.9 billion in the quarters ended June 30, 2015 and March 31, 2016, respectively. During the first six months of 2016 and fourth quarters of 2015, average net interest-free funds aggregated $35.4 billion and $30.0 billion, respectively. In connection with the acquisition of Hudson City, the Company added noninterest-bearing deposits of $691 million at the acquisition date. In addition to the impact of the merger, growth in noninterest-bearing deposits since the firstsecond quarter of 2015 was due, in part, to higher deposits of commercial and trust customers. The rise in average shareholders’ equity included $3.1 billion of common equity issued in connection with the acquisition of Hudson City as well as net retained earnings. Goodwill and core deposit and other intangible assets averaged $4.7 billion in each of the two most recent quarter,quarters, compared with $3.6$3.5 billion in the first quarter of 2015 and $4.3 billion in the fourthsecond quarter of 2015. Goodwill of $1.1 billion and core deposit intangible of $132 million resulted from the Hudson City acquisition. The cash surrender value of bank owned life insurance averaged $1.7 billion in each of the three-month periods ended June 30, 2016, June 30, 2015 and March 31, 2016, March 31, 2015 and December 31, 2015.2016. Increases in the cash surrender value of bank owned life insurance and benefits received are not included in interest income, but rather are recorded in “other revenues from operations.” The contribution of net interest-free funds to net interest margin was .18% in the most recent quarter, compared with .20% in the second quarter of 2015 and .17% in the first quarter of 2016, compared with .20% in2016. That contribution for the first quartersix months of 2016 and 2015 was .17% and .18% in the fourth quarter of 2015..20%, respectively.

Reflecting the changes to the net interest spread and the contribution of net interest-free funds as described herein, the Company’s net interest

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margin was 3.13% in the recent quarter, down from 3.17% in the year-earlier quarter and 3.18% in the first quarter of 2016, compared with 3.17% in2016. During the first quartersix months of 2016 and 2015, the net interest margin was 3.15% and 3.12% in the fourth quarter of 2015.3.17%, respectively. Future changes in market interest rates or spreads, as well as changes in the composition of the Company’s portfolios of earning assets and interest-bearing liabilities that result in reductions in spreads, could adversely impact the Company’s net interest income and net interest margin.

Management assesses the potential impact of future changes in interest rates and spreads by projecting net interest income under several interest rate scenarios. In managing interest rate risk, the Company has utilized

- 56 -


interest rate swap agreements to modify the repricing characteristics of certain portions of its interest-bearing liabilities. Periodic settlement amounts arising from these agreements are reflected in the rates paid on interest-bearing liabilities. The notional amount of interest rate swap agreements entered into for interest rate risk management purposes was $1.4 billion at each of June 30, 2016, June 30, 2015 and March 31, 2016, March 31, 2015 and December 31, 2015.2016. Under the terms of those interest rate swap agreements, the Company received payments based on the outstanding notional amount at fixed rates and made payments at variable rates. Those interest rate swap agreements were designated as fair value hedges of certain fixed rate long-term borrowings. There were no interest rate swap agreements designated as cash flow hedges at those respective dates.

In a fair value hedge, the fair value of the derivative (the interest rate swap agreement) and changes in the fair value of the hedged item are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in “other revenues from operations” in the Company’s consolidated statement of income. The amounts of hedge ineffectiveness recognized during each of the quarters ended June 30, 2016, June 30, 2015 and March 31, 2016 March 31, 2015 and December 31, 2015 were not material to the Company’s results of operations. The estimated aggregate fair value of interest rate swap agreements designated as fair value hedges represented gains of approximately $34 million at June 30, 2016, $64 million at June 30, 2015, $41 million at March 31, 2016 $73 million at March 31, 2015 and $44 million at December 31, 2015. The fair values of such interest rate swap agreements were substantially offset by changes in the fair values of the hedged items. The changes in the fair values of the interest rate swap agreements and the hedged items primarily result from the effects of changing interest rates and spreads. The Company’s credit exposure as of March 31,June 30, 2016 with respect to the estimated fair value of interest rate swap agreements used for managing interest rate risk has been substantially mitigated through master netting arrangements with trading account interest rate contracts with the same counterparty as well as counterparty postings of $21$9 million of collateral with the Company.

The weighted-average rates to be received and paid under interest rate swap agreements currently in effect were 4.42% and 1.59%1.63%, respectively, at March 31,June 30, 2016. The average notional amounts of interest rate swap agreements entered into for interest rate risk management purposes, the related effect on net interest income and margin, and the weighted-average interest rates paid or received on those swap agreements are presented in the accompanying table. Additional information about the Company’s use of interest rate swap agreements and other derivatives is included in note 10 of Notes to Financial Statements.

 

- 57 --64-


INTEREST RATE SWAP AGREEMENTS

Dollars in thousands

 

  Three months ended March 31   Three months ended June 30 
  2016 2015   2016 2015 
  Amount   Rate (a) Amount   Rate (a)   Amount   Rate(a) Amount   Rate(a) 

Increase (decrease) in:

              

Interest income

  $—       —   $—       —    $—       —   $—       —  

Interest expense

   (10,333   (.05 (11,277   (.08   (9,798   (.05 (11,143   (.08
  

 

    

 

     

 

    

 

   

Net interest income/margin

  $10,333     .04 $11,277     .06  $9,798     .04 $11,143     .06
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Average notional amount

  $1,400,000     $1,400,000      $1,400,000     $1,400,000    
  

 

    

 

     

 

    

 

   

Rate received (b)

     4.42    4.42

Rate paid (b)

     1.45    1.20

Rate received(b)

     4.42    4.42

Rate paid(b)

     1.60    1.22
    

 

    

 

     

 

    

 

 
  Six months ended June 30 
  2016 2015 
  Amount   Rate(a) Amount   Rate(a) 

Increase (decrease) in:

       

Interest income

  $—       —   $—       —  

Interest expense

   (20,131   (.05 (22,420   (.08
  

 

    

 

   

Net interest income/margin

  $20,131     .03 $22,420     .06
  

 

   

 

  

 

   

 

 

Average notional amount

  $1,400,000     $1,400,000    
  

 

    

 

   

Rate received(b)

     4.42    4.42

Rate paid(b)

     1.53    1.21
    

 

    

 

 

 

(a)Computed as an annualized percentage of average earning assets or interest-bearing liabilities.
(b)Weighted-average rate paid or received on interest rate swap agreements in effect during the period.

As a financial intermediary, the Company is exposed to various risks, including liquidity and market risk. Liquidity refers to the Company’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future obligations, including demands for loans and deposit withdrawals, funding operating costs, and other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. The Company has, from time to time, issued subordinated capital notes and junior subordinated debentures associated with trust preferred securities to provide liquidity and enhance regulatory capital ratios. However, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Company’s junior subordinated debentures associated with trust preferred securities have been phased-out of the definition of Tier 1 capital. Effective January 1, 2015, 75% of such securities were excluded from the Company’s Tier 1 capital, and beginning January 1, 2016, 100% were excluded. The amounts excluded from Tier 1 capital are includable in total capital. In accordance with its 2015 capital plan,Capital Plan, in April 2015 M&T redeemed the junior subordinated debentures associated with the trust preferred securities of M&T Capital Trusts I, II and III.

The Company has informal and sometimes reciprocal sources of funding available through various arrangements for unsecured short-term borrowings from a wide group of banks and other financial institutions. Short-term federal funds borrowings were $157aggregated $156 million, at March 31, 2016, $155$111 million at March 31, 2015 and $99 million at June 30, 2016, June 30, 2015 and December 31, 2015.2015, respectively. In general, those borrowings were unsecured and matured on the next business day. In addition to satisfying customer demand, Cayman Islands office deposits may be used by the Company as an alternative to short-term borrowings. Cayman Islands office deposits totaled $194 million at June 30, 2016, $167 million $179 millionat June 30, 2015, and $170 million at March 31, 2016, March 31, 2015 and December 31, 2015, respectively. 2015.

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The Company has also benefited from the placement of brokered deposits. The Company has brokered interest-bearing transaction and brokered money-market deposit accounts which aggregated approximately $1.0 billion at June 30, 2016, $1.1 billion at each of March 31, 2016June 30, 2015 and March 31, 2015, compared with $1.2 billion at December 31, 2015. Brokered time deposits were not a significant source of funding as of those dates.

The Company’s ability to obtain funding from these or other sources could be negatively impacted should the Company experience a substantial deterioration in its financial condition or its debt ratings, or should the availability of short-term funding become restricted due to a disruption in the financial markets. The Company attempts to quantify such credit-event risk by modeling scenarios that estimate the liquidity impact resulting from a short-term ratings downgrade over various grading levels. Such impact is estimated by attempting to measure the effect on available unsecured lines of credit,

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available capacity from secured borrowing sources and securitizable assets. In addition to deposits and borrowings, other sources of liquidity include maturities of investment securities and other earning assets, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services.

Certain customers of the Company obtain financing through the issuance of variable rate demand bonds (“VRDBs”). The VRDBs are generally enhanced by letters of credit provided by M&T Bank. M&T Bank oftentimes acts as remarketing agent for the VRDBs and, at its discretion, may from time-to-time own some of the VRDBs while such instruments are remarketed. When this occurs, the VRDBs are classified as trading account assets in the Company’s consolidated balance sheet. Nevertheless, M&T Bank is not contractually obligated to purchase the VRDBs. The value of VRDBs in the Company’s trading account totaled $37 million and $11$17 million at March 31,June 30, 2016 and 2015, respectively, while less than $1 million were held at December 31, 2015, while there were no VRDBs in the Company’s trading account at June 30, 2015. The total amount of VRDBs outstanding backed by M&T Bank letters of credit was $1.7 billion at each of March 31,June 30, 2016 and December 31, 2015, compared with $1.9$1.8 billion at March 31,June 30, 2015. M&T Bank also serves as remarketing agent for most of those bonds.

The Company enters into contractual obligations in the normal course of business which require future cash payments. Such obligations include, among others, payments related to deposits, borrowings, leases and other contractual commitments. Off-balance sheet commitments to customers may impact liquidity, including commitments to extend credit, standby letters of credit, commercial letters of credit, financial guarantees and indemnification contracts, and commitments to sell real estate loans. Because many of these commitments or contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. Further discussion of these commitments is provided in note 13 of Notes to Financial Statements.

M&T’s primary source of funds to pay for operating expenses, shareholder dividends and treasury stock repurchases has historically been the receipt of dividends from its banking subsidiaries, which are subject to various regulatory limitations. Dividends from any banking subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current year and the two preceding years. For purposes of that test, at March 31,June 30, 2016 approximately $1.3 billion was available for payment of dividends to M&T from banking subsidiaries. Information regarding the long-term debt obligations of M&T is included in note 5 of Notes to Financial Statements.

Management closely monitors the Company’s liquidity position on an ongoing basis for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs anticipated in the normal course of business. Management does not anticipate engaging in any activities, either currently or in the long-term, for which adequate funding would not be available and would therefore result in a significant

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strain on liquidity at either M&T or its subsidiary banks. Banking regulators have finalized rules requiring a banking company to maintain a minimum amount of liquid assets to withstand a standardized supervisory liquidity stress scenario. The effective date for those rules for the Company was January 1, 2016, subject to a phase-in period. The Company has taken steps as noted herein to enhance its liquidity and is in compliance with the phase-in requirements of the rules.

Market risk is the risk of loss from adverse changes in the market prices and/or interest rates of the Company’s financial instruments. The primary market risk the Company is exposed to is interest rate risk. Interest rate risk arises from the Company’s core banking activities of lending and deposit-taking, because assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability of net

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interest income in future periods under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and derivatives used to hedge interest rate risk. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans and investment securities, and expected maturities of investment securities, loans and deposits. Management uses a “value of equity” model to supplement the modeling technique described above. Those supplemental analyses are based on discounted cash flows associated with on- and off-balance sheet financial instruments. Such analyses are modeled to reflect changes in interest rates and provide management with a long-term interest rate risk metric.

The Company’s Asset-Liability Committee, which includes members of senior management, monitors the sensitivity of the Company’s net interest income to changes in interest rates with the aid of a computer model that forecasts net interest income under different interest rate scenarios. In modeling changing interest rates, the Company considers different yield curve shapes that consider both parallel (that is, simultaneous changes in interest rates at each point on the yield curve) and non-parallel (that is, allowing interest rates at points on the yield curve to vary by different amounts) shifts in the yield curve. In utilizing the model, projections of net interest income calculated under the varying interest rate scenarios are compared to a base interest rate scenario that is reflective of current interest rates. The model considers the impact of ongoing lending and deposit-gathering activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments and intends to do so in the future. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and adding to, modifying or terminating existing interest rate swap agreements or other financial instruments used for interest rate risk management purposes.

The accompanying table as of March 31,June 30, 2016 and December 31, 2015 displays the estimated impact on net interest income from non-trading financial instruments in the base scenario described above resulting from parallel changes in interest rates across repricing categories during the first modeling year.

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SENSITIVITY OF NET INTEREST INCOME

TO CHANGES IN INTEREST RATES

Dollars in thousands

 

  

Calculated increase (decrease)

in projected net interest income

   Calculated increase (decrease)
in projected net interest income
 

Changes in interest rates

  March 31, 2016   December 31, 2015   June 30, 2016   December 31, 2015 

+200 basis points

  $280,537    $243,958    $295,378     243,958  

+100 basis points

   163,692     145,169     168,194     145,169  

-50 basis points

   (115,291   (99,603   (118,987   (99,603

The Company utilized many assumptions to calculate the impact that changes in interest rates may have on net interest income. The more significant of those assumptions included the rate of prepayments of mortgage-related assets, cash flows from derivative and other financial instruments held for non-trading purposes, loan and deposit volumes and pricing, and deposit maturities. In the scenarios presented, the Company also assumed gradual increases in interest rates during a twelve-month period of 100 and 200 basis points, as compared with the assumed base scenario, as well as a gradual decrease of 50 basis points. In the declining rate scenario, the rate changes may be limited to lesser amounts such that interest rates remain positive at all points on the yield curve. In 2016,

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the Company suspended the -100 basis point scenario due to the persistent low level of interest rates. This scenario will be reinstated if and when interest rates rise sufficiently to make the analysis more meaningful. The assumptions used in interest rate sensitivity modeling are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly from those presented due to the timing, magnitude and frequency of changes in interest rates and changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions, such as those previously described, which management may take to counter such changes.

Changes in fair value of the Company’s financial instruments can also result from a lack of trading activity for similar instruments in the financial markets. That impact is most notable on the values assigned to some of the Company’s investment securities. Information about the fair valuation of investment securities is presented herein under the heading “Capital” and in notes 3 and 12 of Notes to Financial Statements.

The Company engages in limited trading account activities to meet the financial needs of customers and to fund the Company’s obligations under certain deferred compensation plans. Financial instruments utilized in trading account activities consist predominantly of interest rate contracts, such as swap agreements, and forward and futures contracts related to foreign currencies. The Company generally mitigates the foreign currency and interest rate risk associated with trading account activities by entering into offsetting trading positions that are also included in the trading account. The fair values of the offsetting trading account positions associated with interest rate contracts and foreign currency and other option and futures contracts are presented in note 10 of Notes to Financial Statements. The amounts of gross and net trading account positions, as well as the type of trading account activities conducted by the Company, are subject to a well-defined series of potential loss exposure limits established by management and approved by M&T’s Board of Directors. However, as with any non-government guaranteed financial instrument, the Company is exposed to credit risk associated with counterparties to the Company’s trading account activities.

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The notional amounts of interest rate contracts entered into for trading account purposes aggregated $18.9totaled $20.1 billion at March 31,June 30, 2016, $17.1compared with $17.2 billion at March 31,June 30, 2015 and $18.4 billion at December 31, 2015. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes totaled $2.8 billionaggregated $826 million at March 31,June 30, 2016, compared with $1.4 billion and $1.6 billion at March 31each of June 30, 2015 and December 31, 2015, respectively.2015. Although the notional amounts of these contracts are not recorded in the consolidated balance sheet, the fair values of all financial instruments used for trading account activities are recorded in the consolidated balance sheet. The fair values of all trading account assets and liabilities were $468totaled $506 million and $296$353 million, respectively, at March 31,June 30, 2016, $363$277 million and $240$172 million, respectively, at March 31,June 30, 2015, and $274 million and $161 million, respectively, at December 31, 2015. Included in trading account assets were assets related to deferred compensation plans totaling $22 million at March 31,June 30, 2016 compared with $25 million at March 31, 2015 and $24 million at each of June 30, 2015 and December 31, 2015. Changes in the fair value of such assets are recorded as “trading account and foreign exchange gains” in the consolidated statement of income. Included in “other liabilities” in the consolidated balance sheet at March 31,June 30, 2016 were $26 million of liabilities related to deferred compensation plans, compared with $29 million and $28 million at March 31each of June 30, 2015 and December 31, 2015, respectively.2015. Changes in the balances of such liabilities due to the valuation of allocated investment options to which the liabilities are indexed are recorded in “other costs of operations” in the consolidated statement of income. Also included in trading account assets were investments in mutual funds and other assets that

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the Company was required to hold under terms of certain non-qualified supplemental retirement and other benefit plans that were assumed by the Company in various acquisitions. Those assets totaled $48$40 million, $24$25 million and $33 million at March 31,June 30, 2016, March 31,June 30, 2015 and December 31, 2015, respectively.

Given the Company’s policies, limits and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading account activities was not material, however, as previously noted, the Company is exposed to credit risk associated with counterparties to transactions related to the Company’s trading account activities. Additional information about the Company’s use of derivative financial instruments in its trading account activities is included in note 10 of Notes to Financial Statements.

Provision for Credit Losses

The Company maintains an allowance for credit losses that in management’s judgment appropriately reflects losses inherent in the loan and lease portfolio. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. The provision for credit losses was $32 million in the firstsecond quarter of 2016, wascompared with $30 million in the second quarter of 2015 and $49 million in the initial 2016 quarter. For the six-month periods ended June 30, 2016 and 2015, the provision for credit losses was $81 million and $68 million, respectively. Net charge-offs of loans were $24 million in the recently completed quarter, compared with $38$21 million in the year-earlier quarter and $58 million in the fourth quarter of 2015. A $21 million provision for credit losses was recorded in the fourth quarter of 2015, in accordance with GAAP, related to loans obtained in the Hudson City acquisition that had a fair value in excess of outstanding principal. GAAP provides that an allowance for credit losses on such loans be recorded beyond the recognition of the fair value of the loans at the acquisition date. Net loan charge-offs were $42 million in the recentfirst quarter compared with $36 million in each of the first and fourth quarters of 2015.2016. Net charge-offs as an annualized percentage of average loans and leases were .11% in the recent quarter, compared with .13% in the year-earlier quarter and .19% in the initial 2016 quarter, compared with .22%quarter. Net charge-offs for the six-month periods ended June 30 aggregated $66 million in the year-earlier quarter2016 and .18%$58 million in the final 2015, quarter.representing an annualized rate of .15% and .17% of average loans and leases in those respective periods. A summary of net charge-offs by loan type is presented in the table that follows.

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NET CHARGE-OFFS (RECOVERIES)

BY LOAN/LEASE TYPE

In thousands

 

  2016 
  First Quarter
2016
   First Quarter
2015
   Fourth Quarter
2015
   1st Qtr.   2nd Qtr.   Year
to-date
 

Commercial, financial, leasing, etc.

  $902     8,411     (3,358  $902     (3,132   (2,230

Real estate:

            

Commercial

   (1,141   6,094     (1,743   (1,141   (1,866   (3,007

Residential

   5,085     2,129     2,462     5,085     3,115     8,200  

Consumer

   37,394     19,555     38,445     37,394     26,139     63,533  
  

 

   

 

   

 

   

 

   

 

   

 

 
  $42,240     36,189     35,806    $42,240     24,256     66,496  
  

 

   

 

   

 

   

 

   

 

   

 

 
  2015 
  1st Qtr.   2nd Qtr.   Year
to-date
 

Commercial, financial, leasing, etc.

  $8,411     4,056     12,467  

Real estate:

      

Commercial

   6,094     2,429     8,523  

Residential

   2,129     2,071     4,200  

Consumer

   19,555     12,830     32,385  
  

 

   

 

   

 

 
  $36,189     21,386     57,575  
  

 

   

 

   

 

 

Reflected in net charge-offs of commercial loans and leases in the recent quarter was a $7 million recovery of a previously charged-off loan. Included in net charge-offs of consumer loans and leases were net charge-offs during the quarters ended June 30, 2016, June 30, 2015 and March 31, 2016, March 31, 2015 and December 31, 2015, respectively, of: automobile loans of $11$6 million, $4$2 million and $3$11 million; recreational vehicle loans of $12 million, $3 million, $2 million and $3$12 million; and home equity loans and lines of credit of $5$4 million, $6$3 million and $3$5 million. During the first quartertwo quarters of 2016, the Company charged off consumer loans associated with customers who were either deceased or had filed for bankruptcy that, in accordance with GAAP, had previously been considered when determining the level of the allowance for credit losses. Such charge-offs totaled $14$5 million in the recent quarter and $14 million in the initial 2016 quarter and included $2 million and $11 million, respectively, of loan balances with a current payment status. Netstatus at the time of charge-off. In addition, reflected in consumer loan charge-offs of consumer loans in the fourthrecent quarter of 2015 includedwas a $20$6 million charge-off of a single personal usage loan obtained in a previous acquisition.loan.

Loans acquired in connection with acquisition transactions subsequent to 2008 were recorded at fair value with no carry-over of any previously

- 62 -


recorded allowance for credit losses. Determining the fair value of acquired loans requires estimating cash flows expected to be collected on the loans and discounting those cash flows at then-current interest rates. For acquired loans where fair value was less than outstanding principal as of the acquisition date and the resulting discount was due, at least in part, to credit deterioration, the excess of expected cash flows over the carrying value of the loans is recognized as interest income over the lives of the loans. The difference between contractually required payments and the cash flows expected to be collected is referred to as the nonaccretable balance and is not recorded on the consolidated balance sheet. The nonaccretable balance reflects estimated future credit losses and other contractually required payments that the Company does not expect to collect. The Company regularly evaluates the reasonableness of its cash flow projections associated with such loans. Any decreases to the expected cash flows require the Company to evaluate the need for an additional allowance for credit losses and could lead to charge-offs of

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loan balances. Any significant increases in expected cash flows result in additional interest income to be recognized over the then-remaining lives of the loans. The carrying amount of loans acquired at a discount subsequent to 2008 and accounted for based on expected cash flows was $2.3$2.2 billion $2.4 billionat each of June 30, 2016 and June 30, 2015 and $2.5 billion at March 31, 2016, March 31, 2015 and December 31, 2015, respectively.2015. The decrease in the recent quarter as compared with December 31, 2015 was largely attributable to payments received. The nonaccretable balance related to remaining principal losses associated with loans acquired at a discount as of March 31,June 30, 2016 and December 31, 2015 is presented in the accompanying table.

NONACCRETABLE BALANCE - PRINCIPAL

 

  Remaining balance   Remaining balance 
  March 31,
2016
   December 31,
2015
   June 30,
2016
   December 31,
2015
 
  (in thousands)   (in thousands) 

Commercial, financial, leasing, etc.

  $6,565     10,806  

Commercial, financing, leasing, etc.

  $7,057     10,806  

Commercial real estate

   49,640     48,173     46,959     48,173  

Residential real estate

   91,093     113,478     82,495     113,478  

Consumer

   15,207     17,952     12,410     17,952  
  

 

   

 

   

 

   

 

 

Total

  $162,505     190,409    $148,921     190,409  
  

 

   

 

   

 

   

 

 

For acquired loans where the fair value exceeded the outstanding principal balance, the resulting premium is recognized as a reduction of interest income over the lives of the loans. Immediately following the acquisition date and thereafter, an allowance for credit losses is recorded for incurred losses inherent in the portfolio, consistent with the accounting for originated loans and leases. The carrying amount of Hudson City loans acquired at a premium was $17.0$16.1 billion and $17.8 billion at March 31,June 30, 2016 and December 31, 2015, respectively. As noted previously, aA $21 million provision for credit losses was recorded in the fourth quarter of 2015 for incurred losses inherent in those loans. GAAP does not allow the credit loss component of the net premium associated with those loans to be bifurcated and accounted for as a nonaccreting balance as is the case with purchased impaired loans and other loans acquired at a discount. Despite the fact that the determination of aggregate fair value reflects the impact of expected credit losses, GAAP provides that incurred losses in a portfolio of loans acquired at a premium be recognized even though in a relatively homogenous portfolio of residential mortgage loans the specific loans to which the losses relate cannot be individually identified at the acquisition date.

Nonaccrual loans totaled $877$849 million or 1.00%.96% of total loans and leases outstanding at March 31,June 30, 2016, compared with $791$797 million or 1.18%1.17% a

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year earlier, and $799 million or .91% at December 31, 2015.2015 and $877 million or 1.00% at March 31, 2016. The increase in nonaccrual loans at the two most recent quarter-endquarter-ends as compared with March 31,June 30, 2015 and December 31, 2015 reflects the normal migration of $113 million of previously performing residential real estate loans obtained in the acquisition of Hudson City that became over 90 days past due during the recent quarterfirst six months of 2016 and, as such, were not identifiable as purchased impaired as of the acquisition date.

Accruing loans past due 90 days or more (excluding loans acquired at a discount) totaled $336$298 million or .38%.34% of total loans and leases at March 31,June 30, 2016, compared with $237$239 million or .35% at March 31,June 30, 2015, and $317 million or .36% at December 31, 2015.2015 and $336 million or .38% at March 31, 2016. Those loans included loans guaranteed by government-related entities of $270 million, $207 million, $276 million and $279 million $194 millionat June 30, 2016, June 30, 2015, December 31, 2015 and $276 million at March 31, 2016, March 31, 2015 and December 31, 2015, respectively. Such guaranteed loans obtained in the acquisition of Hudson City totaled $45 million at June 30, 2016 and $44 million at each of December 31, 2015 and

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March 31, 2016 and December 31, 2015.2016. Guaranteed loans also included one-to-four family residential mortgage loans serviced by the Company that were repurchased to reduce associated servicing costs, including a requirement to advance principal and interest payments that had not been received from individual mortgagors. Despite the loans being purchased by the Company, the insurance or guarantee by the applicable government-related entity remains in force. The outstanding principal balances of the repurchased loans that are guaranteed by government-related entities totaled $226$218 million $178at June 30, 2016, $195 million at June 30, 2015, $221 million at December 31, 2015 and $221$226 million at March 31, 2016, March 31, 2015 and December 31, 2015, respectively.2016. The remaining accruing loans past due 90 days or more not guaranteed by government-related entities were loans considered to be with creditworthy borrowers that were in the process of collection or renewal.

Purchased impaired loans are loans obtained in acquisition transactions subsequent to 2008 that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all outstanding principal and contractually required interest payments. Those loans were impaired at the date of acquisition, were recorded at estimated fair value and were generally delinquent in payments, but, in accordance with GAAP, the Company continues to accrue interest income on such loans based on the estimated expected cash flows associated with the loans. The carrying amount of such loans was $716$662 million at March 31,June 30, 2016, or approximately .8%.7% of total loans. Of that amount, $624$582 million iswas related to the Hudson City acquisition. Purchased impaired loans totaled $184$169 million and $768 million at March 31June 30 and December 31, 2015, respectively.

Accruing loans acquired at a discount past due 90 days or more are loans that could not be specifically identified as impaired as of the acquisition date, but were recorded at estimated fair value as of such date. Such loans totaled $62$69 million at March 31,June 30, 2016, compared with $80$79 million at March 31,June 30, 2015 and $68 million at December 31, 2015.

In an effort to assist borrowers, the Company modified the terms of select loans. If the borrower was experiencing financial difficulty and a concession was granted, the Company considered such modifications as troubled debt restructurings. Loan modifications included such actions as the extension of loan maturity dates and the lowering of interest rates and monthly payments. The objective of the modifications was to increase loan repayments by customers and thereby reduce net charge-offs. In accordance with GAAP, the modified loans are included in impaired loans for purposes of determining the level of the allowance for credit losses. Information about modifications of loans that are considered troubled debt restructurings is included in note 4 of Notes to Financial Statements.

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Residential real estate loans modified under specified loss mitigation programs prescribed by government guarantors have not been included in renegotiated loans because the loan guarantee remains in full force and, accordingly, the Company has not granted a concession with respect to the ultimate collection of the original loan balance. Such loans aggregated $155$162 million, $153$156 million and $147 million at March 31,June 30, 2016, March 31,June 30, 2015 and December 31, 2015, respectively.

Nonaccrual commercial loans and leases aggregated $241 million at June 30, 2016, $210 million at June 30, 2015, $242 million at December 31, 2015 and $280 million at March 31, 2016, $195 million at March 31, 2015 and $242 million at December 31, 2015.2016. The largest commercial loans placed in nonaccrual status since March 31,June 30, 2015 were a $24$21 million relationship with a commercial maintenance services provider with operations in New Jersey and

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Pennsylvania that was placed in nonaccrual status in the third quarter of 2015 and a $40$37 million relationship with a multi-regional manufacturer of refractory brick and other cast-able products placed in nonaccrual status in the first quarter of 2016. The decline in nonaccrual commercial loans from March 31 to June 30, 2016 was due largely to payments received on such loans.

Commercial real estate loans classified as nonaccrual totaled $218 million at June 30, 2016, $246 million at June 30, 2015 and $224 million at March 31, 2016 andeach of December 31, 2015 and $232 million at March 31, 2015.2016. Nonaccrual commercial real estate loans included construction-related loans of $46 million, $78 million, $45 million and $53 million $90 millionat June 30, 2016, June 30, 2015, December 31, 2015 and $45 million at March 31, 2016, March 31, 2015 and December 31, 2015, respectively. Those nonaccrual construction loans included loans to residential builders and developers of $24 million, $57 million, $28 million and $32 million at June 30, 2016, June 30, 2015, December 31, 2015 and $65 million at March 31, 2016, and 2015, respectively, and $28 million at December 31, 2015.respectively. Information about the location of nonaccrual and charged-off loans to residential real estate builders and developers as of and for the three-month period ended March 31,June 30, 2016 is presented in the accompanying table.

RESIDENTIAL BUILDER AND DEVELOPER LOANS, NET OF UNEARNED DISCOUNT

 

  March 31, 2016 Quarter ended
March 31, 2016
   June 30, 2016 Quarter ended
June 30, 2016
 
      Nonaccrual Net charge-offs
(recoveries)
       Nonaccrual Net charge-offs
(recoveries)
 
  Outstanding
balances (b)
   Balances   Percent of
outstanding
balances
 Balances Annualized
percent of
average
outstanding
balances
   Outstanding
balances(b)
   Balances   Percent of
outstanding
balances
 Balances Annualized
percent of
average
outstanding
balances
 
  (dollars in thousands)   (dollars in thousands) 

New York

  $823,828    $2,868     .35 $71   .01  $806,003    $1,913     .24 $690   .09

Pennsylvania

   136,965     26,898     19.64   (18 (.01   124,102     19,643     15.83   (70 (.06

Mid-Atlantic(a)

   428,913     3,740     .87   (952 (.22   463,954     3,177     .68   (1,580 (.35

Other

   450,849     1,277     .28    —      —       504,769     1,554     .31    —      —    
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $1,840,555    $34,783     1.89 $(899 (.05)%   $1,898,828    $26,287     1.38 $(960 (.05)% 
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

 

(a)Includes Delaware, Maryland, New Jersey, Virginia, West Virginia and the District of Columbia.
(b)Includes approximately $18$15 million of loans not secured by real estate, of which approximately $2 million are in nonaccrual status.

Residential real estate loans in nonaccrual status at March 31,June 30, 2016 were $263$282 million, compared with $246$233 million at March 31,June 30, 2015, and $215 million at December 31, 2015.2015 and $263 million at March 31, 2016. The increase in residential real estate loans classified as nonaccrual at March 31, 2016the two most recent quarter-ends as compared with December 31, 2015 reflects the normal migration of $80 million of previously performing loans obtained with the acquisition of Hudson City that became more than 90 days delinquent during the recent quarter.first six months of 2016. Such loans increased nonaccrual residential real estate loans by $79 million at March 31, 2016 and by $113 million at June 30, 2016. Those loans could not be identified as purchased impaired loans at the acquisition date because the borrowers were making current loan payments at the time and the loans were not recorded at a

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discount. The decrease in residential real estate loans classified as nonaccrual from March 31, 2015 to December 31, 2015 reflects improved repayment performance by customers. Included in residential real estate loans classified as nonaccrual were limited documentation first mortgage loans of $79 million, $68 million, $62 million and $76 million $74 millionat June 30, 2016, June 30, 2015, December 31, 2015 and $62 million at March 31, 2016 March 31, 2015 and December 31, 2015, respectively. Limited documentation first mortgage loans represent loans secured by residential real estate that at origination typically included some form of limited borrower documentation requirements as compared with more traditional loans.

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Such loans in the Company’s portfolio prior to the Hudson City transaction were originated by the Company before 2008. Hudson City discontinued its limited documentation loan program in January 2014. Residential real estate loans past due 90 days or more and accruing interest (excluding loans acquired at a discount) totaled $279$271 million (including $44$46 million obtained in the acquisition of Hudson City) at March 31,June 30, 2016, compared with $197$207 million a year earlier andat June 30, 2015, $284 million at December 31, 2015.2015 and $279 million at March 31, 2016. A substantial portion of such amounts related to guaranteed loans repurchased from government-related entities. Information about the location of nonaccrual and charged-off residential real estate loans as of and for the quarter ended June 30, 2016 is presented in the accompanying table.

Nonaccrual consumer loans totaled $108 million at each of June 30, 2016 and June 30, 2015, $118 million at December 31, 2015 and $110 million at March 31, 2016. Included in nonaccrual consumer loans at June 30, 2016, June 30, 2015, December 31, 2015 and March 31, 2016 were: automobile loans of $12 million, $15 million, $17 million and $15 million, respectively; recreational vehicle loans of $5 million, $8 million, $9 million and $10 million, respectively; and outstanding balances of home equity loans and lines of credit of $87 million, $78 million, $84 million and $79 million, respectively. Information about the location of nonaccrual and charged-off home equity loans and lines of credit as of and for the quarter ended June 30, 2016 is presented in the accompanying table.

 

- 66 --74-


SELECTED RESIDENTIAL REAL ESTATE-RELATED LOAN DATA

 

  March 31, 2016 Quarter ended
March 31, 2016
   June 30, 2016 Quarter ended
June 30, 2016
 
      Nonaccrual Net charge-offs
(recoveries)
       Nonaccrual Net charge-offs
(recoveries)
 
  Outstanding
balances
   Balances   Percent of
outstanding
balances
 Balances Annualized
percent of
average
outstanding
balances
   Outstanding
balances
   Balances   Percent of
outstanding
balances
 Balances Annualized
percent of
average
outstanding
balances
 
  (dollars in thousands)   (dollars in thousands) 

Residential mortgages:

                

New York

  $6,623,498    $68,450     1.03 $1,740   .10  $6,602,947    $70,130     1.06 $476   .03

Pennsylvania

   1,800,458     16,332     .91   736   .16     1,747,161     19,068     1.09   52   .01  

Maryland

   1,309,386     13,567     1.04   483   .15     1,302,399     15,293     1.17   (2 (.01

New Jersey

   6,058,466     27,216     .45   454   .03     5,745,014     31,819     .55   1,678   .11  

Other Mid-Atlantic(a)

   1,127,285     12,800     1.14   217   .08     1,104,550     13,698     1.24   (12 (.01

Other

   4,242,521     47,061     1.11   452   .04     4,069,810     52,153     1.28   287   .03  
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $21,161,614    $185,426     .88 $4,082   .08  $20,571,881    $202,161     .98 $2,479   .05
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Residential construction loans:

                

New York

  $6,019    $23     .38 $—     —    $7,968    $18     .23 $(1 (.04)% 

Pennsylvania

   4,678     482     10.31   13   1.15     3,883     350     9.01   13   1.13  

Maryland

   4,269     —       —      —      —       4,119     —       —      —      —    

New Jersey

   890     —       —      —      —       1,019     —       —      —      —    

Other Mid-Atlantic(a)

   3,207     —       —      —      —       3,444     —       —      —      —    

Other

   11,414     521     4.56   19   .62     7,129     420     5.89   (2 (.09
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $30,477    $1,026     3.37 $32   .41  $27,562    $788     2.86 $10   .14
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Limited documentation first mortgages:

                

New York

  $1,717,886    $23,091     1.34 $574   .13  $1,655,680    $25,693     1.55 $349   .08

Pennsylvania

   86,663     4,858     5.61   25   .11     83,208     5,217     6.27   2   .01  

Maryland

   48,923     2,755     5.63   164   1.34     48,136     2,977     6.18   7   .06  

New Jersey

   1,612,316     13,541     .84   12   .01     1,536,823     16,139     1.05   187   .05  

Other Mid-Atlantic(a)

   43,947     3,180     7.24   (84 (.75   42,993     2,810     6.54   (14 (.13

Other

   597,812     28,840     4.82   280   .19     563,966     26,192     4.64   95   .07  
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $4,107,547    $76,265     1.86 $971   .09  $3,930,806    $79,028     2.01 $626   .06
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

First lien home equity loans and lines of credit:

                

New York

  $1,333,557    $17,149     1.29 $365   .11  $1,323,782    $16,866     1.27 $969   .29

Pennsylvania

   864,700     9,746     1.13   270   .13     848,355     10,621     1.25   139   .07  

Maryland

   702,543     6,675     .95   149   .08     695,324     8,217     1.18   11   .01  

New Jersey

   41,188     234     .57    —      —       40,230     388     .96    —      —    

Other Mid-Atlantic(a)

   211,391     498     .24   4   .01     210,089     1,662     .79   (9 (.02

Other

   19,789     1,368     6.91   1   .02     19,338     1,277     6.60    —      —    
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $3,173,168    $35,670     1.12 $789   .10  $3,137,118    $39,031     1.24 $1,110   .14
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Junior lien home equity loans and lines of credit:

                

New York

  $942,014    $26,558     2.82 $2,021   .80  $933,175    $27,313     2.93 $790   .33

Pennsylvania

   382,366     3,464     .91   745   .72     380,564     5,226     1.37   713   .75  

Maryland

   855,594     7,004     .82   1,120   .49     848,125     9,786     1.15   951   .45  

New Jersey

   131,933     2,068     1.57   13   .04     130,916     1,948     1.49   308   1.06  

Other Mid-Atlantic(a)

   321,220     1,226     .38   75   .09     315,860     1,511     .48   81   .10  

Other

   41,868     2,281     5.45   (1 (.01   41,699     1,715     4.11   320   3.08  
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $2,674,995    $42,601     1.59 $3,973   .56  $2,650,339    $47,499     1.79 $3,163   .48
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Limited documentation junior lien:

                

New York

  $841    $—       —   $2   .73  $836    $29     3.48 $—     —  

Pennsylvania

   342     —       —      —      —       340     —       —      —      —    

Maryland

   1,604     72     4.50    —      —       1,602     —       —      —      —    

New Jersey

   389     —       —      —      —       388     —       —      —      —    

Other Mid-Atlantic(a)

   745     —       —      —      —       709     —       —      —      —    

Other

   5,171     379     7.32   60   4.61     4,987     311     6.23   (3 (.25
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $9,092    $451     4.96 $62   2.71  $8,862    $340     3.84 $(3 (.13)% 
  

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

 

 

(a)Includes Delaware, Virginia, West Virginia and the District of Columbia.

 

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Nonaccrual consumer loans aggregated $110 million at March 31, 2016, compared with $118 million at each of March 31, 2015 and December 31, 2015. Included in nonaccrual consumer loans at March 31, 2016, March 31, 2015 and December 31, 2015 were: automobile loans of $15 million, $14 million and $17 million, respectively; recreational vehicle loans of $16 million, $9 million and $9 million, respectively; and outstanding balances of home equity loans and lines of credit of $79 million, $88 million and $84 million, respectively. Information about the location of nonaccrual and charged-off home equity loans and lines of credit as of and for the quarter ended March 31, 2016 is presented in the accompanying table.

Real estate and other foreclosed assets totaled $188 million and $63 million at March 31, 2016 and March 31, 2015, respectively, and $195 million at December 31, 2015. The higher levels of real estate and other foreclosed assets at March 31, 2016 and December 31, 2015 reflect residential real estate properties associated with the Hudson City acquisition, which totaled $121 million and $126 million at those respective dates. Gains or losses resulting from the sales of real estate and other foreclosed assets were not material in the three-month periods ended March 31, 2016, March 31, 2015 or December 31, 2015. At March 31, 2016, the Company’s holding of residential real estate-related properties comprised approximately 90% of foreclosed assets.

A comparative summary of nonperforming assets and certain past due loan data and credit quality ratios as of the end of the periods indicated is presented in the accompanying table.

- 68 --75-


NONPERFORMING ASSET AND PAST DUE, RENEGOTIATED AND IMPAIRED LOAN DATA

Dollars in thousands

 

  2016
First Quarter
    2015 Quarters     2016 Quarters 2015 Quarters 
   Fourth Third Second First   Second First Fourth Third Second 

Nonaccrual loans

  $876,691   799,409   787,098   797,146   790,586    $848,855   876,691   799,409   787,098   797,146  

Real estate and other foreclosed assets

   188,004   195,085   66,144   63,734   62,578     172,473   188,004   195,085   66,144   63,734  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total nonperforming assets

  $1,064,695   994,494   853,242   860,880   853,164    $1,021,328   1,064,695   994,494   853,242   860,880  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Accruing loans past due 90 days or more(a)

  $336,170   317,441   231,465   238,568   236,621    $298,449   336,170   317,441   231,465   238,568  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Government guaranteed loans included in totals above:

            

Nonaccrual loans

  $49,688   47,052   48,955   58,259   60,508    $52,486   49,688   47,052   48,955   58,259  

Accruing loans past due 90 days or more

   279,340   276,285   193,998   206,775   193,618     269,962   279,340   276,285   193,998   206,775  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Renegotiated loans

  $200,771   182,865   189,639   197,145   198,911    $211,159   200,771   182,865   189,639   197,145  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Accruing loans acquired at a discount past due 90 days or more(b)

  $61,767   68,473   80,827   78,591   80,110  

Acquired accruing loans past due 90 days or more(b)

  $68,591   61,767   68,473   80,827   78,591  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Purchased impaired loans(c):

            

Outstanding customer balance

  $1,124,776   1,204,004   278,979   312,507   335,079    $1,040,678   1,124,776   1,204,004   278,979   312,507  

Carrying amount

   715,874   768,329   149,421   169,240   184,018     662,059   715,874   768,329   149,421   169,240  

Nonaccrual loans to total loans and leases, net of unearned discount

   1.00 .91 1.15 1.17 1.18   .96 1.00 .91 1.15 1.17

Nonperforming assets to total net loans and leases and real estate and other foreclosed assets

   1.21 1.13 1.24 1.26 1.27   1.15 1.21 1.13 1.24 1.26

Accruing loans past due 90 days or more (a) to total loans and leases, net of unearned discount

   .38 .36 .34 .35 .35   .34 .38 .36 .34 .35
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

 

(a)Excludes loans acquired at a discount. Predominantly residential mortgage loans.
(b)Loans acquired at a discount that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately.
(c)Accruing loans acquired at a discount that were impaired at acquisition date and recorded at fair value.

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Real estate and other foreclosed assets totaled $172 million at June 30, 2016, compared with $64 million at June 30, 2015, $195 million at December 31, 2015 and $188 million at March 31, 2016. The higher levels of real estate and other foreclosed assets at June 30, 2016, December 31, 2015 and March 31, 2016 reflect residential real estate properties associated with the Hudson City acquisition, which totaled $109 million, $126 million and $121 million at those respective dates. Gains or losses resulting from the sales of real estate and other foreclosed assets were not material in the three-month periods ended June 30, 2016, June 30, 2015 or March 31, 2016. At June 30, 2016, the Company’s holding of residential real estate-related properties comprised approximately 92% of foreclosed assets.

A comparative summary of nonperforming assets and certain past due loan data and credit quality ratios as of the end of the periods indicated is presented in the accompanying table.

Management determined the allowance for credit losses by performing ongoing evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the economic environment in which borrowers operate, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or indemnifications. Management evaluated the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet repayment obligations when quantifying the Company’s exposure to credit losses and the allowance for such losses as of each reporting date. Factors also considered by management when performing its assessment, in addition to general economic conditions and the other factors described above, included, but were not limited to: (i) the impact of residential real estate values on the Company’s portfolio of loans to residential real estate builders and developers and

- 69 -


other loans secured by residential real estate; (ii) the concentrations of commercial real estate loans in the Company’s loan portfolio; (iii) the amount of commercial and industrial loans to businesses in areas of New York State outside of the New York City metropolitan area and in central Pennsylvania that have historically experienced less economic growth and vitality than the vast majority of other regions of the country; (iv) the expected repayment performance associated with the Company’s first and second lien loans secured by residential real estate, including loans obtained in the acquisition of Hudson City that were not classified as purchased impaired; and (v) the size of the Company’s portfolio of loans to individual consumers, which historically have experienced higher net charge-offs as a percentage of loans outstanding than other loan types. The level of the allowance is adjusted based on the results of management’s analysis.

Management cautiously and conservatively evaluated the allowance for credit losses as of March 31,June 30, 2016 in light of: (i) residential real estate values and the level of delinquencies of loans secured by residential real estate; (ii) economic conditions in the markets served by the Company; (iii) slower growth in private sector employment in upstate New York and central Pennsylvania than in other regions served by the Company and nationally; (iv) the significant subjectivity involved in commercial real estate valuations; and (v) the amount of loan growth experienced by the Company. While there has been general improvement in economic conditions, concerns continue to exist about the strength and sustainability of such improvements; the troubled state of global commodity and export markets, including the impact international economic conditions could have on the U.S. economy; Federal Reserve positioning of monetary policy; and continued stagnant population growth in the upstate New York and central Pennsylvania regions (approximately 55% of the Company’s loans are to customers in New York State and Pennsylvania).

The Company utilizes a loan grading system whichthat 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

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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. Criticized commercial loans and commercial real estate loans were $2.4 billion at June 30, 2016, compared with $2.3 billion at each of June 30, 2015 and March 31, 2016 compared withand $2.1 billion at December 31, 2015. The increase in criticized loan balances since December 31, 2015 included $74reflected $206 million related to commercial real estate loans, including a $63 million loan to a retail outlet and $91a $56 million related to commercial loans.loan for condominium development, both in New York City. Approximately 94%97% of loan balances added to the criticized category during the recent quarter were less than 90 days past due and 91%95% had a current payment status. The borrower industries most significantly impacting the higher level of criticized loans were investment real estate, services and manufacturing.

Loan officers with the support of loan review personnel in different geographic locations are responsible to continuously review and reassign loan grades to pass and criticized loans based on their detailed knowledge of individual borrowers and their judgment of the impact on such borrowers resulting from changing conditions in their respective geographic regions. At least annually, updated financial information is obtained from commercial borrowers associated with pass grade loans and additional analysis is performed. On a quarterly basis, the Company’s centralized loan review department reviews all criticized commercial loans and commercial real estate loans greater than $1 million to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or

- 70 -


nonaccruing. For criticized nonaccrual loans, additional meetings are held with loan officers and their managers, workout specialists and senior management to discuss each of the relationships. In analyzing criticized loans, borrower-specific information is reviewed, including operating results, future cash flows, recent developments and the borrower’s outlook, and other pertinent data. The timing and extent of potential losses, considering collateral valuation and other factors, and the Company’s potential courses of action are reviewed. To the extent that these loans are collateral-dependent, they are evaluated based on the fair value of the loan’s collateral as estimated at or near the financial statement date. As the quality of a loan deteriorates to the point of classifying the loan as “criticized,” the process of obtaining updated collateral valuation information is usually initiated, unless it is not considered warranted given factors such as the relative size of the loan, the characteristics of the collateral or the age of the last valuation. In those cases where current appraisals may not yet be available, prior appraisals are utilized with adjustments, as deemed necessary, for estimates of subsequent declines in value as determined by line of business and/or loan workout personnel in the respective geographic regions. Those adjustments are reviewed and assessed for reasonableness by the Company’s loan review department. Accordingly, for real estate collateral securing larger commercial and commercial real estate loans, estimated collateral values are based on current appraisals and estimates of value. For non-real estate loans, collateral is assigned a discounted estimated liquidation value and, depending on the nature of the collateral, is verified through field exams or other procedures. In assessing collateral, real estate and non-real estate values are reduced by an estimate of selling costs. With regard to residential real estate loans, the Company’s loss identification and estimation techniques make reference to loan performance and house price data in specific areas of the country where collateral securing the Company’s residential real estate loans is located. For residential real estate-related loans, including home equity loans and lines of credit, the excess of the loan balance over the net realizable value of the property collateralizing the loan is charged-off when the loan becomes 150 days delinquent. That charge-off is based on recent indications of value

-78-


from external parties that are generally obtained shortly after a loan becomes nonaccrual. Loans to consumers that file for bankruptcy are generally charged-off to estimated net collateral value shortly after the Company is notified of such filings. At March 31,June 30, 2016, approximately 54% of the Company’s home equity portfolio consisted of first lien loans and lines of credit. Of the remaining junior lien loans in the portfolio, approximately 72%71% (or approximately 33% of the aggregate home equity portfolio) consisted of junior lien loans that were behind a first lien mortgage loan that was not owned or serviced by the Company. To the extent known by the Company, if a senior lien loan would be on nonaccrual status because of payment delinquency, even if such senior lien loan was not owned by the Company, the junior lien loan or line that is owned by the Company is placed on nonaccrual status. At March 31,June 30, 2016, the balance of junior lien loans and lines that were in nonaccrual status solely as a result of first lien loan performance was $23$16 million, compared with $22 million at each of March 31,June 30, 2015 and December 31, 2015.2015 and $23 million at March 31, 2016. In monitoring the credit quality of its home equity portfolio for purposes of determining the allowance for credit losses, the Company reviews delinquency and nonaccrual information and considers recent charge-off experience. When evaluating individual home equity loans and lines of credit for charge off, if the Company does not know the amount of the remaining first lien mortgage loan (typically because the Company does not own or service the first lien loan), the Company assumes that the first lien mortgage loan has had no principal amortization since the origination of the junior lien loan. Similarly, data used in estimating incurred losses for purposes of determining the allowance for credit losses also assumes no reductions in outstanding principal of first lien loans since the origination of the junior lien loan. Home equity line of credit terms vary but such lines are generally originated with an open draw period of ten years followed by an amortization period of up to twenty years. At March 31,June 30, 2016,

- 71 -


approximately 86%85% of all outstanding balances of home equity lines of credit related to lines that were still in the draw period, the weighted-average remaining draw periods were approximately five years, and approximately 21%9% were making contractually allowed payments that do not include repayment of principal.

Factors that influence the Company’s credit loss experience include overall economic conditions affecting businesses and consumers, generally, but also residential and commercial real estate valuations, in particular, given the size of the Company’s real estate loan portfolios. Commercial real estate valuations can be highly subjective, as they are based upon many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, interest rates, and, in many cases, the results of operations of businesses and other occupants of the real property. Similarly, residential real estate valuations can be impacted by housing trends, the availability of financing at reasonable interest rates, and general economic conditions affecting consumers.

In determining 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. In quantifying incurred losses, the Company considers the factors and uses the techniques described herein and in note 4 of Notes to Financial Statements. For purposes of determining the level of the allowance for credit losses, the Company segments its loan and lease portfolio by loan type. The amount of specific loss components in the Company’s loan and lease portfolios is determined through a loan-by-loan analysis of commercial loans and commercial real estate loans in nonaccrual status. Measurement of the specific loss components is typically based on expected future cash flows, collateral values or other factors that may impact the borrower’s ability to pay. Losses associated with residential real estate loans and consumer loans are generally determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term

-79-


forecasted loss estimates developed by the Company’s credit department. These forecasts give consideration to overall borrower repayment performance and current geographic region changes in collateral values using third party published historical price indices or automated valuation methodologies. 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 junior lien position. Approximately 46% of the Company’s home equity portfolio consists of junior lien loans and lines of credit. Except for consumer loans and residential real estate loans that are considered smaller balance homogeneous loans and are evaluated collectively and loans obtained at a discount in acquisition transactions, the Company considers a loan to be impaired 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 and has been placed in nonaccrual status. Those impaired loans are evaluated for specific loss components. 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. Loans less than 90 days delinquent are deemed to have a minimal delay in payment and are generally not considered to be impaired. Loans acquired in connection with acquisition transactions subsequent to 2008 were recorded at fair value with no carry-over of any previously recorded allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans and discounting those cash flows at then-current interest rates. For loans acquired at a discount, the impact of estimated future credit losses represents the predominant difference between contractually required payments

- 72 -


and the cash flows expected to be collected. Subsequent decreases to those expected cash flows require the Company to evaluate the need for an additional allowance for credit losses and could lead to charge-offs of acquired loan balances. Additional information regarding the Company’s process for determining the allowance for credit losses is included in note 4 of Notes to Financial Statements.

Management believes that the allowance for credit losses at March 31,June 30, 2016 appropriately reflected credit losses inherent in the portfolio as of that date. The allowance for credit losses was $963$970 million, or 1.10% of total loans and leases at March 31,June 30, 2016, compared with $921$930 million or 1.37%1.36% at March 31,June 30, 2015 and $956 million or 1.09% at December 31, 2015. The ratio of the allowance to total loans and leases at each respective date reflects the impact of loans obtained in acquisition transactions subsequent to 2008 that have been recorded at estimated fair value. As noted earlier, GAAP prohibits any carry-over of an allowance for credit losses for acquired loans recorded at fair value. However, for loans acquired at a premium, GAAP provides that an allowance for credit losses be recognized for incurred losses inherent in the portfolio. The declines in the ratio of the allowance to total loans and leases at March 31,June 30, 2016 and December 31, 2015 from March 31,as compared with June 30, 2015 reflects the impact of loans (predominantly residential real estate loans) obtained in the acquisition of Hudson City. The level of the allowance reflects management’s evaluation of the loan and lease portfolio using the methodology and considering the factors as described herein. Should the various credit factors considered by management in establishing the allowance for credit losses change and should management’s assessment of losses inherent in the loan portfolios also change, the level of the allowance as a percentage of loans could increase or decrease in future periods. The ratio of the allowance to nonaccrual loans at March 31,June 30, 2016 was 110%114%, compared with 117% a year earlier and 120% at December 31, 2015. Given the Company’s general position as a secured lender and its practice of charging-off loan balances when collection is deemed doubtful, that ratio and changes in that ratio are generally not an indicative measure of the adequacy of the Company’s allowance for credit losses, nor does management rely upon that ratio in assessing the adequacy of the allowance. The level of the allowance reflects management’s evaluation of the loan and lease portfolio as of each respective date.

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Other Income

Other income totaled $448 million in the second quarter of 2016, compared with $497 million in the year-earlier quarter and $421 million in the first quarter of 2016, compared with $440 million in the year-earlier quarter and $448 million in the fourth quarter of 2015.2016. The most significant factors contributing to the declineincrease in other income fromin the recent quarter as compared with the first quarter of 2015 were a $20 million decrease in2016 resulted from higher trust income, mortgage banking revenues, and trading account and foreign exchange gains. The decline in the recent quarter as compared with the year-earlier quarter reflects a $13$45 million decreasegain in trust income,the second quarter of 2015 from the divestiture of the trade processing business within the retirement services business of the Company and lower mortgage banking revenues that were partially offset by increases in bank-owned life insurance incomehigher trading account and credit-related fees. As compared with the fourth quarter of 2015, the recent quarter decline in other income reflected lower loan syndication fees and declines in commercial mortgage banking revenues, service charges on deposit accounts and trust income.foreign exchange gains.

Mortgage banking revenues totaledwere $89 million in the recently completed quarter, down from $103 million in the second quarter of 2015 but improved from $82 million in the recent quarter, compared with $102 million in the initial quarter of 2015 and $88 million in the final 20152016 quarter. Mortgage banking revenues are comprised of both residential and commercial mortgage banking activities. The Company’s involvement in commercial mortgage banking activities includes the origination, sales and servicing of loans under the multi-family loan programs of Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development.

Residential mortgage banking revenues, consisting of realized gains from sales of residential real estate loans and loan servicing rights, unrealized gains and losses on residential real estate loans held for sale and related commitments, residential real estate loan servicing fees, and

- 73 -


other residential real estate loan-related fees and income, were $65 million in the second quarter of 2016, compared with $75 million in the second quarter of 2015 and $60 million in each of the firstinitial quarter of 2016 and the final quarter2016. The lower level of 2015, compared with $79 million in the first quarter of 2015. As compared with the first quarter of 2015, the recent quarter decline in residential mortgage banking revenues in the recent quarter as compared with the year-earlier quarter reflects a declinedeclines in revenues associated with servicing residential real estate loans for others and lower gains from origination activities, while the increase from 2016’s first quarter was predominantly attributable to higher gains from origination activities, due largelyprimarily to decreasedincreased volumes of loans originated for sale.

New commitments to originate residential real estate loans to be sold were approximately $858 million in the recent quarter, compared with $995 million and $659 million in 2016’s initial quarter, compared with $936 million in the year-earlier quarter and $667 million in the finalsecond quarter of 2015.2015 and the first quarter of 2016, respectively. Realized gains from sales of residential real estate loans and loan servicing rights and recognized net unrealized gains and losses attributable to residential real estate loans held for sale, commitments to originate loans for sale and commitments to sell loans totaled to gains of $14$19 million in each of the first quarter of 2016 and the final 2015recent quarter, compared with gains of $21 million in the second quarter of 2015 and $14 million in the first quarter of 2015.2016.

The Company is contractually obligated to repurchase previously sold loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan documentation. When required to do so, the Company may reimburse purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues for losses related to its obligations to loan purchasers. The amount of those charges varies based on the volume of loans sold, the level of reimbursement requests received from loan purchasers and estimates of losses that may be associated with previously sold loans. Residential mortgage banking revenues during each of the first quarter ofthree-month periods ended June 30, 2016, June 30, 2015 and the first and final quarters of 2015March 31, 2016 were reduced by approximately $1 million related to the actual or anticipated settlement of repurchase obligations.

Loans held for sale that were secured by residential real estate totaled $269 million and $423$374 million at March 31,June 30, 2016, and$479 million at June 30, 2015 respectively, and $353 million at December 31, 2015. Commitments to sell residential real estate loans and commitments to originate residential real estate loans for sale at

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pre-determined rates were $646$816 million and $521$638 million, respectively, at March 31,June 30, 2016, compared with $859$930 million and $661$672 million, respectively, at March 31,June 30, 2015, and $687 million and $489 million, respectively, at December 31, 2015. Net recognized unrealized gains on residential real estate loans held for sale, commitments to sell loans, and commitments to originate loans for sale were $17 million and $21$19 million at March 31,each of June 30, 2016 and March 31,June 30, 2015, respectively, andcompared with $16 million at December 31, 2015. Changes in such net unrealized gains are recorded in mortgage banking revenues and resulted in net increases in revenue of $3 million and $1 million in the most recent quarter and $2 million in the year-earlierinitial quarter of 2016, respectively, compared with a net decrease in revenue of $3$2 million in the fourthsecond quarter of 2015.

Revenues from servicing residential real estate loans for others were $45$46 million in the recent quarter, compared with $58$53 million and $46$45 million during the quarters ended June 30, 2015 and March 31, 2016, respectively. The decline in the two most recent quarters as compared with the second quarter of 2015 and December 31, 2015, respectively.reflects lower revenues from sub-servicing activities. Residential real estate loans serviced for others totaled $57.8 billion at June 30, 2016, compared with $66.5 billion at June 30, 2015, $61.7 billion at December 31, 2015 and $60.0 billion at March 31, 2016, $65.0 billion at March 31, 2015 and $61.7 billion at December 31, 2015.2016. Reflected in residential real estate loans serviced for others were loans sub-serviced for others of $36.3$34.6 billion $40.4at June 30, 2016, $42.3 billion at June 30, 2015, $37.8 billion at December 31, 2015 and $37.8$36.3 billion at March 31, 2016, March 31, 2015 and December 31, 2015, respectively.2016. Revenues earned for sub-servicing loans were $25 million and $30 million for the three-month periods ended June 30, 2016 and 2015, respectively, and $23 million infor the first quarter of 2016, $35 million in the year-earlier quarter and $25 million in the fourth quarter of 2015.three-month period ended March 31, 2016. The contractual servicing rights associated with loans sub-serviced by the Company were predominantly held by affiliates of Bayview Lending Group LLC (“BLG”).

Capitalized servicing rights consist largely of servicing associated with loans sold by the Company. Capitalized residential mortgage loan

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servicing assets totaled $117 million at June 30, 2016, compared with $114 million a year earlier and $118 million at each of March 31, 2016 and December 31, 2015 compared with $111 million atand March 31, 2015.2016.

Commercial mortgage banking revenues were $22$24 million in the most recentsecond quarter of 2016, compared with $23$28 million in the year-earlier period and $22 million in the first quarter of 2015 and $27 million in the fourth quarter of 2015.2016. Included in such amounts were revenues from loan origination and sales activities of $14 million in the recent quarter, compared with $17 million and $12 million in the first quarter of 2016, $13 million in the firstsecond quarter of 2015 and $15 million in the fourthinitial 2016 quarter, of 2015.respectively. Commercial real estate loans originated for sale to other investors totaled approximately $355$567 million in the firstsecond quarter of 2016, compared with $455$890 million and $464$355 million in the year-earlier quarter and the first and fourth quartersquarter of 2015,2016, respectively. Loan servicing revenues were $10 million in each of the first two quarters of 2016, and 2015, compared with $12$11 million in the finalsecond quarter of 2015. Capitalized commercial mortgage servicing assets aggregatedtotaled $86 million and $78 million at June 30, 2016 and 2015, respectively, and $84 million at each of March 31, 2016 and December 31, 2015, compared with $74 million at March 31, 2015. Commercial real estate loans serviced for other investors totaled $10.9$11.1 billion, $11.4$11.3 billion and $11.0 billion at March 31,June 30, 2016, March 31,June 30, 2015 and December 31, 2015, respectively, and included $2.6 billion, $2.4$2.5 billion and $2.5 billion, respectively, of loan balances for which investors had recourse to the Company if such balances are ultimately uncollectible. Commitments to sell commercial real estate loans and commitments to originate commercial real estate loans for sale were $312$340 million and $184$112 million, respectively, at March 31,June 30, 2016, $464$425 million and $347$105 million, respectively, at March 31,June 30, 2015 and $96 million and $58 million, respectively, at December 31, 2015. Commercial real estate loans held for sale at March 31,June 30, 2016, March 31,June 30, 2015 and December 31, 2015 were $128$228 million, $117$320 million and $39 million, respectively.

Service charges on deposit accounts totaled $104 million in the second quarter of 2016, compared with $105 million and $102 million in eachthe second quarter of 2015 and the first quartersquarter of 2016, and 2015, compared with $106 millionrespectively. The higher

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level of fees in the final 2015 quarter. The recent quarter’s declinequarter as compared with the fourthfirst quarter of 20152016 was largely due to seasonally lowerhigher consumer deposit service charges, particularly overdraft fees.

Trust income includes fees related to two significant businesses. The Institutional Client Services (“ICS”) business provides a variety of trustee, agency, investment management and administrative services for corporations and institutions, investment bankers, corporate tax, finance and legal executives, and other institutional clients who: (i) use capital markets financing structures; (ii) use independent trustees to hold retirement plan and other assets; and (iii) need investment and cash management services. The Wealth Advisory Services (“WAS”) business helps high net worth clients grow their wealth, protect it, and transfer it to their heirs. A comprehensive array of wealth management services are offered, including asset management, fiduciary services and family office services. Trust income totaled $120 million in the second quarter of 2016, compared with $119 million in the second quarter of 2015 and $111 million in the first quarter of 2016, compared with $124 million in the first quarter of 2015 and $115 million in the fourth quarter of 2015.2016. Revenues associated with the ICS business were approximately $52 million, $61 million and $54$58 million during the quarter ended June 30, 2016, compared with $52 million in each of the quarters ended June 30, 2015 and March 31, 2016, March 31, 2015 and December 31, 2015, respectively.2016. The higher ICS revenue decline in the two most recent quartersquarter as compared with the firstsecond quarter of 2015 reflects the April 2015 divestiture of the trade processing business within the retirement services division of ICS. Revenues related to that business reflected in trust income (in the ICS business) duringand the first quarter of 2015 were approximately $9 million. After considering related expenses, including the portion of those revenues paid to sub-advisors, net income attributable to the sold business was not material to the consolidated results of operations of the Company in 2015’s initial quarter.2016 reflects stronger sales activities and higher fees earned from money-market mutual funds. Revenues attributable to WAS were approximately $51$55 million and $56$58 million for the three-month periods ended March 31,June 30, 2016 and 2015, respectively, and $52$51 million for the three-month period ended DecemberMarch 31, 2015.2016. The decline in such recent quarter revenues as compared with the first and fourth quarters

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second quarter of 2015 was due largely to lower customer balances and market performance. The improvement in WAS revenues as compared with the initial 2016 quarter was largely due to annual tax preparation fees recognized in the recent quarter and improved market performance impacting customer balances. Total trust assets, which include assets under management and assets under administration, aggregated $200.0$203.6 billion at March 31,June 30, 2016, compared with $293.4$205.0 billion and $199.2 billion at March 31,June 30, 2015 and December 31, 2015, respectively. The declines in trust assets at the two most recent quarter-ends as compared with March 31, 2015 were predominantly due to the customer account balances included in the April 2015 sale of the trade processing business. Trust assets under management were $66.2$67.0 billion, $69.4$68.3 billion and $66.7 billion at March 31,June 30, 2016, March 31,June 30, 2015 and December 31, 2015, respectively. Additional trust income from investment management activities totaled $8$7 million in the recent quarter, $9 million in the fourthsecond quarter of 2015 and $7$8 million in the first quarter of 2015.2016. That income largely relates to fees earned from retail customer investment accounts and from an affiliated investment manager. Assets managed by that affiliated manager were $6.7 billion at March 31,June 30, 2016, $9.4$8.5 billion at March 31,June 30, 2015 and $7.1 billion at December 31, 2015. The Company’s trust income from that affiliate was not material for any of the quarters then-ended. The Company’s proprietary mutual funds had assets of $11.4$11.2 billion, $12.8$11.9 billion and $12.2 billion at March 31,June 30, 2016, March 31,June 30, 2015 and December 31, 2015, respectively.

Brokerage services income, which includes revenues from the sale of mutual funds and annuities and securities brokerage fees, totaled $16 million in each of the two most recent quarters, compared with $15little changed from $17 million in the firstsecond quarter of 2015. Gains from trading account and foreign exchange activity totaled $7$13 million duringin the firstsecond quarter of 2016, compared with $6 million in the year-earlier quarter and $7 million in the first quarter of 2015 and $10 million in the final 2015 quarter.2016. The recent quarter declineincrease as compared with the immediately preceding quarterthose earlier periods resulted predominantly from lowerhigher activity related to interest rate swap transactions executed on behalf of commercial customers. Information about the notional amount of interest rate, foreign exchange and other contracts entered into by the Company for trading account purposes is included in note 10 of Notes to Financial Statements and herein under the heading “Taxable-equivalent Net Interest Income.”

Other revenues from operations totaled $105 million in the second quarter of 2016, compared with $148 million in the year-earlier quarter and $102 million in the first quarter of 2016, compared with $91 million in the year-earlier quarter and $115 million in the fourth quarter of 2015.2016. The increasedecrease in the recent quarter as compared with the year-earlier quarter reflects higher bank-owned life insurance income, credit-related fees and merchant discount and credit card fees. The recent quarter’s decline as comparedthe $45 million

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gain associated with the finalApril 2015 quarter was largely attributable to lower fees for providing loan syndication and corporate advisory services.sale of the trade processing business in the retirement services division. Included in other revenues from operations were the following significant components. Letter of credit and other credit-related fees totaled $28$30 million in the recent quarter, compared with $26$37 million in the second quarter of 2015 and $28 million in the first quarter of 2015 and $42 million2016. The higher revenues in the fourth2015’s second quarter of 2015.were largely attributable to fees for providing loan syndication services. Tax-exempt income from bank owned life insurance, which includes increases in the cash surrender value of life insurance policies and benefits received, totaled $16$13 million during the recent quarter, compared with $11$15 million in the initialsecond quarter of 2015 and $15$16 million in the finalfirst quarter of 2015.2016. Revenues from merchant discount and credit card fees were $26$27 million in the quarter ended March 31,June 30, 2016, compared with $24$26 million and $28 million in each of the quarters ended June 30, 2015 and March 31, 2015 and December 31, 2015, respectively.2016. Insurance-related sales commissions and other revenues totaled $12$9 million in the initialsecond quarter of 2016, compared with $11$8 million in the year-earlier quarter and $10$12 million in the fourthfirst quarter of 2015.2016. The 2016 initial quarter reflects seasonally higher revenues. M&T’s share of the operating losses of BLG recognized using the equity method of accounting was $4$3 million in each of the firstsecond quarters of 2016 and 2015 and $3$4 million in the fourthfirst quarter of 2015.2016. Information about the Company’s relationship with BLG and its affiliates is included in note 15 of Notes to Financial Statements. Other miscellaneous revenues and the changes in such revenues from period-to-period were not individually significant.

Other income totaled $869 million in the first half of 2016, compared with $937 million in the year-earlier period. Excluding the gain on the divestiture of the trade processing business, other income aggregated $892 million in the first six months of 2015. The most significant contributors to the decrease in other income during the 2016 period were lower mortgage banking revenues and trust income offset, in part, by higher gains from trading account and foreign exchange activity.

Mortgage banking revenues were $171 million during the first half of 2016, compared with $204 million in the year-earlier period. Residential mortgage banking revenues totaled $124 million in the first six months of 2016, down from $154 million in the first half of 2015. New commitments to originate residential real estate loans to be sold were $1.5 billion and $1.9 billion during the first six months of 2016 and 2015, respectively. Realized gains from sales of residential real estate loans and loan servicing rights and recognized unrealized gains and losses on residential real estate loans held for sale, commitments to originate loans for sale and commitments to sell loans totaled to gains of $33 million and $42 million during the six-month periods ended June 30, 2016 and 2015, respectively. Revenues from servicing residential mortgage loans for others were $91 million and $111 million for the first six months of 2016 and 2015, respectively. That decline was attributable to lower sub-servicing revenues that totaled $48 million and $65 million in the 2016 and 2015 periods, respectively. The decline in servicing revenues resulted from lower balances of loans serviced for others. Commercial mortgage banking revenues totaled $47 million and $51 million during the six-month periods ended June 30, 2016 and 2015, respectively. That decrease resulted predominantly from revenues associated with loan origination and sales activities. Commercial real estate loans originated for sale to other investors were $922 million in the first half of 2016, compared with $1.3 billion in the similar 2015 period.

Service charges on deposit accounts totaled $206 million and $208 million during the six-month periods ended June 30, 2016 and 2015, respectively. Trust income aggregated $232 million in the first half of 2016, compared with $242 million in the year-earlier period. That decline was largely attributable to revenues of $9 million associated with the trade processing business sold in April 2015 that were recognized in the first quarter of 2015. Brokerage services income totaled $32 million during each of the first six months of 2016 and 2015. Trading account and foreign exchange activity resulted in gains of $21 million and $12 million for the six-month

 

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periods ended June 30, 2016 and 2015, respectively. That increase was predominantly the result of higher activity related to interest rate swap transactions executed on behalf of commercial customers.

Other revenues from operations were $207 million in the first half of 2016 and $239 million in the year-earlier period. Excluding the $45 million gain on sale of the trade processing business, other revenues from operations were $194 million for the first half of 2015. Included in other revenues from operations were the following significant components. Letter of credit and other credit-related fees totaled $58 million in 2016 and $63 million in 2015. Income from bank owned life insurance was $29 million and $26 million in 2016 and 2015, respectively. Merchant discount and credit card fees aggregated $53 million in 2016 and $50 million in 2015. Insurance-related sales commissions and other revenues totaled $22 million and $19 million in the first six months of 2016 and 2015, respectively. M&T’s investment in BLG resulted in losses of $6 million and $7 million for the first half of 2016 and 2015, respectively. Also contributing to the increase in other revenues from operations in the first half of 2016 as compared with the year-earlier period were higher corporate advisory fees of $4 million.

Other Expense

Other expense totaled $750 million in the second quarter of 2016, compared with $697 million in the year-earlier quarter and $776 million in the first quarter of 2016, compared with $686 million in the year-earlier quarter and $786 million in the final quarter of 2015.2016. Included in those amounts are expenses considered by management to be “nonoperating” in nature consisting of (i) amortization of core deposit and other intangible assets of $12$11 million in the most recent quarter, compared with $7$6 million in the firstsecond quarter of 2015 and $10 million in the fourth quarter of 2015 and merger-related expenses of $23$12 million in the first quarter of 2016 and $76(ii) merger-related expenses of $13 million in the fourthsecond quarter of 2015.2016 and $23 million in the first quarter of 2016. There were no merger-related expenses during the firstsecond quarter of 2015. Exclusive of those nonoperating expenses, noninterest operating expenses totaled $726 million in the second quarter of 2016, compared with $691 million in the year-earlier quarter and $741 million in the first quarter of 2016, compared with $680 million in the year-earlier quarter and $701 million in the fourth quarter of 2015.2016. The most significant factors contributing tofor the increasehigher level of operating expenses in the recent quarter as compared with the year-earlier period were costs associated withsecond quarter of 2015 was the impact of operations obtained in the Hudson City acquisition higher costs for salaries and employee benefits, and increased Federal Deposit Insurance Corporation (“FDIC”) assessments.assessments, which were partially offset by a $40 million cash contribution to The riseM&T Charitable Foundation in the second quarter of 2015. The recent quarter’s lower level of noninterest operating expenses from the fourthas compared with 2016’s first quarter of 2015 reflected the full-quarter impact of the Hudson City acquisition, along with seasonally higherwas due, in large part, to a decline in personnel costs, including stock-based compensation, and employee benefits expenseswhich were seasonably higher in the initial 2016 period, offset, in part, by lowerhigher professional services costs.

Other expense for the first six months of 2016 aggregated $1.53 billion, compared with $1.38 billion in the year-earlier period. Included in those amounts are expenses considered to be “nonoperating” in nature consisting of amortization of core deposit and other intangible assets of $24 million and $13 million in the six-month periods ended June 30, 2016 and 2015, respectively, and merger-related expenses of $36 million in the first half of 2016. There were no merger-related expenses during the first half of 2015. Exclusive of those nonoperating expenses, noninterest operating expenses for the six-month period ended June 30, 2016 increased 7% to $1.47 billion from $1.37 billion in the first six months of 2015. That $96 million increase was attributable to costs associated with acquired operations of Hudson City. Table 2 provides a reconciliation of other expense to noninterest operating expense.

Salaries and employee benefits expense totaled $399 million in the recent quarter, compared with $362 million in the second quarter of 2015 and $432 million in 2016’sthe initial quarter, compared with $390 million in2016 quarter. During the year-earlier quarterfirst six months of 2016 and $434 million in the fourth quarter of 2015. Merger-related2015, salaries and employee benefits expenses were $51expense aggregated $830 million (consisting predominantly of severance) in the fourth quarter of 2015 and $5$752 million, in the first quarter of 2016.respectively. As compared with the year-earlier period, 2015 periods,

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the recent quarter reflectsincreases during the impactthree months and six months ended June 30, 2016 were predominantly the result of the additional employees associated with the Company’s expanded operations and the impact of annual merit increases for employees. Excluding merger-related expenses, theThe higher level of salaries and employee benefits expense level in the recent2016’s initial quarter as compared with the finalrecent quarter reflects the accelerated recognition of 2015 was largely attributablecompensation costs in the earlier quarter for stock-based awards granted to retirement-eligible employees as well as the seasonally higher stock-based compensation, medical plan costs,unemployment insurance, payroll-related taxes unemployment insurance and the Company’s contributions for retirement savings plan benefits related to annual incentive compensation payments. The Company, in accordance with GAAP, has accelerated the recognitionStock-based compensation totaled $17 million during each of compensation costs for stock-based awards granted to retirement-eligible employeesquarters ended June 30, 2016 and employees who will become retirement-eligible prior to full vesting of the award. As a result, stock-based compensation expenseJune 30, 2015 and $29 million during the first quarters of 2016 and 2015 included $16 million and $14 million, respectively, that would have been recognized over the normal vesting period if not for the accelerated expense recognition provisions of GAAP. That acceleration had no effect on the value of stock-based compensation awarded to employees. Salaries and employee benefits expense included stock-based compensation of $29 million and $28 million in the quartersquarter ended March 31, 2016, and March 31,$45 million and $44 million for the six-month periods ended June 30, 2016 and 2015, respectively, and $11 million in the quarter ended December 31, 2015.respectively. The number of full-time equivalent employees was 16,814 at June 30, 2016, 15,380 at June 30, 2015, 16,979 at December 31, 2015 and 16,718 at March 31, 2016, compared with 15,263 and 16,979 at March 31, 2015 and December 31, 2015, respectively.2016.

Excluding the nonoperating expenses described earlier from each quarter, nonpersonnel operating expenses were $314$327 million and $290$329 million in the quarters ended March 31,June 30, 2016 and March 31,June 30, 2015, respectively, and $317$314 million in the fourthfirst quarter of 2015.2016. On the same basis, such expenses were $641 million and $619 million during the first six months of 2016 and 2015, respectively. The increase in such expenses in the recent quarter2016 periods as compared with the year-earlier quarter2015 periods reflected higher equipment and net occupancy expenses and increased FDIC assessments, each due largely to the impact of the acquisition of Hudson City. City, partially offset by a $40 million cash contribution made in the second quarter of 2015 to The M&T Charitable Foundation. As compared with the initial 2016 quarter, the recent quarter increase in nonpersonnel operating expenses was largely the result of higher costs for professional services.

The efficiency ratio measures the relationship of noninterest operating expenses to revenues. The Company’s efficiency ratio was 55.1% during the recent quarter, compared with 58.2% during the second quarter of 2015 and 57.0% in the first quarter of 2016. The efficiency ratios for the six-month periods ended June 30, 2016 compared with 61.5% in the year-earlier period and 55.5% in the fourth

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quarter of 2015.2015 were 56.0% and 59.8%, respectively. The calculation of the efficiency ratio is presented in table 2.

Income Taxes

The provision for income taxes for the firstsecond quarter of 2016 was $169$194 million, compared with $134$167 million in the year-earlier quarter and $140$169 million in the fourthfirst quarter of 2015.2016. The effective tax rates were 36.2%36.6%, 35.6%36.8% and 34.1%36.2% for the quarters ended June 30, 2016, June 30, 2015 and March 31, 2016, March 31, 2015respectively. For the six-month periods ended June 30, 2016 and December 31, 2015, respectively. During the fourth quarter of 2015, the provision for income taxes was reduced by $5 million to reflect technology research credits related to 2011 through 2014 thateffective tax rates were accepted by the Internal Revenue Service in December 2015.36.4% and 36.3%, respectively. The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income, the level of income allocated to the various state and local jurisdictions where the Company operates, because tax rates differ among such jurisdictions, and the impact of any large but infrequently occurring items.

The Company’s effective tax rate in future periods will be affected by the results of operations allocated to the various tax jurisdictions within which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company’s interpretations by any of various tax authorities that may examine tax returns filed by M&T or any of its subsidiaries.

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Capital

Shareholders’ equity was $16.4$16.5 billion at March 31,June 30, 2016, representing 13.12%13.30% of total assets, compared with $12.5$12.7 billion or 12.73%13.05% at March 31,June 30, 2015 and $16.2 billion or 13.17% at December 31, 2015.

Included in shareholders’ equity was preferred stock with a financial statement carrying value of $1.2 billion at each of March 31,June 30, 2016, March 31,June 30, 2015 and December 31, 2015. Further information concerning M&T’s preferred stock can be found in note 6 of Notes to Financial Statements.

Common shareholders’ equity aggregated $15.1$15.2 billion, or $95.00$96.49 per share, at March 31,June 30, 2016, compared with $11.3$11.4 billion, or $84.95$85.90 per share, a year earlier and $14.9 billion, or $93.60 per share, at December 31, 2015. In conjunction with the acquisition of Hudson City, M&T issued 25,953,950 common shares, which added $3.1 billion to common shareholders’ equity on November 1, 2015. Tangible equity per common share, which excludes goodwill and core deposit and other intangible assets and applicable deferred tax balances, was $65.65$66.95 at March 31,June 30, 2016, $58.29$59.39 at March 31,June 30, 2015 and $64.28 at December 31, 2015. The Company’s ratio of tangible common equity to tangible assets was 8.71%8.87% at March 31,June 30, 2016, compared with 8.17%8.45% a year earlier and 8.69% at December 31, 2015. Reconciliations of total common shareholders’ equity and tangible common equity and total assets and tangible assets as of each of those respective dates are presented in table 2.

Shareholders’ equity reflects accumulated other comprehensive income or loss, which includes the net after-tax impact of unrealized gains or losses on investment securities classified as available for sale, unrealized losses on held-to-maturity securities for which an other-than-temporary impairment charge has been recognized, gains or losses associated with interest rate swap agreements designated as cash flow hedges, foreign currency translation adjustments and adjustments to reflect the funded status of defined benefit pension and other postretirement plans. Net unrealized gains on investment securities, net of applicable tax effect, were $145$193 million, or $.91$1.22 per common share, at March 31,June 30, 2016, compared with net unrealized gains of $153$80 million, or $1.15$.60 per common share, at March 31,June 30, 2015 and $48 million, or $.30 per common share, at December 31, 2015. The higher unrealized gains at the recent quarter-end as compared with December 31, 2015 resulted largely

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from a decline inlower market yields on treasurythe securities with comparable duration toin the majority of the Company’s government issued or guaranteed mortgage-backed securitiesinvestment portfolio. Information about unrealized gains and losses as of March 31,June 30, 2016 and December 31, 2015 is included in note 3 of Notes to Financial Statements.

Reflected in net unrealized gains at March 31,June 30, 2016 were pre-tax effect unrealized losses of $34$26 million on available-for-sale investment securities with an amortized cost of $1.7 billion$399 million and pre-tax effect unrealized gains of $297$366 million on securities with an amortized cost of $10.2$11.2 billion. The pre-tax effect unrealized losses reflect $26$22 million of losses on trust preferred securities issued by financial institutions having an amortized cost of $124$125 million and an estimated fair value of $98$103 million (generally considered Level 2 valuations). Further information concerning the Company’s valuations of available-for-sale investment securities is provided in note 12 of Notes to Financial Statements.

As of March 31,June 30, 2016, based on a review of each of the securities in the investment securities portfolio, the Company concluded that the declines in the values of any securities containing an unrealized loss were temporary and that any additional other-than-temporary impairment charges were not appropriate. It is likely that the Company will be required to sell certain of its collateralized debt obligations backed by trust preferred securities held in the available-for-sale portfolio to comply with the provisions of the Dodd-Frank Act commonly referred to as the “Volcker Rule”.Rule.” However, the amortized cost and fair value of those collateralized debt obligations were $24 million and $29 million, respectively, at March 31,June 30, 2016 and the Company does not expect that it would realize any material losses if it ultimately

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was required to sell such securities. As of that date, the Company did not intend to sell nor is it anticipated that it would be required to sell any of its other impaired securities, that is, where fair value is less than the cost basis of the security. The Company intends to continue to closely monitor the performance of its securities because changes in their underlying credit performance or other events could cause the cost basis of those securities to become other-than-temporarily impaired. However, because the unrealized losses on available-for-sale investment securities have generally already been reflected in the financial statement values for investment securities and shareholders’ equity, any recognition of an other-than-temporary decline in value of those investment securities would not have a material effect on the Company’s consolidated financial condition. Any other-than-temporary impairment charge related to held-to-maturity securities would result in reductions in the financial statement values for investment securities and shareholders’ equity. Additional information concerning fair value measurements and the Company’s approach to the classification of such measurements is included in note 12 of the Notes to Financial Statements.

The Company assesses impairment losses on privately issued mortgage-backed securities in the held-to-maturity portfolio by performing internal modeling to estimate bond-specific cash flows considering recent performance of the mortgage loan collateral and utilizing assumptions about future defaults and loss severity. These bond-specific cash flows also reflect the placement of the bond in the overall securitization structure and the remaining subordination levels. In total, at March 31,June 30, 2016 and December 31, 2015, the Company had in its held-to-maturity portfolio privately issued mortgage-backed securities with an amortized cost basis of $175$169 million and $181 million, respectively, and a fair value of $137$129 million and $142 million, respectively. At March 31,June 30, 2016, 89%85% of the mortgage-backed securities were in the most senior tranche of the securitization structure with 28%26% being independently rated as investment grade. The mortgage-backed securities are generally collateralized by residential and small-balance commercial real estate loans originated between 2004 and 2008 and had a weighted-average credit enhancement of 15%16% at March 31,June 30, 2016, calculated by dividing the remaining unpaid principal balance of bonds subordinate to the

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bonds owned by the Company plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure. All mortgage-backed securities in the held-to-maturity portfolio had a current payment status as of March 31,June 30, 2016. The weighted-average default percentage and loss severity assumptions utilized in the Company’s internal modeling were 33%31% and 88%80%, respectively. The Company has concluded that as of March 31,June 30, 2016, its privately issued mortgage-backed securities were not other-than-temporarily impaired. Nevertheless, it is possible that adverse changes in the future performance of mortgage loan collateral underlying such securities could impact the Company’s conclusions.

Adjustments to reflect the funded status of defined benefit pension and other postretirement plans, net of applicable tax effect, reduced accumulated other comprehensive income by $293$289 million, or $1.84$1.83 per common share, at March 31,June 30, 2016, $295 million, or $2.22 per common share, at June 30, 2015 and $297 million, or $1.86 per common share, at December 31, 2015.

The Company did not repurchase any shares of its common stock during 2015. However, in accordance with its 2015 Capital Plan, M&T repurchased 948,545 common shares for $100 million in the first quarter of 2016 and $3011,319,487 common shares for $154 million or $2.26 per common share, at March 31, 2015.in the second quarter of 2016.

On March 12, 2015,June 29, 2016, M&T announced that the Federal Reserve did not object to M&T’s proposed 20152016 Capital Plan. Accordingly, M&T was allowedThat plan includes the repurchase of up to maintain a$1.15 billion of common shares during the four-quarter period starting on July 1, 2016 and an increase in the quarterly common stock dividend in the first quarter of $.702017 of up to $.05 per share;share to $.75 per share. M&T may also continue to pay dividends and interest on other equity and debt instruments

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included in regulatory capital, including preferred stock, trust preferred securities and subordinated debt that were outstanding at December 31, 2014,2015, consistent with the contractual terms of those instruments; repurchase up to $200 million of common shares during the first half of 2016; and redeem or repurchase up to $310 million of trust preferred securities. Those latter securities were redeemed in April 2015. Common and preferred dividendsinstruments. Dividends are subject to approvaldeclaration by M&T’s Board of Directors. Furthermore, on July 19, 2016, M&T’s Board of Directors in the ordinary course of business. As the Hudson City transaction occurred later than contemplated in that 2015 Capital Plan, common stock dividends paid in relation to the common stock issued as merger consideration were less than projected. With the concurrence of the Federal Reserve, the distribution of that capital, approximately $54 million, is being re-allocated into the commonauthorized a new stock repurchase program for the second quarterto repurchase up to $1.15 billion of 2016.

The Company did not repurchase any shares of its common stock during 2015. However,subject to all applicable regulatory reporting limitations, including those set forth in M&T’s 2016 Capital Plan. During July 2016, M&T commenced a program to repurchase its commonrepurchased 1,150,000 shares for $132 million in accordance with its approved 2015 Capital Plan, and in the first quarter of 2016 repurchased 948,545 shares for $100 million. M&T’s Board of Directors has authorized the repurchase of up to $154 million of common stock in the second quarter of 2016.that program.

Cash dividends declared on M&T’s common stock duringtotaled $111 million in the recent quarter, ended March 31, 2016 totaled $112 million, compared with $94 million and $112 million in each of the quarters ended June 30, 2015 and March 31, and December 31, 2015,2016, respectively, and represented a quarterly dividend payment of $.70 per common share in each of those quarters.periods. Common stock dividends during the six-month periods ended June 30, 2016 and 2015 were $223 million and $187 million, respectively. Cash dividends declared on preferred stock aggregated $20 million in each of the firstsecond quarters of 2016 and 2015 and the fourthfirst quarter of 2015.2016.

M&T and its subsidiary banks are required to comply with applicable capital adequacy regulations established by the federal banking agencies. Pursuant to those regulations, the minimum capital ratios are as follows:

 

4.5% Common Equity Tier 1 (“CET1”) to risk-weighted assets (each as defined in the capital regulations);

 

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets (each as defined in the capital regulations);

 

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets (each as defined in the capital regulations); and

 

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4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”), as defined in the regulation.

In addition, capital regulations provide for the phase-in of a “capital conservation buffer” composed entirely of CET1 on top of these minimum risk-weighted asset ratios. When fully phased-in on January 1, 2019 the capital conservation buffer will be 2.5%. For 2016, the phased-in transition portion of that buffer is .625%.

The regulatory capital ratios of the Company, M&T Bank and Wilmington Trust, N.A. as of March 31,June 30, 2016 are presented in the accompanying table.

REGULATORY CAPITAL RATIOS

March 31,June 30, 2016

 

  M&T
(Consolidated)
  M&T
Bank
  Wilmington
Trust, N.A.
   M&T
(Consolidated)
 M&T
Bank
 Wilmington
Trust, N.A.
 
   

Common equity Tier 1

   11.06 11.33 73.17   11.01  11.24  74.53

Tier 1 capital

   12.35 11.33 73.17   12.29  11.24  74.53

Total capital

   14.84 13.35 73.84   14.72  13.25  75.20

Tier 1 leverage

   9.96 9.15 20.72   9.99  9.14  19.56

The Company is also subject to the comprehensive regulatory framework applicable to bank and financial holding companies and their subsidiaries, which includes regular examinations by a number of federal regulators. Regulation of financial institutions such as M&T and its subsidiaries is intended primarily for the protection of depositors, the Deposit Insurance Fund of the FDIC and the banking and financial system as a whole, and generally is

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not intended for the protection of shareholders, investors or creditors other than insured depositors. Changes in laws, regulations and regulatory policies applicable to the Company’s operations can increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive environment in which the Company operates, all of which could have a material effect on the business, financial condition or results of operations of the Company and in M&T’s ability to pay dividends.

For additional information concerning this comprehensive regulatory framework, refer to Part I, Item 1 of M&T’s Form 10-K for the year ended December 31, 2015 and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of that Form 10-K under the heading “Regulatory Oversight.”

On June 17, 2013, M&T and M&T Bank entered into a written agreement with the Federal Reserve Bank of New York. Under the terms of the agreement, M&T and M&T Bank were required to submit to the Federal Reserve Bank of New York a revised compliance risk management program designed to ensure compliance with the Bank Secrecy Act and anti-money-laundering laws and regulations (“BSA/AML”) and to take certain other steps to enhance their compliance practices. M&T and M&T Bank have since made substantial progress in implementing a BSA/AML program with significantly expanded scale and scope, as recognized by the Board of Governors of the Federal Reserve System in its Order approving M&T and M&T Bank’s applications to acquire Hudson City and Hudson City Savings Bank. M&T and M&T Bank are continuing to work towards the resolution of all outstanding issues in the written agreement.

Segment Information

As required by GAAP, the Company’s reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Financial information about the Company’s segments is presented in note 14 of Notes to Financial Statements. EffectiveAs disclosed in M&T’s Form 10-K for the year ended December 31, 2015, effective July 1, 2015, the Company changed its internal profitability reporting to move a builder and developer lending unit from the Residential Mortgage Banking

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segment to the Commercial Real Estate segment and, accordingly, the financial information for the Company’s reportable segments for the three-month and six-month periods ended June 30, 2015 have been restated to provide segment information on a comparable basis. Additionally, during the second quarter of 2016, the Company revised its funds transfer pricing allocation related to the residential real estate loans obtained in the acquisition of Hudson City, retroactive to November 1, 2015. Accordingly, financial information for the Discretionary Portfolio segment and the “All Other” category for the three-month period ended March 31, 20152016 has been restatedreclassified to reflect that change.conform to the current allocation methodology.

The Business Banking segment earned $23 million in the second quarter of 2016, compared with $25 million in each of the two most recent quartersthree-month periods ended June 30, 2015 and in the first quarter of 2015.March 31, 2016. As compared with the year-earlier quarter, higher branch network allocated costs largely associated with the acquired Hudson City operations were partially offset by a $4$3 million increase in net interest income. The higher net interest income resulted largely from an increase in average outstanding deposit balances of $950 million. The decline in net income from 2016’s first quarter reflected an increase in advertising and promotional expenses and other operating expenses. Net income recorded by the Business Banking segment totaled $48 million in the first six months of 2016, compared with $50 million in the year-earlier period. That 4% year-over-year decline was attributable to higher allocated costs primarily associated with the acquired Hudson City branches, largely offset by a $7 million increase in net interest income and a $3$4 million decline in the provision for credit losses, due to lower net charge-offs, were offset by higher centrally-allocated costs largely associated with the acquired Hudson City operations.charge-offs. The higherimprovement in net interest income resulted predominantly fromprimarily reflected an increase in average outstanding deposit balances of $1.1 billion. As compared with the immediately preceding quarter, a decrease in the provision for credit losses, largely due to lower net charge-offs, was offset by lower revenues from merchant discount and credit card fees and modestly higher centrally-allocated costs.

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The Commercial Banking segment contributedrecorded net income of $101$105 million during the quarter ended March 31,June 30, 2016, compared with $96$108 million in the year-earlier quarter and $118$101 million in the fourthfirst quarter of 2015.2016. The recent quarter’s 5% improvement2% decline in net income as compared with the firstsecond quarter of 2015 reflected higher volume-related and other costs related to data processing, risk management and other services that were partially offset by an $8 million decline in the provision for credit losses, primarily due to lower net charge-offs, and a $7 million increase in net interest income. The higher net interest income resulted from increases in average outstanding loan and deposit balances of $1.1$1.2 billion and $831 million, respectively, and a widening of the net interest margin on deposits of 10 basis points, partially offset by a narrowing of the net interest margin on loans of 7 basis points. The recent quarter’s 4% rise in net income as compared with the first quarter of 2016 was largely due to $5 million increases in each of corporate customer advisory fees and net interest income and a decline in the provision for credit losses of $4 million, due to lower net charge-offs. The higher net interest income largely reflects an increase in average outstanding loan balances of $710 million. Those favorable factors were offset, in part, by increases in FDIC assessments, data processing expenses, and other miscellaneous operating expenses. Net income earned by the Commercial Banking segment totaled $207 million for the first half of 2016, up slightly from $205 million earned in the similar 2015 period. That improvement reflected a $15 million rise in net interest income and an $8 million decline in the provision for credit losses. The higher net interest income resulted from higher average outstanding balances of loans and deposits of $1.2 billion and $501 million, respectively, and a widening of the net interest margin on deposits of 11 basis points, partially offset by a narrowing of the net interest margin on loans of 8 basis points. Those factors were largely offset by an increase in FDIC assessments of $6 million and higher allocated operating expenses associated with data processing, risk management and other support services provided to the Commercial Banking segment.

The Commercial Real Estate segment contributed net income of $84 million in the second quarter of 2016, compared with $83 million in the year-earlier period and $81 million in the first quarter of 2016. The modest improvement in net income as compared with the second quarter of 2015 reflects $5 million increases in each of net interest income and trading account and foreign exchange gains, largely offset by higher FDIC assessments and a decrease in mortgage banking revenues, the result of a decline in origination and sales activities. The higher net interest income resulted from an increase in average outstanding loan balances of $1.7 billion and a widening of the net interest margin on deposits of 13 basis points, partially offset by a narrowing of the net interest margin on loans of 919 basis points. Those favorable factors were offset, in part, by an increase in centrally-allocated technology-related costs and other operating expenses. The recent quarter’s decline in net income as compared with 2015’s fourth quarter was largely dueContributing to lower credit-related and other fees of $13 million and a $10 million increasethe 4% improvement in the provision for credit losses, largely due to a $10 million partial recovery in the final 2015 quarter of a previously charged-off loan related to a relationship with a motor vehicle-related parts wholesaler.

The Commercial Real Estate segment contributed net income of $81 million in the first quarter of 2016, compared with $83 million in the year-earlier period and $90 million in the fourth quarter of 2015. The modest decline inrecent quarter’s net income as compared with the first quarter of 2015 reflects2016 was a $3$6 million increaserise in the provision for credit losses, due to lower recoveries of previously charged-off loans,net interest income and higher operating expenses that were largely offset by a $5 million increase in net interest income, reflecting increases in average outstanding loan and deposit balances of $1.5 billion and $371 million, respectively. The recent quarter decline in net income as compared with the final 2015 quarter was largely due to lower net interest income and trading account and foreign exchange gains of $2 million each, increases in personnel costs of $2 million and othergains. The higher operating expenses. The lower net interest income was predominantly due to a narrowing of the net interest margin on loans of 10 basis points, partially offset byreflected an increase in average outstanding loan balances of $439$568 million combined with a 6 basis point widening of the net interest margin on loans. Those favorable factors were partially offset by higher FDIC assessment costs. Net income for the Commercial Real Estate segment totaled $165 million during each of the six-month periods ended June 30, 2016 and 2015. A rise in net interest income of $10 million and higher trading account and foreign exchange gains of $7 million were offset by increased FDIC assessments of $6 million, lower mortgage banking revenues of $3 million and a higher provision for credit losses. The increase in net interest income resulted from higher average outstanding loan balances of $1.6 billion and a widening of the net interest margin on deposits of 1614 basis points offset, in part, by a narrowing of the net interest margin on loans of 19 basis points. The higher trading account and foreign exchange gains during the three-month and six-month periods ended June 30, 2016 resulted from increased activity related to interest rate swap transactions executed on behalf of customers.

The Discretionary Portfolio segment recorded net income of $40$46 million during the three-month period ended March 31,June 30, 2016, compared with $6$11 million

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in the year-earlier period and $31$55 million in the fourthfirst quarter of 2015.2016. The significant improvement as compared with the firstsecond quarter of 2015 was predominantly due to the impact of residential real estate loans obtained in the acquisition of Hudson City. A $5 million increase in bank owned life insurance revenues also contributed toPartially offsetting that improvement. Those favorable factorsfactor were offset, in part, by a $3 million increaseincreases in the provision for credit losses and FDIC assessments of $6 million each, and higher loan and other real estate-related servicing costs. The decline in net income in the recent quarter’s favorable performancequarter as compared with the immediately preceding quarter includedresulted from a $9 million decrease in net interest income, lower bank owned life insurance revenues of $4 million and higher FDIC assessments. The lower net interest income predominantly reflected lower average outstanding loan balances of $936 million and a narrowing of the full-quarter impactnet interest margin on investment securities of 8 basis points. Year-to-date net income for this segment totaled $101 million in 2016 and $17 million in 2015. That significant increase was predominantly the result of residential real estate loans obtained in the acquisition of Hudson City, partially offset by

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a $4 million increase increases in the provision for credit losses primarily due toand FDIC assessments of $9 million each and higher net charge-offs.loan and other real-estate servicing costs.

Net income from the Residential Mortgage Banking segment was $17$20 million in the recent quarter, compared with $29$25 million in the second quarter of 2015 and $17 million in the first quarter of 2015 and $13 million in 2015’s fourth quarter.2016. The decline in net income as compared with the year-earlier period was largelypredominantly attributable to lower revenues from subservicing residential real estate loans. The recent quarter’s improved performance as compared with the first quarter of 2016 reflected a $7$6 million increase in revenues associated with mortgage origination and sales activities (including intersegment revenues) due to higher origination volumes. The Residential Mortgage Banking segment contributed $37 million of net income in the first six months of 2016, compared with $54 million in the corresponding 2015 period. That decline reflected a $9 million decrease in revenues from mortgage origination and sales activities (including intersegment revenues), due to lower origination volumes, and a decline in revenues from subservicing residential real estate loans. Contributing to the recent quarter’s improved results as compared with the final quarter of 2015 were a $2 million improvement in net interest income and decreased centrally-allocated loan servicing expenses. The improvement in net interest income reflected a widening of the net interest margin on loans.

Net income earned by the Retail Banking segment totaled $63$71 million in the firstsecond quarter of 2016, compared with $69 million in the year-earlier quarter and $65$63 million in the finalfirst quarter of 2016. As compared with the second quarter of 2015, quarter. The primary contributorsthe recent quarter’s improved performance resulted from a $41 million rise in net interest income, predominantly due to the impact of deposits obtained in the acquisition of Hudson City, that was largely offset by: a $14 million increase in personnel-related expenses, resulting from the Hudson City acquisition; a $9 million increase in the provision for credit losses, reflecting a $6 million charge-off of a personal usage loan; increased FDIC assessments of $5 million; higher equipment and net occupancy costs of $4 million, reflecting the impact of the Hudson City acquisition, and a $3 million increase in advertising and promotional expenses. The recent quarter declinequarter’s 13% improvement in net income as compared with the year-earlier period were:first quarter of 2016 reflected a $21$17 million increasedecrease in the provision for credit losses, largely due to partial charge-offs recognized in the first quarter of 2016 on loans for which the Company identified that the customer was either bankrupt or deceased; a $15deceased, partially offset by increased FDIC assessments. Net income recorded by the Retail Banking segment totaled $135 million rise in personnel-related expensesthe first half of 2016 and $138 million in 2015. Factors contributing to that 2% decline were increases in: the provision for credit losses of $30 million, due to higher net charge-offs; personnel costs of $29 million, equipment and net occupancy costsexpenses of $4$8 million reflectingand advertising and promotional expenses of $6 million, all predominantly due to the impact of the acquisition of Hudson City acquisition; a $3 million increase in advertisingCity; and promotional expenses and higher centrally-allocated operating costs.FDIC assessment costs of $5 million. Those unfavorable factors were largely offset by an $80 million increase in net interest income, of $39 million, predominantly due to the impact of deposits obtained in the acquisition of Hudson City. The recent quarter’s modest decline in net income as compared with the fourth quarter of 2015 reflected a $23 million increase in the provision for credit losses, largely due to the aforementioned partial charge-offs recognized in the first quarter of 2016, seasonally lower service charges on deposit accounts of $5 million and higher personnel-related expenses of $4 million due to the full-quarter impact of the Hudson City acquisition. Those unfavorable factors were largely offset by a $17 million rise in net interest income and an $8 million decrease in advertising and promotional expenses. The improvement in net interest income predominantly reflected the full-quarter impact of consumer deposits obtained in the acquisition of Hudson City.

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The “All Other” category reflects other activities of the Company that are not directly attributable to the reported segments. Reflected in this category are the amortization of core deposit and other intangible assets resulting from the acquisitions of financial institutions, including the November 2015 Hudson City transaction, M&T’s share of the operating losses of BLG, merger-related expenses resulting from acquisitions and the net impact of the Company���sCompany’s allocation methodologies for internal transfers for funding charges and credits associated with the earning assets and interest-bearing liabilities of the Company’s reportable segments and the provision for credit losses. The “All Other” category also includes the trust income of the Company that reflects the ICS and WAS business activities. The various components of the “All Other” category resulted in net losses totaling $29$14 million for the quarter ended March 31,June 30, 2016, $67$34 million in the year-earlier quarter and $71$44 million in the fourthfirst quarter of 2015.2016. As compared with the firstyear-earlier quarter, of 2015,the recent quarter reflects the favorable impact from the Company’s allocation methodologies for internal transfers for funding charges and credits associated with earning assets and interest-bearing liabilities of the Company’s reportable segments and the provision for credit losses, and decreasesa decrease in professional servicesallocated FDIC assessments that were partially offset by higher personnel-related costs of $7$20 million were offset, in part, by:and merger-related expenses aggregating $23$13 million in the recent quarter (there were no such expenses in the firstsecond quarter of 2015); higher personnel-related expenses. Results for the second quarter of $17 million; a decline in trust income of $132015 reflected the $45 million in

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large part reflecting the impact ofpre-tax gain related to the sale of the trade processing business within the retirement services division that was mostly offset by $40 million of ICS in April 2015; and increased FDIC assessmentstax-deductible cash contributions to The M&T Charitable Foundation. The after-tax impact of $10those two items lowered net income by approximately $1 million. Merger-related costsThe reduced net loss in the fourthsecond quarter of 2015 aggregated $97 million. Excluding merger-related costs in each of the two most recent quarters, the “All Other” category resulted in net losses for the quarters ended March 31, 2016 and December 31, 2015 of $15 million and $10 million, respectively. The increased net loss fromas compared with the immediately preceding quarter was mostly due toreflected a decrease in personnel-related costs of $29 million (resulting from seasonally higher stock-based incentive compensation, unemployment insurance, payroll-related taxes and other benefits in the initial 2016 quarter), a reduction of merger-related expenses of $11 million, an increase in personnel-relatedtrust income of $9 million and other operatinglower allocated FDIC assessments, partially offset by higher professional services costs offset,of $12 million and the impact from the Company’s allocation methodologies for internal transfers for funding charges and credits associated with earning assets and interest-bearing liabilities of the Company’s reportable segments. The “All Other” category had net losses of $58 million and $100 million for the six months ended June 30, 2016 and 2015, respectively. The improved performance in part, by2016 was predominantly due to the favorable impact from the Company’s allocation methodologies for internal transfers for funding charges and lower professional services costs.credits associated with earning assets and interest-bearing liabilities of the Company’s reportable segments, partially offset by $36 million of merger-related expenses (there were no such expenses in the 2015 period).

Recent Accounting Developments

Effective January 1, 2016, the Company adopted amended accounting guidance relating to the consolidation of variable interest entities to modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and to eliminate the presumption that a general partner should consolidate a limited partnership. The amended guidance also eliminates certain conditions in the assessment of whether fees paid by a legal entity to a decision maker or a service provider represent a variable interest in the legal entity and reduces the extent to which related party arrangements cause an entity to be considered a primary beneficiary. The new guidance eliminates the indefinite deferral of existing consolidation guidance for certain investment funds, but provides a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.position or results of operations.

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In January 2016, the Company also adopted amended accounting guidance for debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position at January 1, 2016.

In the first quarter of 2016, the Company adopted amended accounting guidance for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amended guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

Amended accounting guidance for measurement-period adjustments related to business combinations was also adopted by the Company in the first quarter of 2016. The amended guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the

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reporting period in which the adjustment amounts are determined. The acquirer is now required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

In MarchJune 2016, the Financial Accounting Standards Board (“FASB”) issued amended guidance for the measurement of credit losses on certain financial assets. The amended guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses will represent a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense. Subsequent changes in the allowance will be recorded as an expense. In addition, the amended guidance requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The calculation of credit losses for available-

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for-sale securities will be similar to how it is determined under existing guidance. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company is evaluating the impact the amended guidance may have on its consolidated financial statements.

In March 2016, the FASB issued amended accounting guidance for share-based transactions. The amended guidance requires that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement and that excess tax benefits should be recognized regardless of whether the benefit reduces taxes payable in the current period. The guidance allows an entity to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The guidance permits share-based awards that allow for the withholding of shares up to the maximum statutory tax ratio in applicable jurisdictions to qualify for equity classification. The previous GAAP threshold was restricted to the employer’s minimum statutory withholding requirements. The guidance also specifies certain changes to the reporting of share-based transactions on the statement of cash flows and is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company is still evaluatingexpects adoption of the impactguidance will result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for share-based transactions, but the amended guidance may haveactual amounts recognized in tax expense will be dependent on its consolidated financial statements.the amount of share-based transactions entered into and the stock price at the time of vesting.

In March 2016, the FASB issued amended accounting guidance for the transition to the equity method of accounting. The amended guidance eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method has been in effect during all previous periods that the investment had been held. Instead, the amended guidance requires the investor to adopt the equity method of accounting as of the date the investment first qualifies for such accounting. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company does not expect the guidance to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued two amendments to its rules on accounting for derivatives and hedging. The first amendment clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The second amendment clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment is required to assess the embedded call (put) options solely in accordance with a four-step decision sequence and no longer has to assess whether the event that triggers the ability to exercise the option is related to interest rates or credit risks. Both amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect the guidance will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued guidance related to the accounting for leases. The core principle of the guidance is that all leases create an asset and a liability for the lessee and, therefore, lease assets and lease liabilities should be recognized in the balance sheet. Lease assets will be recognized as a right-of-use asset and lease liabilities will be recognized

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as a liability to make lease payments. While the guidance requires all

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leases to be recognized in the balance sheet, there continues to be a differentiation between finance leases and operating leases for purposes of income statement recognition and cash flow statement presentation. For finance leases, interest on the lease liability and amortization of the right-of-use asset will be recognized separately in the statement of income. Repayments of principal on those lease liabilities will be classified within financing activities and payments of interest on the lease liability will be classified within operating activities in the statement of cash flows. For operating leases, a single lease cost is recognized in the statement of income and allocated over the lease term, generally on a straight-line basis. All cash payments are presented within operating activities in the statement of cash flows. The accounting applied by lessors is largely unchanged from existing GAAP, however, the guidance eliminates the accounting model for leveraged leases for leases that commence after the effective date of the guidance. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company occupies certain banking offices and uses certain equipment under noncancelable operating lease agreements, which currently are not reflected in its consolidated balance sheet. Such leases generally will be required to be presented in the Company’s consolidated balance sheet upon adoption of this guidance. The Company is evaluating the impact the guidance will have on its consolidated financial statements.

In January 2016, the FASB issued amended guidance related to recognition and measurement of financial assets and liabilities. The amended guidance requires that equity investments (excluding those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. An entity can elect to measure equity investments that do not have readily determinable fair values at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The impairment assessment of equity investments without readily determinable fair values is simplified by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates impairment exists, an entity is required to measure the investment at fair value. The guidance eliminates the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Further, the guidance requires public entities to use the exit price when measuring the fair value of financial instruments for disclosure purposes. The guidance also requires an entity to present separately in other comprehensive income, a change in the instrument-specific credit risk when the entity has elected to measure a liability at fair value in accordance with the fair value option. Separate presentation of financial assets and financial liabilities by measurement category and type of instrument on the balance sheet or accompanying notes to the financial statements is required. The guidance also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is evaluating the impact the guidance could have on its consolidated financial statements.

In May 2014, the FASB issued amended accounting and disclosure guidance for revenue from contracts with customers. The core principle of the accounting guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract;

- 86 -


(3) determine the transaction price; (4) allocate the transaction price to the

-96-


performance obligations in the contract; (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amended disclosure guidance requires sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of this guidance by one year. The amended guidance is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The guidance should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. The Company is still evaluating the impact the guidance could have on its consolidated financial statements.

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain forward-looking statements that are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “prospects” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could,” or “may,” or by variations of such words or by similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Forward-looking statements speak only as of the date they are made and the Company assumes no duty to update forward-looking statements.

Future Factors include changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity; prepayment speeds, loan originations, credit losses and market values of loans, collateral securing loans and other assets; sources of liquidity; common shares outstanding; common stock price volatility; fair value of and number of stock-based compensation awards to be issued in future periods; the impact of changes in market values on trust-related revenues; legislation and/or regulation affecting the financial services industry as a whole, and M&T and its subsidiaries individually or collectively, including tax legislation or regulation; regulatory supervision and oversight, including monetary policy and capital requirements; changes in accounting policies or procedures as may be required by the FASB or regulatory agencies; increasing price and product/service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products/services; containing costs and expenses; governmental and public policy changes; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; the outcome of pending and future litigation and governmental proceedings, including tax-related examinations and other matters; continued availability of financing; financial resources in the amounts, at the times and on the terms required to support M&T and its subsidiaries’ future businesses; and material differences in the actual financial results of merger, acquisition and investment activities compared with M&T’s initial expectations, including the full realization of anticipated cost savings and revenue enhancements.

These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates,

- 87 -


general economic and political conditions, either nationally or in the states

-97-


in which M&T and its subsidiaries do business, including interest rate and currency exchange rate fluctuations, changes and trends in the securities markets, and other Future Factors.

 

- 88 --98-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

Table 1

QUARTERLY TRENDS

 

  2016 2015 Quarters   2016 Quarters 2015 Quarters 
  First Quarter Fourth Third Second First   Second First Fourth Third Second First 

Earnings and dividends

             

Amounts in thousands, except per share

             

Interest income (taxable-equivalent basis)

  $979,166   908,734   776,274   766,374   743,925    $977,143   979,166   908,734   776,274   766,374   743,925  

Interest expense

   100,870   95,333   77,199   77,226   78,499     106,802   100,870   95,333   77,199   77,226   78,499  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net interest income

   878,296   813,401   699,075   689,148   665,426     870,341   878,296   813,401   699,075   689,148   665,426  

Less: provision for credit losses

   49,000   58,000   44,000   30,000   38,000     32,000   49,000   58,000   44,000   30,000   38,000  

Other income

   420,933   448,108   439,699   497,027   440,203     448,254   420,933   448,108   439,699   497,027   440,203  

Less: other expense

   776,095   786,113   653,816   696,628   686,375     749,895   776,095   786,113   653,816   696,628   686,375  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Income before income taxes

   474,134   417,396   440,958   459,547   381,254     536,700   474,134   417,396   440,958   459,547   381,254  

Applicable income taxes

   169,274   140,074   154,309   166,839   133,803     194,147   169,274   140,074   154,309   166,839   133,803  

Taxable-equivalent adjustment

   6,332   6,357   6,248   6,020   5,838     6,522   6,332   6,357   6,248   6,020   5,838  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net income

  $298,528   270,965   280,401   286,688   241,613    $336,031   298,528   270,965   280,401   286,688   241,613  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net income available to common shareholders-diluted

  $275,748   248,059   257,346   263,481   218,837    $312,974   275,748   248,059   257,346   263,481   218,837  

Per common share data

             

Basic earnings

  $1.74   1.65   1.94   1.99   1.66    $1.98   1.74   1.65   1.94   1.99   1.66  

Diluted earnings

   1.73   1.65   1.93   1.98   1.65     1.98   1.73   1.65   1.93   1.98   1.65  

Cash dividends

  $.70   .70   .70   .70   .70    $.70   .70   .70   .70   .70   .70  

Average common shares outstanding

             

Basic

   158,734   150,027   132,630   132,356   132,049     157,802   158,734   150,027   132,630   132,356   132,049  

Diluted

   159,181   150,718   133,376   133,116   132,769     158,341   159,181   150,718   133,376   133,116   132,769  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Performance ratios, annualized

             

Return on

             

Average assets

   .97 .93 1.13 1.18 1.02   1.09 .97 .93 1.13 1.18 1.02

Average common shareholders’ equity

   7.44 7.22 8.93 9.37 7.99   8.38 7.44 7.22 8.93 9.37 7.99

Net interest margin on average earning assets (taxable-equivalent basis)

   3.18 3.12 3.14 3.17 3.17   3.13 3.18 3.12 3.14 3.17 3.17

Nonaccrual loans to total loans and leases, net of unearned discount

   1.00 .91 1.15 1.17 1.18   .96 1.00 .91 1.15 1.17 1.18
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net operating (tangible) results (a)

             

Net operating income (in thousands)

  $320,064   337,613   282,907   290,341   245,776    $350,604   320,064   337,613   282,907   290,341   245,776  

Diluted net operating income per common share

   1.87   2.09   1.95   2.01   1.68     2.07   1.87   2.09   1.95   2.01   1.68  

Annualized return on

             

Average tangible assets

   1.09 1.21 1.18 1.24 1.08   1.18 1.09 1.21 1.18 1.24 1.08

Average tangible common shareholders’ equity

   11.62 13.26 12.98 13.76 11.90   12.68 11.62 13.26 12.98 13.76 11.90

Efficiency ratio (b)

   57.00 55.53 57.05 58.23 61.46   55.06 57.00 55.53 57.05 58.23 61.46
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Balance sheet data

             

In millions, except per share

             

Average balances

             

Total assets (c)

  $123,252   115,052   98,515   97,598   95,892    $123,706   123,252   115,052   98,515   97,598   95,892  

Total tangible assets (c)

   118,577   110,772   94,989   94,067   92,346     119,039   118,577   110,772   94,989   94,067   92,346  

Earning assets

   111,211   103,587   88,446   87,333   85,212     111,872   111,211   103,587   88,446   87,333   85,212  

Investment securities

   15,348   15,786   14,441   14,195   13,376     14,914   15,348   15,786   14,441   14,195   13,376  

Loans and leases, net of unearned discount

   87,584   81,110   67,849   67,670   66,587     88,155   87,584   81,110   67,849   67,670   66,587  

Deposits

   92,391   85,657   73,821   72,958   71,698     94,033   92,391   85,657   73,821   72,958   71,698  

Common shareholders’ equity (c)

   15,047   13,775   11,555   11,404   11,227     15,145   15,047   13,775   11,555   11,404   11,227  

Tangible common shareholders’ equity (c)

   10,372   9,495   8,029   7,873   7,681     10,478   10,372   9,495   8,029   7,873   7,681  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

At end of quarter

             

Total assets (c)

  $124,626   122,788   97,797   97,080   98,378    $123,821   124,626   122,788   97,797   97,080   98,378  

Total tangible assets (c)

   119,955   118,109   94,272   93,552   94,834     119,157   119,955   118,109   94,272   93,552   94,834  

Earning assets

   113,005   110,802   87,807   86,990   87,959     112,057   113,005   110,802   87,807   86,990   87,959  

Investment securities

   15,467   15,656   14,495   14,752   14,393     14,963   15,467   15,656   14,495   14,752   14,393  

Loans and leases, net of unearned discount

   87,872   87,489   68,540   68,131   67,099     88,522   87,872   87,489   68,540   68,131   67,099  

Deposits

   94,215   91,958   72,945   72,630   73,594     94,650   94,215   91,958   72,945   72,630   73,594  

Common shareholders’ equity, net of undeclared cumulative preferred dividends (c)

   15,120   14,939   11,687   11,433   11,294     15,237   15,120   14,939   11,687   11,433   11,294  

Tangible common shareholders’ equity (c)

   10,449   10,260   8,162   7,905   7,750     10,573   10,449   10,260   8,162   7,905   7,750  

Equity per common share

   95.00   93.60   87.67   85.90   84.95     96.49   95.00   93.60   87.67   85.90   84.95  

Tangible equity per common share

   65.65   64.28   61.22   59.39   58.29     66.95   65.65   64.28   61.22   59.39   58.29  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Market price per common share

             

High

  $119.24   127.39   134.00   128.70   129.58    $121.11   119.24   127.39   134.00   128.70   129.58  

Low

   100.08   111.50   111.86   117.86   111.78     107.01   100.08   111.50   111.86   117.86   111.78  

Closing

   111.00   121.18   121.95   124.93   127.00     118.23   111.00   121.18   121.95   124.93   127.00  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

(a)Excludes amortization and balances related to goodwill and core deposit and other intangible assets and merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. A reconciliation of net income and net operating income appears in Table 2.
(b)Excludes impact of merger-related expenses and net securities transactions.
(c)The difference between total assets and total tangible assets, and common shareholders’ equity and tangible common shareholders’ equity, represents goodwill, core deposit and other intangible assets, net of applicable deferred tax balances. A reconciliation of such balances appears in Table 2.

 

-89--99-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

Table 2

RECONCILIATION OF QUARTERLY GAAP TO NON-GAAP MEASURES

 

  2016 2015 Quarters   2016 Quarters 2015 Quarters 
  First Quarter Fourth Third Second First   Second First Fourth Third Second First 

Income statement data

             

In thousands, except per share

             

Net income

             

Net income

  $298,528   270,965   280,401   286,688   241,613    $336,031   298,528   270,965   280,401   286,688   241,613  

Amortization of core deposit and other intangible assets (a)

   7,488   5,828   2,506   3,653   4,163     6,936   7,488   5,828   2,506   3,653   4,163  

Merger-related expenses (a)

   14,048   60,820    —      —      —       7,637   14,048   60,820    —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net operating income

  $320,064   337,613   282,907   290,341   245,776    $350,604   320,064   337,613   282,907   290,341   245,776  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Earnings per common share

             

Diluted earnings per common share

  $1.73   1.65   1.93   1.98   1.65    $1.98   1.73   1.65   1.93   1.98   1.65  

Amortization of core deposit and other intangible assets (a)

   .05   .04   .02   .03   .03     .04   .05   .04   .02   .03   .03  

Merger-related expenses (a)

   .09   .40    —      —      —       .05   .09   .40    —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Diluted net operating earnings per common share

  $1.87   2.09   1.95   2.01   1.68    $2.07   1.87   2.09   1.95   2.01   1.68  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Other expense

             

Other expense

  $776,095   786,113   653,816   696,628   686,375    $749,895   776,095   786,113   653,816   696,628   686,375  

Amortization of core deposit and other intangible assets

   (12,319 (9,576 (4,090 (5,965 (6,793   (11,418 (12,319 (9,576 (4,090 (5,965 (6,793

Merger-related expenses

   (23,162 (75,976  —      —      —       (12,593 (23,162 (75,976  —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Noninterest operating expense

  $740,614   700,561   649,726   690,663   679,582    $725,884   740,614   700,561   649,726   690,663   679,582  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Merger-related expenses

             

Salaries and employee benefits

  $5,274   51,287    —      —      —      $60   5,274   51,287    —      —      —    

Equipment and net occupancy

   939   3    —      —      —       339   939   3    —      —      —    

Printing, postage and supplies

   937   504    —      —      —       545   937   504    —      —      —    

Other costs of operations

   16,012   24,182    —      —      —       11,649   16,012   24,182    —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Other expense

   23,162   75,976    —      —      —       12,593   23,162   75,976    —      —      —    

Provision for credit losses

   —     21,000    —      —      —       —      —     21,000    —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

  $23,162   96,976    —      —      —      $12,593   23,162   96,976    —      —      —    
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Efficiency ratio

             

Noninterest operating expense (numerator)

  $740,614   700,561   649,726   690,663   679,582    $725,884   740,614   700,561   649,726   690,663   679,582  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Taxable-equivalent net interest income

   878,296   813,401   699,075   689,148   665,426     870,341   878,296   813,401   699,075   689,148   665,426  

Other income

   420,933   448,108   439,699   497,027   440,203     448,254   420,933   448,108   439,699   497,027   440,203  

Less: Gain (loss) on bank investment securities

   4   (22  —     (10 (98   264   4   (22  —     (10 (98
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Denominator

  $1,299,225   1,261,531   1,138,774   1,186,185   1,105,727    $1,318,331   1,299,225   1,261,531   1,138,774   1,186,185   1,105,727  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Efficiency ratio

   57.00 55.53 57.05 58.23 61.46   55.06 57.00 55.53 57.05 58.23 61.46
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Balance sheet data

             

In millions

             

Average assets

             

Average assets

  $123,252   115,052   98,515   97,598   95,892    $123,706   123,252   115,052   98,515   97,598   95,892  

Goodwill

   (4,593 (4,218 (3,513 (3,514 (3,525   (4,593 (4,593 (4,218 (3,513 (3,514 (3,525

Core deposit and other intangible assets

   (134 (101 (20 (25 (31   (122 (134 (101 (20 (25 (31

Deferred taxes

   52   39   7   8   10     48   52   39   7   8   10  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Average tangible assets

  $118,577   110,772   94,989   94,067   92,346    $119,039   118,577   110,772   94,989   94,067   92,346  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Average common equity

             

Average total equity

  $16,279   15,007   12,787   12,636   12,459    $16,377   16,279   15,007   12,787   12,636   12,459  

Preferred stock

   (1,232 (1,232 (1,232 (1,232 (1,232   (1,232 (1,232 (1,232 (1,232 (1,232 (1,232
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Average common equity

   15,047   13,775   11,555   11,404   11,227     15,145   15,047   13,775   11,555   11,404   11,227  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Goodwill

   (4,593 (4,218 (3,513 (3,514 (3,525   (4,593 (4,593 (4,218 (3,513 (3,514 (3,525

Core deposit and other intangible assets

   (134 (101 (20 (25 (31   (122 (134 (101 (20 (25 (31

Deferred taxes

   52   39   7   8   10     48   52   39   7   8   10  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Average tangible common equity

  $10,372   9,495   8,029   7,873   7,681    $10,478   10,372   9,495   8,029   7,873   7,681  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

At end of quarter

             

Total assets

             

Total assets

  $124,626   122,788   97,797   97,080   98,378    $123,821   124,626   122,788   97,797   97,080   98,378  

Goodwill

   (4,593 (4,593 (3,513 (3,513 (3,525   (4,593 (4,593 (4,593 (3,513 (3,513 (3,525

Core deposit and other intangible assets

   (128 (140 (18 (22 (28   (117 (128 (140 (18 (22 (28

Deferred taxes

   50   54   6   7   9     46   50   54   6   7   9  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total tangible assets

  $119,955   118,109   94,272   93,552   94,834    $119,157   119,955   118,109   94,272   93,552   94,834  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total common equity

             

Total equity

  $16,355   16,173   12,922   12,668   12,528    $16,472   16,355   16,173   12,922   12,668   12,528  

Preferred stock

   (1,232 (1,232 (1,232 (1,232 (1,232   (1,232 (1,232 (1,232 (1,232 (1,232 (1,232

Undeclared dividends - cumulative preferred stock

   (3 (2 (3 (3 (2   (3 (3 (2 (3 (3 (2
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Common equity, net of undeclared cumulative preferred dividends

   15,120   14,939   11,687   11,433   11,294     15,237   15,120   14,939   11,687   11,433   11,294  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Goodwill

   (4,593 (4,593 (3,513 (3,513 (3,525   (4,593 (4,593 (4,593 (3,513 (3,513 (3,525

Core deposit and other intangible assets

   (128 (140 (18 (22 (28   (117 (128 (140 (18 (22 (28

Deferred taxes

   50   54   6   7   9     46   50   54   6   7   9  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total tangible common equity

  $10,449   10,260   8,162   7,905   7,750    $10,573   10,449   10,260   8,162   7,905   7,750  
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

(a)After any related tax effect.

 

- 90 --100-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

Table 3

AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES

 

   2016 First Quarter  2015 Fourth Quarter  2015 Third Quarter 

Average balance in millions; interest in thousands

  Average
Balance
  Interest   Average
Rate
  Average
Balance
  Interest   Average
Rate
  Average
Balance
  Interest   Average
Rate
 

Assets

             

Earning assets

             

Loans and leases, net of unearned discount*

             

Commercial, financial, etc.

  $20,717   $174,657     3.39  20,221    164,515     3.23  19,939    161,709     3.22

Real estate - commercial

   29,426    309,415     4.16    28,973    303,960     4.11    28,309    302,626     4.18  

Real estate - consumer

   25,859    254,144     3.93    20,369    204,420     4.01    8,348    87,047     4.17  

Consumer

   11,582    130,971     4.55    11,547    129,103     4.44    11,253    126,369     4.46  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total loans and leases, net

   87,584    869,187     3.99    81,110    801,998     3.92    67,849    677,751     3.96  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Interest-bearing deposits at banks

   8,193    10,337     .51    6,622    4,931     .30    6,060    3,852     .25  

Federal funds

   1    1     .77    1    2     .54    —      —       —    

Trading account

   85    378     1.78    68    317     1.88    96    125     .52  

Investment securities**

             

U.S. Treasury and federal agencies

   14,264    90,138     2.54    14,778    89,052     2.39    13,548    86,152     2.52  

Obligations of states and political subdivisions

   113    1,164     4.13    128    1,419     4.40    138    1,398     4.03  

Other

   971    7,961     3.30    880    11,015     4.96    755    6,996     3.68  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total investment securities

   15,348    99,263     2.60    15,786    101,486     2.55    14,441    94,546     2.60  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total earning assets

   111,211    979,166     3.54    103,587    908,734     3.48    88,446    776,274     3.48  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Allowance for credit losses

   (955     (947     (937   

Cash and due from banks

   1,288       1,348       1,218     

Other assets

   11,708       11,064       9,788     
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total assets

  $123,252       115,052       98,515     
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Liabilities and shareholders’ equity

             

Interest-bearing liabilities

             

Interest-bearing deposits

             

Interest-checking deposits

  $1,359    414     .12    1,331    384     .11    1,309    360     .11  

Savings deposits

   48,976    15,891     .13    45,974    13,219     .11    41,197    10,937     .11  

Time deposits

   12,999    24,322     .75    9,686    15,986     .65    2,858    3,643     .51  

Deposits at Cayman Islands office

   187    193     .42    224    167     .30    206    151     .29  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total interest-bearing deposits

   63,521    40,820     .26    57,215    29,756     .21    45,570    15,091     .13  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Short-term borrowings

   2,082    2,162     .42    1,615    1,575     .39    174    32     .07  

Long-term borrowings

   10,528    57,888     2.21    10,748    64,002     2.36    10,114    62,076     2.44  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total interest-bearing liabilities

   76,131    100,870     .53    69,578    95,333     .54    55,858    77,199     .55  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Noninterest-bearing deposits

   28,870       28,443       28,251     

Other liabilities

   1,972       2,024       1,619     
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total liabilities

   106,973       100,045       85,728     
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Shareholders’ equity

   16,279       15,007       12,787     
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $123,252       115,052       98,515     
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Net interest spread

      3.01       2.94       2.93  

Contribution of interest-free funds

      .17       .18       .21  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Net interest income/margin on earning assets

   $878,296     3.18   813,401     3.12   699,075     3.14
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

   2016 Second Quarter  2016 First Quarter  2015 Fourth Quarter 

Average balance in millions; interest in thousands

  Average
Balance
  Interest   Average
Rate
  Average
Balance
  Interest   Average
Rate
  Average
Balance
  Interest   Average
Rate
 

Assets

             

Earning assets

             

Loans and leases, net of unearned discount*

             

Commercial, financial, etc.

  $21,450   $184,803     3.47  20,717    174,657     3.39  20,221    164,515     3.23

Real estate - commercial

   30,134    311,490     4.09    29,426    309,415     4.16    28,973    303,960     4.11  

Real estate - consumer

   24,858    244,806     3.94    25,859    254,144     3.93    20,369    204,420     4.01  

Consumer

   11,713    132,437     4.55    11,582    130,971     4.55    11,547    129,103     4.44  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total loans and leases, net

   88,155    873,536     3.99    87,584    869,187     3.99    81,110    801,998     3.92  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Interest-bearing deposits at banks

   8,711    10,993     .51    8,193    10,337     .51    6,622    4,931     .30  

Federal funds

   —      —       —      1    1     .77    1    2     .54  

Trading account

   92    364     1.58    85    378     1.78    68    317     1.88  

Investment securities**

             

U.S. Treasury and federal agencies

   13,906    84,019     2.43    14,264    90,138     2.54    14,778    89,052     2.39  

Obligations of states and political subdivisions

   97    1,009     4.20    113    1,164     4.13    128    1,419     4.40  

Other

   911    7,222     3.19    971    7,961     3.30    880    11,015     4.96  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total investment securities

   14,914    92,250     2.49    15,348    99,263     2.60    15,786    101,486     2.55  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total earning assets

   111,872    977,143     3.51    111,211    979,166     3.54    103,587    908,734     3.48  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Allowance for credit losses

   (976     (955     (947   

Cash and due from banks

   1,243       1,288       1,348     

Other assets

   11,567       11,708       11,064     
  

 

 

     

 

 

     

 

 

    

Total assets

  $123,706       123,252       115,052     
  

 

 

     

 

 

     

 

 

    

Liabilities and shareholders’ equity

             

Interest-bearing liabilities

             

Interest-bearing deposits

             

Interest-checking deposits

  $1,332    400     .12    1,359    414     .12    1,331    384     .11  

Savings deposits

   50,515    20,134     .16    48,976    15,891     .13    45,974    13,219     .11  

Time deposits

   12,755    26,867     .85    12,999    24,322     .75    9,686    15,986     .65  

Deposits at Cayman Islands office

   182    181     .40    187    193     .42    224    167     .30  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total interest-bearing deposits

   64,784    47,582     .30    63,521    40,820     .26    57,215    29,756     .21  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Short-term borrowings

   1,078    1,143     .43    2,082    2,162     .42    1,615    1,575     .39  

Long-term borrowings

   10,297    58,077     2.27    10,528    57,888     2.21    10,748    64,002     2.36  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total interest-bearing liabilities

   76,159    106,802     .56    76,131    100,870     .53    69,578    95,333     .54  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Noninterest-bearing deposits

   29,249       28,870       28,443     

Other liabilities

   1,921       1,972       2,024     
  

 

 

     

 

 

     

 

 

    

Total liabilities

   107,329       106,973       100,045     
  

 

 

     

 

 

     

 

 

    

Shareholders’ equity

   16,377       16,279       15,007     
  

 

 

     

 

 

     

 

 

    

Total liabilities and shareholders’ equity

  $123,706       123,252       115,052     
  

 

 

     

 

 

     

 

 

    

Net interest spread

      2.95       3.01       2.94  

Contribution of interest-free funds

      .18       .17       .18  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income/margin on earning assets

   $870,341     3.13  $878,296     3.18   813,401     3.12
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

*       Includes nonaccrual loans.

(continued)

**

Includes available-for-sale securities at amortized cost.

 

-91-(continued)

-101-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

Table 3 (continued)

AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)

 

  2015 Second Quarter 2015 First Quarter   2015 Third Quarter 2015 Second Quarter 

Average balance in millions; interest in thousands

  Average
Balance
 Interest   Average
Rate
 Average
Balance
 Interest   Average
Rate
   Average
Balance
 Interest   Average
Rate
 Average
Balance
 Interest   Average
Rate
 

Assets

                  

Earning assets

                  

Loans and leases, net of unearned discount*

                  

Commercial, financial, etc.

  $19,973   $158,109     3.18 19,457   153,866     3.21  $19,939   $161,709     3.22 19,973   158,109     3.18

Real estate - commercial

   28,208   298,565     4.19   27,596   288,121     4.18     28,309   302,626     4.18   28,208   298,565     4.19  

Real estate - consumer

   8,447   88,473     4.19   8,572   88,850     4.15     8,348   87,047     4.17   8,447   88,473     4.19  

Consumer

   11,042   122,812     4.46   10,962   121,366     4.49     11,253   126,369     4.46   11,042   122,812     4.46  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Total loans and leases, net

   67,670   667,959     3.96   66,587   652,203     3.97     67,849   677,751     3.96   67,670   667,959     3.96  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Interest-bearing deposits at banks

   5,326   3,351     .25   5,073   3,118     .25     6,060   3,852     .25   5,326   3,351     .25  

Federal funds

   39   9     .10   97   24     .10     —      —       —     39   9     .10  

Trading account

   103   239     .92   79   565     2.87     96   125     .52   103   239     .92  

Investment securities**

                  

U.S. Treasury and federal agencies

   13,265   83,356     2.52   12,437   78,313     2.55     13,548   86,152     2.52   13,265   83,356     2.52  

Obligations of states and political subdivisions

   149   1,607     4.32   159   1,967     5.04     138   1,398     4.03   149   1,607     4.32  

Other

   781   9,853     5.06   780   7,735     4.02     755   6,996     3.68   781   9,853     5.06  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Total investment securities

   14,195   94,816     2.68   13,376   88,015     2.67     14,441   94,546     2.60   14,195   94,816     2.68  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Total earning assets

   87,333   766,374     3.52   85,212   743,925     3.54     88,446   776,274     3.48   87,333   766,374     3.52  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Allowance for credit losses

   (929    (925      (937    (929   

Cash and due from banks

   1,180      1,221        1,218      1,180     

Other assets

   10,014      10,384        9,788      10,014     
  

 

  

 

   

 

  

 

  

 

   

 

   

 

     

 

    

Total assets

  $97,598      95,892       $98,515      97,598     
  

 

  

 

   

 

  

 

  

 

   

 

   

 

     

 

    

Liabilities and shareholders’ equity

                  

Interest-bearing liabilities

                  

Interest-bearing deposits

                  

Interest-checking deposits

  $1,333   349     .11   1,121   311     .11    $1,309   360     .11   1,333   349     .11  

Savings deposits

   41,712   10,361     .10   41,525   10,219     .10     41,197   10,937     .11   41,712   10,361     .10  

Time deposits

   2,948   3,690     .50   3,017   3,740     .50     2,858   3,643     .51   2,948   3,690     .50  

Deposits at Cayman Islands office

   212   150     .28   224   147     .27     206   151     .29   212   150     .28  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Total interest-bearing deposits

   46,205   14,550     .13   45,887   14,417     .13     45,570   15,091     .13   46,205   14,550     .13  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Short-term borrowings

   195   36     .07   196   34     .07     174   32     .07   195   36     .07  

Long-term borrowings

   10,164   62,640     2.47   9,835   64,048     2.64     10,114   62,076     2.44   10,164   62,640     2.47  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Total interest-bearing liabilities

   56,564   77,226     .55   55,918   78,499     .57     55,858   77,199     .55   56,564   77,226     .55  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Noninterest-bearing deposits

   26,753      25,811        28,251      26,753     

Other liabilities

   1,645      1,704        1,619      1,645     
  

 

  

 

   

 

  

 

  

 

   

 

   

 

     

 

    

Total liabilities

   84,962      83,433        85,728      84,962     
  

 

  

 

   

 

  

 

  

 

   

 

   

 

     

 

    

Shareholders’ equity

   12,636      12,459        12,787      12,636     
  

 

  

 

   

 

  

 

  

 

   

 

   

 

     

 

    

Total liabilities and shareholders’ equity

  $97,598      95,892       $98,515      97,598     
  

 

  

 

   

 

  

 

  

 

   

 

   

 

     

 

    

Net interest spread

      2.97       2.97        2.93       2.97  

Contribution of interest-free funds

      .20       .20        .21       .20  
  

 

  

 

   

 

  

 

  

 

   

 

    

 

   

 

   

 

   

 

 

Net interest income/margin on earning assets

   $689,148     3.17  665,426     3.17   $699,075     3.14  689,148     3.17
  

 

  

 

   

 

  

 

  

 

   

 

    

 

   

 

   

 

   

 

 

 

*Includes nonaccrual loans.
**Includes available-for-sale securities at amortized cost.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Incorporated by reference to the discussion contained under the caption “Taxable-equivalent Net Interest Income” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 4.Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. Based upon their evaluation of the effectiveness of M&T’s disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)), Robert G. Wilmers, Chairman of the Board and Chief Executive Officer, and René F. Jones,Darren J. King, Executive Vice President and Chief Financial Officer, concluded that M&T’s disclosure controls and procedures were effective as of March 31,June 30, 2016.

(b) Changes in internal control over financial reporting. M&T regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. No changes in internal control over financial reporting have been identified in connection with the evaluation of disclosure controls and procedures during the quarter ended March 31,June 30, 2016 that have materially affected, or are reasonably likely to materially affect, M&T’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings.

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Company’s liabilities and contingencies in connection with such proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

Wilmington Trust Corporation Investigative and Litigation Matters

M&T’s Wilmington Trust Corporation subsidiary is the subject of certain governmental investigations arising from actions undertaken by Wilmington Trust Corporation prior to M&T’s acquisition of Wilmington Trust Corporation and its subsidiaries, as set forth below.

DOJ Investigation (United States v. Wilmington Trust Corp., et al, District of Delaware, Crim. No. 15-23-RGA):Prior to M&T’s acquisition of Wilmington Trust Corporation, the Department of Justice (“DOJ”) commenced an investigation of Wilmington Trust Corporation, relating to Wilmington Trust Corporation’s financial reporting and securities filings, as well as certain commercial real estate lending relationships involving its subsidiary bank, Wilmington Trust Company, all of which relate to filings and activities occurring prior to the acquisition of Wilmington Trust Corporation by M&T. On January 6, 2016, the U.S. Attorney for the District of Delaware obtained an indictment against Wilmington Trust Corporation relating to alleged conduct that occurred prior to M&T’s acquisition of Wilmington Trust Corporation in

 

- 93 --103-


May 2011. M&T strongly believes that this unprecedented action is unjustified and Wilmington Trust Corporation will vigorously defend itself. Trial in this matter is scheduled to begin on January 17, 2017. Wilmington Trust Corporation and its counsel are currently involved in pretrial discovery, motion practice and trial preparation.

The indictment of Wilmington Trust Corporation could result in potential criminal remedies, or criminal or non-criminal resolutions or settlements, including, among other things, enforcement actions, potential statutory or regulatory restrictions on the ability to conduct certain businesses (for which waivers may or may not be available), fines, penalties, restitution, reputational damage or additional costs and expenses.

In Re Wilmington Trust Securities Litigation (U.S. District Court, District of Delaware, Case No. 10-CV-0990-SLR) :: Beginning on November 18, 2010, a series of parties, purporting to be class representatives, commenced a putative class action lawsuit against Wilmington Trust Corporation, alleging that Wilmington Trust Corporation’s financial reporting and securities filings were in violation of securities laws. The cases were consolidated and Wilmington Trust Corporation moved to dismiss. The Court issued an order denying Wilmington Trust Corporation’s motion to dismiss on March 20, 2014. Fact discovery commenced. On April 13, 2016, the Court issued an order staying fact discovery in the case pending completion of the trial inU.S. v. Wilmington Trust Corp., et al.

Other Matters

TheAs previously disclosed by the Company isin its public filings, including its report on Form 10-Q for the subject of an investigation by government agencies relating toquarter ended March 31, 2016, the origination of Federal Housing Administration (“FHA”) insured residential home loansCompany had been cooperating with the DOJ and residential home loans sold to Freddie Mac and Fannie Mae. A number of other U.S. financial institutions have announced similar investigations. Regarding FHA loans, the U.S. Department of Housing and Urban Development (“HUD”) Office of Inspector General and, which had been reviewing M&T Bank’s participation in the DOJ (collectively, the “Government”) are investigating whether the Company complied with underwriting guidelines concerning certain loans where HUD paid FHA insurance claims. The Company is fully cooperating with the investigation. The Government has advised the Company that based upon its review of a sample of loans for which an FHA insurance claim was paid by HUD, some of the loans do not meet underwriting guidelines. The Company, based on its own review of the sample, does not agree with the sampling methodology andFederal Housing Administration loan analysis employed by the Government. Regarding loans originated by the Company and sold to Freddie Mac and Fannie Mae, the investigation concerns whether the mortgages sold to Freddie Mac and Fannie Mae comply with applicable underwriting guidelines. The Company is also cooperating with that portion of the investigation. The investigation could lead to claims by the Government under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allow treble and other special damages substantially in excess of actual losses. Remedies in these proceedings or settlements may include restitution, fines, penalties, or alterationsprogram. Also, as previously disclosed in the Company’s business practices. The Company andpublic filings, M&T Bank entered into a settlement agreement with the Government continueDOJ on behalf of HUD. Management of M&T Bank determined to settle this matter for $64 million, without admitting liability, in order to avoid the expense of potential litigation. On May 20, 2016, the United States District Court for the Western District of New York entered an order dismissing the matter. As previously disclosed, this settlement discussions regarding the investigation and although progress has been made, the parties have not yet reached a definitive agreement. Based upon the current status of these negotiations, management expects that this potential settlement shoulddid not have a material impact on the Company’s consolidated financial condition or results of operations in future periods.operations.

Due to their complex nature, it is difficult to estimate when litigation and investigatory matters such as these may be resolved. As set forth in the introductory paragraph to this Item 1 — Legal Proceedings, losses from current litigation and regulatory matters which the Company is subject to that are not currently considered probable are within a range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, and are included in the range of reasonably possible losses set forth above.

 

-104-


Item 1A.Risk Factors.

There have been no material changes in risk factors relating to M&T to those disclosed in response to Item 1A. to Part I of Form 10-K for the year ended December 31, 2015.

 

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

(a) – (b) Not applicable.

(c)

 

Issuer Purchases of Equity Securities

Issuer Purchases of Equity Securities

 

Issuer Purchases of Equity Securities

 

Period

  (a)Total
Number
of Shares
(or Units)
Purchased (1)
   (b)Average
Price Paid
per Share
(or Unit)
   (c)Total
Number of
Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
   (d)Maximum
Number (or
Approximate
Dollar Value)
of Shares
(or Units)
that may yet
be Purchased
Under the
Plans or
Programs (2)
   (a)Total
Number
of Shares
(or Units)
Purchased (1)
   (b)Average
Price Paid
per Share
(or Unit)
   (c)Total
Number of
Shares
(or Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
   (d)Maximum
Number (or
Approximate
Dollar Value)
of Shares
(or Units)
that may yet
be Purchased
Under the
Plans or
Programs (2)
 

January 1 – January 31, 2016

   1,186,638    $106.38     948,545    $100,000,000  

April 1 – April 30, 2016

   533,633    $118.80     533,165    $91,000,000  

February 1 – February 29, 2016

   583     105.73     —       100,000,000  

May 1 – May 31, 2016

   786,572     115.30     786,322     —    

March 1 – March 31, 2016

   441     111.45     —       154,000,000  

June 1 – June 30, 2016

   103     112.55     —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   1,187,662    $106.38     948,545       1,320,308    $116.71     1,319,487    
  

 

   

 

   

 

     

 

   

 

   

 

   

 

(1)The total number of shares purchased during the periods indicated reflects shares purchased as part of publicly announced programs andincludes shares deemed to have been received from employees who exercised stock options by attesting to previously acquired common shares in satisfaction of the exercise price or shares received from employees upon the vesting of restricted stock awards in satisfaction of applicable tax withholding obligations, as is permitted under M&T’s stock-based compensation plans.
(2)On November 17, 2015, M&T announced a program to purchase up to $200,000,000 of its common stock through June 30, 2016. On March 31, 2016, M&T’s Board of Directors authorized the repurchase of up to $54,000,000 of additional shares through June 30, 2016, as part of thethat repurchase program currently in effect.program.

On June 29, 2016, M&T announced that it had received a non-objection from the Federal Reserve to M&T’s 2016 Capital Plan and its proposed capital actions for the four-quarter period starting on July 1, 2016, which includes the repurchase of up to $1.15 billion of common shares. On July 19, 2016, M&T’s Board of Directors authorized a new stock repurchase program to repurchase up to $1.15 billion of shares of its common stock following all applicable regulatory limitations, including those set forth in M&T’s 2016 Capital Plan.

 

Item 3.Defaults Upon Senior Securities.

(Not applicable.)

 

Item 4.Mine Safety Disclosures.

(None.)

 

Item 5.Other Information.

(None.)

 

- 95 --105-


Item 6.Exhibits.

Item 6. Exhibits.

The following exhibits are filed as a part of this report.

 

Exhibit

No.

   
  10.1M&T Bank Corporation Supplemental Pension Plan, as amended. Filed herewith.
  
  10.210.1  Consulting Agreement, dated as of June 14, 2016, between M&T Bank Corporation Supplemental Retirement Savings Plan, as amended.and Robert E. Sadler, Jr. Filed herewith.
31.1  Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2  Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1  Certification of Chief Executive Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.2  Certification of Chief Financial Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101.INS  XBRL Instance Document. Filed herewith.
101.SCH  XBRL Taxonomy Extension Schema. Filed herewith.
101.CAL  XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.
101.LAB  XBRL Taxonomy Extension Label Linkbase. Filed herewith.
101.PRE  XBRL Taxonomy Extension Presentation Linkbase. Filed herewith.
101.DEF  XBRL Taxonomy Definition Linkbase. Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  M&T BANK CORPORATION
Date: April 29,August 4, 2016  By: 

/s/ René F. JonesDarren J. King

   René F. JonesDarren J. King
   Executive Vice President
   and Chief Financial Officer

-106-


EXHIBIT INDEX

 

Exhibit

No.

   
10.1  M&T Bank Corporation Supplemental Pension Plan, as amended. Filed herewith.
  
10.2  10.1  Consulting Agreement, dated as of June 14, 2016, between M&T Bank Corporation Supplemental Retirement Savings Plan, as amended.and Robert E. Sadler, Jr. Filed herewith.
31.1
  Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2  Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1  Certification of Chief Executive Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.2  Certification of Chief Financial Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101.INS  XBRL Instance Document. Filed herewith.
101.SCH  XBRL Taxonomy Extension Schema. Filed herewith.
101.CAL  XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.
101.LAB  XBRL Taxonomy Extension Label Linkbase. Filed herewith.
101.PRE  XBRL Taxonomy Extension Presentation Linkbase. Filed herewith.
101.DEF  XBRL Taxonomy Definition Linkbase. Filed herewith.

 

-97--107-