XNYS:MTB M&T Bank Corp Quarterly Report 10-Q Filing - 3/31/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended March 31, 2012

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 30, 2012: 126,558,669 shares.


Table of Contents

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2012

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  
 

Item 1.

  

Financial Statements.

  
    

CONSOLIDATED BALANCE SHEET - March 31, 2012 and December 31, 2011

     3   
    

CONSOLIDATED STATEMENT OF INCOME - Three months ended March 31, 2012 and 2011

     4   
    

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three months ended March 31, 2012 and 2011

     5   
    

CONSOLIDATED STATEMENT OF CASH FLOWS - Three months ended March 31, 2012 and 2011

     6   
    

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Three months ended March 31, 2012 and 2011

     7   
    

NOTES TO FINANCIAL STATEMENTS

     8   
 

Item 2.

  

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

     51   
 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk.

     95   
 

Item 4.

  

Controls and Procedures.

     95   

Part II. OTHER INFORMATION

  
 

Item 1.

  

Legal Proceedings.

     95   
 

Item 1A.

  

Risk Factors.

     95   
 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds.

     96   
 

Item 3.

  

Defaults Upon Senior Securities.

     96   
 

Item 4.

  

Mine Safety Disclosures.

     96   
 

Item 5.

  

Other Information.

     96   
 

Item 6.

  

Exhibits.

     97   

SIGNATURES

     97   

EXHIBIT INDEX

     98   

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share    March 31,
2012
    December 31,
2011
 

Assets

       
  

Cash and due from banks

   $ 1,344,092        1,449,547   
  

Interest-bearing deposits at banks

     1,282,040        154,960   
  

Federal funds sold

     —          2,850   
  

Trading account

     517,620        561,834   
  

Investment securities (includes pledged securities that can be sold or repledged of $1,816,595 at March 31, 2012; $1,826,011 at December 31, 2011)

    
  

Available for sale (cost: $5,892,799 at March 31, 2012; $6,312,423 at December 31, 2011)

     5,838,022        6,228,560   
  

Held to maturity (fair value: $929,478 at March 31, 2012; $1,012,562 at December 31, 2011)

     1,000,294        1,077,708   
    

Other (fair value: $356,980 at March 31, 2012; $366,886 at December 31, 2011)

     356,980        366,886   
    

Total investment securities

     7,195,296        7,673,154   
  

Loans and leases

     61,185,392        60,377,875   
  

Unearned discount

     (263,642     (281,870
    

Loans and leases, net of unearned discount

     60,921,750        60,096,005   
  

Allowance for credit losses

     (909,006     (908,290
    

Loans and leases, net

     60,012,744        59,187,715   
  

Premises and equipment

     580,033        581,435   
  

Goodwill

     3,524,625        3,524,625   
  

Core deposit and other intangible assets

     159,619        176,394   
  

Accrued interest and other assets

     4,570,818        4,611,773   
    

Total assets

   $ 79,186,887        77,924,287   

Liabilities

       
  

Noninterest-bearing deposits

   $ 20,648,970        20,017,883   
  

NOW accounts

     1,875,461        1,912,226   
  

Savings deposits

     32,225,733        31,001,083   
  

Time deposits

     5,767,588        6,107,530   
  

Deposits at Cayman Islands office

     395,191        355,927   
    

Total deposits

     60,912,943        59,394,649   
  

Federal funds purchased and agreements to repurchase securities

     461,977        732,059   
  

Other short-term borrowings

     50,004        50,023   
  

Accrued interest and other liabilities

     1,856,749        1,790,121   
  

Long-term borrowings

     6,476,526        6,686,226   
    

Total liabilities

     69,758,199        68,653,078   
Shareholders’ equity        
  

Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 381,500 shares at March 31, 2012 and December 31, 2011; Liquidation preference of $10,000 per share: 50,000 shares at March 31, 2012 and December 31, 2011

     866,489        864,585   
  

Common stock, $.50 par, 250,000,000 shares authorized, 126,476,266 shares issued at March 31, 2012; 125,683,398 shares issued at December 31, 2011

     63,238        62,842   
  

Common stock issuable, 57,385 shares at March 31, 2012; 68,220 shares at December 31, 2011

     3,427        4,072   
  

Additional paid-in capital

     2,857,556        2,828,986   
  

Retained earnings

     5,969,236        5,867,165   
    

Accumulated other comprehensive income (loss), net

     (331,258     (356,441
    

Total shareholders’ equity

     9,428,688        9,271,209   
    

Total liabilities and shareholders’ equity

   $ 79,186,887        77,924,287   

 

- 3 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

           Three months ended March 31  
In thousands, except per share    2012     2011  

Interest income

  

Loans and leases, including fees

   $ 648,514        594,032   
  

Deposits at banks

     213        36   
  

Federal funds sold

     3        18   
  

Agreements to resell securities

     —          1   
  

Trading account

     317        388   
  

Investment securities

    
  

Fully taxable

     62,964        70,662   
  

Exempt from federal taxes

     2,084        2,346   
    

Total interest income

     714,095        667,483   

Interest expense

  

NOW accounts

     283        202   
  

Savings deposits

     18,183        19,239   
  

Time deposits

     13,509        19,071   
  

Deposits at Cayman Islands office

     213        394   
  

Short-term borrowings

     303        492   
  

Long-term borrowings

     61,215        59,281   
  

Total interest expense

     93,706        98,679   
  

Net interest income

     620,389        568,804   
  

Provision for credit losses

     49,000        75,000   
    

Net interest income after provision for credit losses

     571,389        493,804   

Other income

  

Mortgage banking revenues

     56,192        45,156   
  

Service charges on deposit accounts

     108,889        109,731   
  

Trust income

     116,953        29,321   
  

Brokerage services income

     13,901        14,296   
  

Trading account and foreign exchange gains

     10,571        8,279   
  

Gain on bank investment securities

     45        39,353   
  

Total other-than-temporary impairment ("OTTI") losses

     (20,040     (9,514
  

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

     8,554        (6,527
    

Net OTTI losses recognized in earnings

     (11,486     (16,041
  

Equity in earnings of Bayview Lending Group LLC

     (4,752     (6,678
  

Other revenues from operations

     86,410        91,003   
    

Total other income

     376,723        314,420   

Other expense

  

Salaries and employee benefits

     346,098        266,090   
  

Equipment and net occupancy

     65,043        56,663   
  

Printing, postage and supplies

     11,872        9,202   
  

Amortization of core deposit and other intangible assets

     16,774        12,314   
  

FDIC assessments

     28,949        19,094   
  

Other costs of operations

     170,959        136,208   
  

Total other expense

     639,695        499,571   
  

Income before taxes

     308,417        308,653   
  

Income taxes

     101,954        102,380   
    

Net income

   $ 206,463        206,273   
  

Net income available to common shareholders

    
  

Basic

   $ 188,236        190,113   
  

Diluted

     188,241        190,121   
  

Net income per common share

    
  

Basic

   $ 1.50        1.59   
  

Diluted

     1.50        1.59   
  

Cash dividends per common share

   $ .70        .70   
  

Average common shares outstanding

    
  

Basic

     125,220        119,201   
  

Diluted

     125,616        119,852   

 

- 4 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended March 31  
In thousands    2012     2011  

Net income

   $ 206,463        206,273   

Other comprehensive income, net of tax and reclassification adjustments:

    

Net unrealized gains on investment securities

     20,082        5,658   

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

     (70     (70

Foreign currency translation adjustment

     402        —     

Defined benefit plans liability adjustment

     4,769        2,111   

Total other comprehensive income

     25,183        7,699   

Total comprehensive income

   $ 231,646        213,972   

 

- 5 -


Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Three months ended March 31  

In thousands

          2012        2011   
Cash flows from operating activities   

Net income

   $ 206,463        206,273   
  

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

    
  

Provision for credit losses

     49,000        75,000   
  

Depreciation and amortization of premises and equipment

     21,022        17,978   
  

Amortization of capitalized servicing rights

     14,476        13,478   
  

Amortization of core deposit and other intangible assets

     16,774        12,314   
  

Provision for deferred income taxes

     15,225        11,438   
  

Asset write-downs

     16,388        17,720   
  

Net gain on sales of assets

     (2,471     (44,504
  

Net change in accrued interest receivable, payable

     7,725        5,068   
  

Net change in other accrued income and expense

     32,134        2,063   
  

Net change in loans originated for sale

     154,436        373,020   
  

Net change in trading account assets and liabilities

     7,840        80,805   
    

Net cash provided by operating activities

     539,012        770,653   
Cash flows from investing activities   

Proceeds from sales of investment securities

    
  

Available for sale

     1,045        13,380   
  

Other

     10,224        22,969   
  

Proceeds from maturities of investment securities

    
  

Available for sale

     417,348        408,574   
  

Held to maturity

     82,670        66,465   
  

Purchases of investment securities

    
  

Available for sale

     (10,286     (353,508
  

Held to maturity

     (6,287     (7,796
  

Other

     (318     (352
  

Net increase in loans and leases

     (1,042,144     (579,845
  

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

     (1,127,080     1,121   
  

Other investments, net

     2,416        (8,769
  

Capital expenditures, net

     (19,377     (8,854
  

Proceeds from sales of real estate acquired in settlement of loans

     33,775        17,757   
  

Other, net

     (25,840     16,279   
    

Net cash used by investing activities

     (1,683,854     (412,579
Cash flows from financing activities   

Net increase in deposits

     1,522,583        745,021   
  

Net decrease in short-term borrowings

     (270,081     (442,751
  

Payments on long-term borrowings

     (202,352     (528,511
  

Dividends paid - common

     (89,041     (84,718
  

Dividends paid - preferred

     (4,769     (10,056
  

Other, net

     80,197        11,491   
  

Net cash provided (used) by financing activities

     1,036,537        (309,524
  

Net increase (decrease) in cash and cash equivalents

     (108,305     48,550   
  

Cash and cash equivalents at beginning of period

     1,452,397        933,755   
    

Cash and cash equivalents at end of period

   $ 1,344,092        982,305   
Supplemental disclosure of cash flow information   

Interest received during the period

   $ 721,159        665,490   
  

Interest paid during the period

     89,241        88,658   
    

Income taxes paid during the period

     8,416        77,169   
Supplemental schedule of noncash investing and financing activities   

Real estate acquired in settlement of loans

   $ 17,123        18,168   

 

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Table of Contents

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

In thousands, except per share    Preferred
stock
     Common
stock
     Common
stock
issuable
    Additional
paid-in
capital
    Retained
earnings
   

Accumulated
other
comprehensive
income

(loss), net

    Treasury
stock
    Total  

2011

                  

Balance - January 1, 2011

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

Total comprehensive income

     —           —           —          —          206,273        7,699        —          213,972   

Preferred stock cash dividends

     —           —           —          —          (10,498     —          —          (10,498

Amortization of preferred stock discount

     2,728         —           —          —          (2,728     —          —          —     

Stock-based compensation plans:

                  

Compensation expense, net

     —           —           —          (20,796     —          —          31,664        10,868   

Exercises of stock options, net

     —           —           —          (10,524     —          —          30,072        19,548   

Directors’ stock plan

     —           —           —          (32     —          —          304        272   

Deferred compensation plans, net, including dividend equivalents

     —           —           (300     (220     (47     —          507        (60

Other

     —           —           —          513        —          —          —          513   

Common stock cash dividends - $.70 per share

     —           —           —          —          (84,792     —          —          (84,792

Balance - March 31, 2011

   $ 743,385         60,198         3,889        2,367,556        5,534,909        (197,521     (4,898     8,507,518   

2012

                  

Balance - January 1, 2012

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

Total comprehensive income

     —           —           —          —          206,463        25,183        —          231,646   

Preferred stock cash dividends

     —           —           —          —          (13,363     —          —          (13,363

Amortization of preferred stock discount

     1,904         —           —          —          (1,904     —          —          —     

Stock-based compensation plans:

                  

Compensation expense, net

     —           207         —          7,783        —          —            7,990   

Exercises of stock options, net

     —           183         —          19,429        —          —            19,612   

Directors’ stock plan

     —           2         —          370        —          —            372   

Deferred compensation plans, net, including dividend equivalents

     —           4         (645     507        (40     —            (174

Other

     —           —           —          481        —          —          —          481   

Common stock cash dividends - $.70 per share

     —           —           —          —          (89,085     —          —          (89,085

Balance - March 31, 2012

   $ 866,489         63,238         3,427        2,857,556        5,969,236        (331,258     —          9,428,688   

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS

 

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2011 Annual Report. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

 

2. Acquisitions

On May 16, 2011, M&T acquired all of the outstanding common stock of Wilmington Trust Corporation (“Wilmington Trust”), headquartered in Wilmington, Delaware, in a stock-for-stock transaction. Wilmington Trust operated 55 banking offices in Delaware and Pennsylvania at the date of acquisition. The results of operations acquired in the Wilmington Trust transaction have been included in the Company’s financial results since May 16, 2011. Wilmington Trust shareholders received .051372 shares of M&T common stock in exchange for each share of Wilmington Trust common stock, resulting in M&T issuing a total of 4,694,486 common shares with an acquisition date fair value of $406 million.

The Wilmington Trust transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Assets acquired totaled approximately $10.8 billion, including $6.4 billion of loans and leases (including approximately $3.2 billion of commercial real estate loans, $1.4 billion of commercial loans and leases, $1.1 billion of consumer loans and $680 million of residential real estate loans). Liabilities assumed aggregated $10.0 billion, including $8.9 billion of deposits. The common stock issued in the transaction added $406 million to M&T’s common shareholders’ equity. Immediately prior to the closing of the Wilmington Trust transaction, M&T redeemed the $330 million of preferred stock issued by Wilmington Trust as part of the Troubled Asset Relief Program – Capital Purchase Program of the U.S. Department of Treasury (“U.S. Treasury”). In connection with the acquisition, the Company recorded $112 million of core deposit and other intangible assets. The core deposit and other intangible assets are generally being amortized over periods of 5 to 7 years using an accelerated method. There was no goodwill recorded as a result of the transaction, however, a non-taxable gain of $65 million was realized, which represented the excess of the fair value of assets acquired less liabilities assumed over consideration exchanged. The acquisition of Wilmington Trust added to M&T’s market-leading position in the Mid-Atlantic region by giving M&T a leading deposit market share in Delaware.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

2. Acquisitions, continued

 

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

 

     (in thousands)  

Purchase price:

  

Value of:

  

Common shares issued (4,694,486 shares)

   $ 405,557   

Preferred stock purchased from U.S. Treasury

     330,000   
  

 

 

 

Total purchase price

     735,557   
  

 

 

 

Identifiable assets:

  

Cash and due from banks

     178,940   

Interest-bearing deposits at banks

     2,606,265   

Other short-term investments

     57,817   

Investment securities

     510,390   

Loans and leases

     6,410,430   

Core deposit and other intangibles

     112,094   

Other assets

     969,106   
  

 

 

 

Total identifiable assets

     10,845,042   
  

 

 

 

Liabilities:

  

Deposits

     8,864,161   

Short-term borrowings

     147,752   

Long-term borrowings

     600,830   

Other liabilities

     431,812   
  

 

 

 

Total liabilities

     10,044,555   
  

 

 

 

Net gain resulting from acquisition

   $ 64,930   
  

 

 

 

The following table presents certain pro forma information as if Wilmington Trust had been included in the Company’s results of operations in the first quarter of 2011. These results combine the historical results of Wilmington Trust into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place as indicated. In particular, no adjustments have been made to eliminate the amount of Wilmington Trust’s provision for credit losses of $41 million or the impact of other-than-temporary impairment losses of $5 million in the three months ended March 31, 2011 that may not have been necessary had the acquired loans and investment securities been recorded at fair value as of the beginning of 2011. 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, 2011  
     (in thousands)  

Total revenues (a)

   $ 1,041,494   

Net income

     171,421   

 

(a) Represents net interest income plus other income.

In connection with the 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 the conversion of systems and/or integration of operations; initial marketing and

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

2. Acquisitions, continued

 

promotion expenses designed to introduce M&T Bank to its new customers; severance for former employees; travel costs; and printing, postage, supplies and other costs of completing the transaction and commencing operations in new markets and offices. The Company expects to incur additional merger-related expenses during the remainder of 2012.

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

 

     Three months ended
March 31, 2012
     Three months ended
March 31, 2011
 
     (in thousands)  

Salaries and employee benefits

   $ 1,973       $ 7   

Equipment and net occupancy

     15         79   

Printing, postage and supplies

     —           147   

Other cost of operations

     740         4,062   
  

 

 

    

 

 

 
   $ 2,728       $ 4,295   
  

 

 

    

 

 

 

 

3. Investment securities

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

 

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

March 31, 2012

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 52,010         1,130         —         $ 53,140   

Obligations of states and political subdivisions

     37,431         630         21         38,040   

Mortgage-backed securities:

           

Government issued or guaranteed

     4,101,717         171,479         241         4,272,955   

Privately issued residential

     1,318,040         5,358         212,703         1,110,695   

Privately issued commercial

     15,193         —           1,758         13,435   

Collateralized debt obligations

     43,708         15,907         1,431         58,184   

Other debt securities

     206,661         3,397         41,133         168,925   

Equity securities

     118,039         9,672         5,063         122,648   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,892,799         207,573         262,350         5,838,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     185,859         7,776         32         193,603   

Mortgage-backed securities:

           

Government issued or guaranteed

     541,140         25,089         —           566,229   

Privately issued

     261,851         —           103,649         158,202   

Other debt securities

     11,444         —           —           11,444   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,000,294         32,865         103,681         929,478   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     356,980         —           —           356,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,250,073         240,438         366,031       $ 7,124,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 10 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

3. Investment securities, continued

 

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

December 31, 2011

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 69,468         1,255         —         $ 70,723   

Obligations of states and political subdivisions

     39,518         771         20         40,269   

Mortgage-backed securities:

           

Government issued or guaranteed

     4,344,116         177,392         275         4,521,233   

Privately issued residential

     1,369,371         6,373         239,488         1,136,256   

Privately issued commercial

     17,679         —           2,650         15,029   

Collateralized debt obligations

     43,834         11,154         2,488         52,500   

Other debt securities

     216,700         4,588         44,443         176,845   

Equity securities

     211,737         8,468         4,500         215,705   
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,312,423         210,001         293,864         6,228,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     188,680         9,141         28         197,793   

Mortgage-backed securities:

           

Government issued or guaranteed

     608,533         24,881         —           633,414   

Privately issued

     268,642         —           99,140         169,502   

Other debt securities

     11,853         —           —           11,853   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,077,708         34,022         99,168         1,012,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     366,886         —           —           366,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,757,017         244,023         393,032       $ 7,608,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross realized gains on investment securities were $39.4 million for the quarter ended March 31, 2011. Similar gross realized gains for the quarter ended March 31, 2012 were not significant. Gross realized losses on investment securities for the quarters ended March 31, 2012 and 2011 were not significant. During the three-month period ended March 31, 2011, the Company sold residential mortgage-backed securities guaranteed by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) having an aggregate amortized cost of approximately $484 million, which resulted in a gain of $39 million (pre-tax). The Company recognized $11 million and $16 million of pre-tax other-than-temporary impairment losses during the quarters ended March 31, 2012 and 2011, respectively, related to privately issued mortgage-backed securities. The impairment charges were recognized in light of deterioration of real estate values and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The other-than-temporary losses represent management’s estimate of credit losses inherent in the debt securities considering projected cash flows using assumptions for delinquency rates, loss severities, and other estimates of future collateral performance.

 

- 11 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

3. Investment securities, continued

 

The following table displays changes in credit losses associated with debt securities for which other-than-temporary impairment losses have been previously recognized in earnings for the three months ended March 31, 2012 and March 31, 2011:

 

     Three months ended March 31  
     2012     2011  
     (in thousands)  

Beginning balance

   $ 285,399        327,912   

Additions for credit losses not previously recognized

     11,486        16,041   

Reductions for increases in cash flows

     —          (139

Reductions for realized losses

     (29,412     (21,095
  

 

 

   

 

 

 

Ending balance

   $ 267,473        322,719   
  

 

 

   

 

 

 

At March 31, 2012, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:

 

     Amortized
cost
     Estimated
fair value
 
     (in thousands)  

Debt securities available for sale:

     

Due in one year or less

   $          35,769         35,852   

Due after one year through five years

     41,748         43,230   

Due after five years through ten years

     7,927         8,610   

Due after ten years

     254,366         230,597   
  

 

 

    

 

 

 
     339,810         318,289   

Mortgage-backed securities available for sale

     5,434,950         5,397,085   
  

 

 

    

 

 

 
   $ 5,774,760         5,715,374   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 27,704         27,882   

Due after one year through five years

     30,801         32,541   

Due after five years through ten years

     125,439         131,161   

Due after ten years

     13,359         13,463   
  

 

 

    

 

 

 
     197,303         205,047   

Mortgage-backed securities held to maturity

     802,991         724,431   
  

 

 

    

 

 

 
   $ 1,000,294         929,478   
  

 

 

    

 

 

 

 

- 12 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

 

3. Investment securities, continued

 

A summary of investment securities that as of March 31, 2012 and December 31, 2011 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:

 

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

March 31, 2012

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ 863         (5     1,026         (16

Mortgage-backed securities:

          

Government issued or guaranteed

     21,424         (157     6,098         (84

Privately issued residential

     289,068         (10,826     744,430         (201,877

Privately issued commercial

     —           —          13,435         (1,758

Collateralized debt obligations

     —           —          5,597         (1,431

Other debt securities

     73,498         (6,406     73,019         (34,727

Equity securities

     5,225         (5,063     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     390,078         (22,457     843,605         (239,893
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     4,850         (16     482         (16

Privately issued mortgage-backed securities

     —           —          157,077         (103,649
  

 

 

    

 

 

   

 

 

    

 

 

 
     4,850         (16     157,559         (103,665
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 394,928         (22,473     1,001,164         (343,558
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2011

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ —           —          1,228         (20

Mortgage-backed securities:

          

Government issued or guaranteed

     38,492         (190     6,017         (85

Privately issued residential

     297,133         (14,188     751,077         (225,300

Privately issued commercial

     —           —          15,029         (2,650

Collateralized debt obligations

     2,871         (335     4,863         (2,153

Other debt securities

     72,637         (9,883     73,635         (34,560

Equity securities

     9,883         (4,500     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
     421,016         (29,096     851,849         (264,768
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     3,084         (4     1,430         (24

Privately issued mortgage-backed securities

     1,883         (592     167,139         (98,548
  

 

 

    

 

 

   

 

 

    

 

 

 
     4,967         (596     168,569         (98,572
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 425,983         (29,692     1,020,418         (363,340
  

 

 

    

 

 

   

 

 

    

 

 

 

 

- 13 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 313 individual investment securities with aggregate gross unrealized losses of $366 million at March 31, 2012. Approximately $318 million of the unrealized losses pertain to privately issued mortgage-backed securities with a cost basis of $1.5 billion. The Company also had $43 million of unrealized losses on trust preferred securities issued by financial institutions, securities backed by trust preferred securities issued by financial institutions and other entities, and other debt securities having a cost basis of $195 million. Based on a review of each of the remaining securities in the investment securities portfolio at March 31, 2012, with the exception of the aforementioned securities for which other-than-temporary impairment losses were recognized, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 2012, 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 March 31, 2012, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $357 million of cost method investment securities.

 

4. Loans and leases and the allowance for credit losses

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

 

     March 31,
2012
     December 31,
2011
 
     (in thousands)  

Outstanding principal balance

   $ 8,850,525         9,203,366   

Carrying amount:

     

Commercial, financial, leasing, etc.

     1,259,609         1,331,198   

Commercial real estate

     3,701,591         3,879,518   

Residential real estate

     875,088         915,371   

Consumer

     1,919,740         2,033,700   
  

 

 

    

 

 

 
   $ 7,756,028         8,159,787   
  

 

 

    

 

 

 

Purchased impaired loans totaled $605 million at March 31, 2012 and $653 million at December 31, 2011, representing less than 1% of the Company’s assets as of each date. Interest income on acquired loans that were recorded at fair value at the acquisition date was $81 million and $41 million for the three months ended March 31, 2012 and 2011, respectively. At December 31, 2010 and March 31, 2011, the accretable yield on acquired loans was $457 million and $416 million, respectively. A summary of changes in the accretable yield for acquired loans for the three months ended March 31, 2012 follows:

 

     2012  
     Purchased
impaired
    Other
acquired
    Total  
     (in thousands)  

Balance at beginning of period

   $ 30,805        807,960        838,765   

Interest income

     (7,664     (73,723     (81,387

Reclassifications from (to) nonaccretable balance, net

     (576     1,000        424   

Other (a)

     —          12,229        12,229   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,565        747,466        770,031   
  

 

 

   

 

 

   

 

 

 

 

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

 

- 14 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

A summary of current, past due and nonaccrual loans as of March 31, 2012 and December 31, 2011 were as follows:

 

     Current      30-89
Days

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

March 31, 2012

  

Commercial, financial, leasing, etc.

   $ 15,676,591         76,842         1,506         10,982         18,114         154,637         15,938,672   

Real estate:

                    

Commercial

     20,386,440         139,148         14,436         62,745         185,736         173,443         20,961,948   

Residential builder and developer

     844,400         41,976         292         17,274         274,814         267,065         1,445,821   

Other commercial construction

     1,837,187         54,663         2,453         12,096         70,438         101,949         2,078,786   

Residential

     7,463,049         218,639         249,292         37,609         51,038         175,117         8,194,744   

Residential Alt-A

     374,450         25,475         —           —           —           101,925         501,850   

Consumer:

                    

Home equity lines and loans

     6,440,601         45,068         —           14,986         4,344         47,608         6,552,607   

Automobile

     2,571,414         35,372         —           303         —           23,011         2,630,100   

Other

     2,543,948         38,235         5,102         9,168         295         20,474         2,617,222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,138,080         675,418         273,081         165,163         604,779         1,065,229         60,921,750   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

     

Commercial, financial, leasing, etc.

   $ 15,493,803         37,112         7,601         8,560         23,762         163,598         15,734,436   

Real estate:

                    

Commercial

     19,658,761         172,641         9,983         54,148         192,804         171,111         20,259,448   

Residential builder and developer

     845,680         49,353         13,603         21,116         297,005         281,576         1,508,333   

Other commercial construction

     2,393,304         41,049         968         23,582         78,105         106,325         2,643,333   

Residential

     6,626,182         256,017         250,472         37,982         56,741         172,681         7,400,075   

Residential Alt-A

     383,834         34,077         —           —           —           105,179         523,090   

Consumer:

                    

Home equity lines and loans

     6,570,675         43,516         —           15,409         4,635         47,150         6,681,385   

Automobile

     2,644,330         48,342         —           601         —           26,835         2,720,108   

Other

     2,551,225         43,547         5,249         2,340         310         23,126         2,625,797   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,167,794         725,654         287,876         163,738         653,362         1,097,581         60,096,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

- 15 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

Changes in the allowance for credit losses for the three months ended March 31, 2012 and 2011 were as follows:

 

     Commercial,
Financial,
Leasing, etc.
   

 

Real Estate

    Consumer     Unallocated      Total  
       Commercial     Residential         
     (in thousands)  
2012              

Beginning balance

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

Provision for credit losses

     10,121        (2,260     16,230        23,538        1,371         49,000   

Net charge-offs

             

Charge-offs

     (8,037     (10,540     (12,718     (28,981     —           (60,276

Recoveries

     3,167        1,717        1,874        5,234        —           11,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (4,870     (8,823     (10,844     (23,747     —           (48,284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 239,273        356,554        97,301        142,912        72,966         909,006   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
2011              

Beginning balance

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

Provision for credit losses

     14,942        14,775        15,841        27,764        1,678         75,000   

Net charge-offs

             

Charge-offs

     (14,027     (24,579     (16,167     (28,321     —           (83,094

Recoveries

     2,165        349        1,501        4,841        —           8,856   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (11,862     (24,230     (14,666     (23,480     —           (74,238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 215,659        391,107        87,526        137,351        72,060         903,703   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any portfolio segment.

 

- 16 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

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

 

- 17 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The following tables provide information with respect to impaired loans and leases as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and March 31, 2011.

 

     March 31, 2012      December 31, 2011  
     Recorded
investment
     Unpaid
principal

balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 
     (in thousands)  

With an allowance recorded:

                 

Commercial, financial, leasing, etc.

   $ 124,792         150,354         47,303         118,538         145,510         48,674   

Real estate:

                 

Commercial

     113,600         143,180         19,854         102,886         128,456         17,651   

Residential builder and developer

     190,289         319,845         44,597         159,293         280,869         52,562   

Other commercial construction

     17,252         21,467         2,924         20,234         24,639         3,836   

Residential

     107,537         126,082         4,389         101,882         119,498         4,420   

Residential Alt-A

     140,126         152,157         23,000         150,396         162,978         25,000   

Consumer:

                 

Home equity lines and loans

     10,790         12,047         2,709         9,385         10,670         2,306   

Automobile

     52,363         52,363         10,983         53,710         53,710         11,468   

Other

     9,155         9,155         2,375         8,401         8,401         2,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     765,904         986,650         158,134         724,725         934,731         168,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     37,892         45,608         —           53,104         60,778         —     

Real estate:

                 

Commercial

     65,961         83,706         —           71,636         91,118         —     

Residential builder and developer

     85,389         100,099         —           133,156         177,277         —     

Other commercial construction

     85,258         89,439         —           86,652         89,862         —     

Residential

     18,840         25,511         —           19,686         25,625         —     

Residential Alt-A

     37,310         65,861         —           34,356         60,942         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     330,650         410,224         —           398,590         505,602         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     162,684         195,962         47,303         171,642         206,288         48,674   

Real estate:

                 

Commercial

     179,561         226,886         19,854         174,522         219,574         17,651   

Residential builder and developer

     275,678         419,944         44,597         292,449         458,146         52,562   

Other commercial construction

     102,510         110,906         2,924         106,886         114,501         3,836   

Residential

     126,377         151,593         4,389         121,568         145,123         4,420   

Residential Alt-A

     177,436         218,018         23,000         184,752         223,920         25,000   

Consumer:

                 

Home equity lines and loans

     10,790         12,047         2,709         9,385         10,670         2,306   

Automobile

     52,363         52,363         10,983         53,710         53,710         11,468   

Other

     9,155         9,155         2,375         8,401         8,401         2,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,096,554         1,396,874         158,134         1,123,315         1,440,333         168,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

     Three months ended
March 31, 2012
     Three months ended
March 31, 2011
 
            Interest income
recognized
            Interest income
recognized
 
   Average
recorded
investment
     Total      Cash
basis
     Average
recorded
investment
     Total      Cash
basis
 
     (in thousands)  

Commercial, financial, leasing, etc.

   $ 167,724         409         409         170,337         993         988   

Real estate:

                 

Commercial

     178,315         318         318         189,779         382         339   

Residential builder and developer

     282,495         341         179         326,815         525         128   

Other commercial construction

     104,105         170         170         111,232         510         321   

Residential

     126,376         1,342         878         83,527         997         575   

Residential Alt-A

     181,018         1,843         546         205,632         1,995         551   

Consumer:

                 

Home equity lines and loans

     9,998         166         42         12,076         160         25   

Automobile

     53,289         898         178         58,863         984         296   

Other

     8,302         93         39         3,031         57         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,111,622         5,580         2,759         1,161,292         6,603         3,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. In general, acquired loans that were recorded at estimated fair value on the acquisition date are assigned a “pass” loan grade because their net financial statement value is based on the present value of expected cash flows. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger balance criticized commercial and commercial real estate loans are individually reviewed by centralized loan review personnel each quarter to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. Smaller balance criticized loans are analyzed by business line risk management areas to ensure proper loan grade classification. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Company’s commercial and commercial real estate loans as of March 31, 2012 and December 31, 2011.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

 

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

March 31, 2012

           

Pass

   $ 14,981,173         19,901,115         1,051,018         1,728,343   

Criticized accrual

     802,862         887,390         127,738         248,494   

Criticized nonaccrual

     154,637         173,443         267,065         101,949   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,938,672         20,961,948         1,445,821         2,078,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Pass

   $ 14,869,636         19,089,252         1,085,970         2,254,609   

Criticized accrual

     701,202         999,085         140,787         282,399   

Criticized nonaccrual

     163,598         171,111         281,576         106,325   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,734,436         20,259,448         1,508,333         2,643,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

At March 31, 2012 and December 31, 2011, 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, 2012

              

Individually evaluated for impairment

   $ 47,127         66,344         27,389         16,067       $ 156,927   

Collectively evaluated for impairment

     191,970         288,770         68,261         126,348         675,349   

Purchased impaired

     176         1,440         1,651         497         3,764   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 239,273         356,554         97,301         142,912         836,040   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 72,966   
              

 

 

 

Total

               $ 909,006   
              

 

 

 

December 31, 2011

              

Individually evaluated for impairment

   $ 48,517         71,784         29,420         15,858       $ 165,579   

Collectively evaluated for impairment

     185,048         291,271         60,742         126,613         663,674   

Purchased impaired

     457         4,582         1,753         650         7,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 234,022         367,637         91,915         143,121         836,695   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 71,595   
              

 

 

 

Total

               $ 908,290   
              

 

 

 

The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of March 31, 2012 and December 31, 2011 was as follows:

 

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

March 31, 2012

              

Individually evaluated for impairment

   $ 162,494         547,011         303,813         72,308       $ 1,085,626   

Collectively evaluated for impairment

     15,758,064         23,408,556         8,341,743         11,722,982         59,231,345   

Purchased impaired

     18,114         530,988         51,038         4,639         604,779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,938,672         24,486,555         8,696,594         11,799,929       $ 60,921,750   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Individually evaluated for impairment

   $ 171,442         561,615         306,320         71,496       $ 1,110,873   

Collectively evaluated for impairment

     15,539,232         23,281,585         7,560,104         11,950,849         58,331,770   

Purchased impaired

     23,762         567,914         56,741         4,945         653,362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,734,436         24,411,114         7,923,165         12,027,290       $ 60,096,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

renegotiated loans. The types of concessions that the Company grants typically include principal deferrals and interest rate concessions, but may also include other types of concessions.

The table below summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2012:

 

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

Commercial, financial, leasing, etc.

             

Principal deferral

     9       $ 2,812       $ 2,954       $ 142      $ —     

Other

     1         972         1,098         126        —     

Combination of concession types

     1         45         44         (1     (33

Real estate:

             

Commercial

             

Principal deferral

     2         2,425         2,405         (20     —     

Residential builder and developer

             

Principal deferral

     5         6,822         6,034         (788     —     

Combination of concession types

     2         2,350         2,726         376        —     

Residential

             

Principal deferral

     15         1,505         1,588         83        —     

Combination of concession types

     18         2,936         3,007         71        (200

Residential Alt-A

             

Principal deferral

     3         397         407         10        —     

Combination of concession types

     8         1,360         1,394         34        (5

Consumer:

             

Home equity lines and loans

             

Principal deferral

     1         117         117         —          —     

Interest rate reduction

     1         144         144         —          (6

Combination of concession types

     2         235         235         —          (24

Automobile

             

Principal deferral

     153         1,885         1,885         —          —     

Interest rate reduction

     4         57         57         —          (4

Other

     10         19         19         —          —     

Combination of concession types

     112         1,609         1,609         —          (172

Other

             

Principal deferral

     52         647         647         —          —     

Interest rate reduction

     3         23         23         —          (3

Other

     9         49         49         —          —     

Combination of concession types

     34         219         219         —          (36
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     445       $ 26,628       $ 26,661       $ 33      $ (483
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

The table below summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2011:

 

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

Commercial, financial, leasing, etc.

             

Principal deferral

     13       $ 1,349       $ 1,334       $ (15   $ —     

Real estate:

             

Commercial

             

Principal deferral

     9         6,625         6,597         (28     —     

Residential builder and developer

             

Principal deferral

     1         3,424         3,424         —          —     

Other

     4         116,002         108,394         (7,608     —     

Combination of concession types

     1         798         790         (8     —     

Other commercial construction

             

Principal deferral

     1         2,275         2,269         (6     —     

Residential

             

Principal deferral

     3         124         138         14        —     

Interest rate reduction

     8         1,059         1,079         20        (50

Combination of concession types

     30         7,907         7,999         92        (757

Residential Alt-A

             

Combination of concession types

     9         1,602         1,638         36        (210

Consumer:

             

Home equity lines and loans

             

Combination of concession types

     2         70         71         1        (36

Automobile

             

Principal deferral

     204         3,493         3,493         —          —     

Interest rate reduction

     4         44         44         —          (3

Other

     26         107         107         —          —     

Combination of concession types

     122         2,861         2,861         —          (436

Other

                —     

Principal deferral

     10         74         74         —          —     

Other

     1         11         11         —          —     

Combination of concession types

     37         126         126         —          (20
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     485       $ 147,951       $ 140,449       $ (7,502   $ (1,512
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2012 and 2011 and for which there was a subsequent payment default during the three-month periods ended March 31, 2012 and 2011, respectively, were not material.

 

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Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings

M&T had $1.2 billion of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2012 that are held by various trusts and were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in M&T’s Tier 1 capital. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that was signed into law on July 21, 2010 provides for a three-year phase-in related to the exclusion of trust preferred capital securities from Tier 1 capital for large financial institutions, including M&T. That phase-in period begins on January 1, 2013.

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

The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2068) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval. In connection with the issuance of 8.50% Enhanced Trust Preferred Securities associated with $350 million of Junior Subordinated Debentures maturing in 2068, M&T entered into a replacement capital covenant that provides that neither M&T nor any of its subsidiaries will repay, redeem or purchase any of the Junior Subordinated Debentures due January 31, 2068 or the 8.50% Enhanced Trust Preferred Securities prior to January 31, 2048, with certain limited exceptions, except to the extent that, during the 180 days prior to the date of that repayment, redemption or purchase, M&T and its subsidiaries have received proceeds from the sale of qualifying securities that

 

- 24 -


Table of Contents

NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

5. Borrowings, continued

 

(i) have equity-like characteristics that are the same as, or more equity-like than, the applicable characteristics of the 8.50% Enhanced Trust Preferred Securities or the Junior Subordinated Debentures due January 31, 2068, as applicable, at the time of repayment, redemption or purchase, and (ii) M&T has obtained the prior approval of the Federal Reserve Board, if required.

Including the unamortized portions of acquisition accounting adjustments to reflect estimated fair value at the acquisition dates of the Common Securities of various trusts, the Junior Subordinated Debentures associated with Capital Securities had financial statement carrying values of $1.2 billion at each of March 31, 2012 and December 31, 2011.

 

6. Shareholders’ equity

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

Issued and outstanding preferred stock of M&T is presented below:

 

     Shares
issued and
outstanding
     Carrying
value
March 31,  2012
     Carrying
value
December 31,  2011
 
            (dollars in thousands)  

Series A (a)(b)

        

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

     230,000       $ 224,919       $ 224,277   

Series C (a)(c)

        

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

     151,500         141,570         140,308   

Series D (d)

        

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

     50,000         500,000         500,000   

 

(a) Shares were issued as part of the Troubled Asset Relief Program – Capital Purchase Program of the U.S. Department of Treasury (“U.S. Treasury”). Cash proceeds were allocated between the preferred stock and a ten-year warrant to purchase M&T common stock (Series A – 1,218,522 common shares at $73.86 per share, Series C – 407,542 common shares at $55.76 per share). Dividends, if declared, will accrue and be paid quarterly at a rate of 5% per year for the first five years following the original 2008 issuance dates and thereafter at a rate of 9% per year. The agreement with the U.S. Treasury contains limitations on certain actions of M&T, including the payment of quarterly cash dividends on M&T’s common stock in excess of $.70 per share, the repurchase of its common stock during the first three years of the agreement, and the amount and nature of compensation arrangements for certain of the Company’s officers.
(b) On May 18, 2011, M&T redeemed and retired 370,000 shares of Series A Preferred Stock. Accelerated amortization of preferred stock discount associated with the redemption was $11.2 million.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

6. Shareholders’ equity, continued

 

(c) Shares were assumed in an acquisition and a new Series C Preferred Stock was designated.
(d) Shares were issued on May 31, 2011. Dividends, if declared, will be paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 Capital, M&T may redeem all of the shares within 90 days following that occurrence.

In addition to the Series A and Series C warrants mentioned in (a) above, a ten-year warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at March 31, 2012 and December 31, 2011. This warrant was issued by Wilmington Trust in December 2008 as part of the Troubled Asset Relief Program – Capital Purchase Program of the U.S. Treasury along with $330 million of fixed rate cumulative perpetual preferred stock, which was redeemed by M&T immediately prior to the May 16, 2011 acquisition of Wilmington Trust.

 

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 benefit cost for defined benefit plans consisted of the following:

 

     Pension
benefits
    Other
postretirement
benefits
 
     Three months ended March 31  
     2012     2011     2012      2011  
     (in thousands)  

Service cost

   $ 7,900        5,300        175         125   

Interest cost on projected benefit obligation

     15,600        12,150        950         775   

Expected return on plan assets

     (17,675     (12,700     —           —     

Amortization of prior service cost

     (1,650     (1,650     —           25   

Amortization of net actuarial loss

     9,400        5,100        100         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 13,575        8,200        1,225         925   
  

 

 

   

 

 

   

 

 

    

 

 

 

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $14,625,000 and $10,176,000 for the three months ended March 31, 2012 and 2011, respectively.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

8. Earnings per common share

The computations of basic earnings per common share follow:

 

     Three months ended
March 31
 
     2012     2011  
     (in thousands, except per share)  

Income available to common shareholders:

    

Net income

   $ 206,463        206,273   

Less: Preferred stock dividends (a)

     (13,363     (10,498

Amortization of preferred stock discount (a)

     (1,924     (2,753
  

 

 

   

 

 

 

Net income available to common equity

     191,176        193,022   

Less: Income attributable to unvested stock-based compensation awards

     (2,940     (2,909
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 188,236        190,113   

Weighted-average shares outstanding:

    

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

     127,157        120,992   

Less: Unvested stock-based compensation awards

     (1,937     (1,791
  

 

 

   

 

 

 

Weighted-average shares outstanding

     125,220        119,201   

Basic earnings per common share

   $ 1.50        1.59   

 

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

 

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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
 
     2012     2011  
     (in thousands, except per share)  

Net income available to common equity

   $ 191,176        193,022   

Less: Income attributable to unvested stock-based compensation awards

     (2,935     (2,901
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 188,241        190,121   

Adjusted weighted-average shares outstanding:

    

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

     127,157        120,992   

Less: Unvested stock-based compensation awards

     (1,937     (1,791

Plus: Incremental shares from assumed conversion of stock-based compensation awards and convertible preferred stock

     396        651   
  

 

 

   

 

 

 

Adjusted weighted-average shares outstanding

     125,616        119,852   

Diluted earnings per common share

   $ 1.50        1.59   

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, warrants to purchase common stock of M&T and preferred stock convertible into shares of M&T common stock representing approximately 10.0 million and 10.5 million common shares during the three-month periods ended March 31, 2012 and 2011, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

 

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

9. Comprehensive income

The following table displays the components of other comprehensive income (loss):

 

     Before-tax
amount
    Income
taxes
    Net  
     (in thousands)  

For the three months ended March 31, 2012

      

Unrealized gains (losses) on investment securities: