XNYS:MTB M&T Bank Corp Quarterly Report 10-Q Filing - 6/30/2012

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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 June 30, 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 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 July 31, 2012: 126,686,762 shares.

 

 

 


M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2012

 

Table of Contents of Information Required in Report

   Page  

Part I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements.   
   CONSOLIDATED BALANCE SHEET - June 30, 2012 and December 31, 2011      3   
   CONSOLIDATED STATEMENT OF INCOME - Three and six months ended June 30, 2012 and 2011      4   
   CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME – Three and six months ended June 30, 2012 and 2011      5   
   CONSOLIDATED STATEMENT OF CASH FLOWS - Six months ended June 30, 2012 and 2011      6   
   CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Six months ended June 30, 2012 and 2011      7   
   NOTES TO FINANCIAL STATEMENTS      8   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations.      57   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk.      106   

Item 4.

   Controls and Procedures.      106   

Part II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings.      106   

Item 1A.

   Risk Factors.      106   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds.      107   

Item 3.

   Defaults Upon Senior Securities.      107   

Item 4.

   Mine Safety Disclosures.      107   

Item 5.

   Other Information.      107   

Item 6.

   Exhibits.      108   

SIGNATURES

     108   

EXHIBIT INDEX

     109   

 

-2-


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

M&T BANK CORPORATION AND SUBSIDIARIES

 

 

CONSOLIDATED BALANCE SHEET

CONSOLIDATED BALANCE SHEET (Unaudited)

 

Dollars in thousands, except per share

   June 30,
2012
    December 31,
2011
 

Assets

      
 

Cash and due from banks

   $ 1,421,831        1,449,547   
 

Interest-bearing deposits at banks

     1,069,717        154,960   
 

Federal funds sold

     1,000        2,850   
 

Trading account

     544,938        561,834   
 

Investment securities (includes pledged securities that can be sold or repledged of $1,839,246 at June 30, 2012; $1,826,011 at December 31, 2011)

    
 

Available for sale (cost: $5,510,097 at June 30, 2012; $6,312,423 at December 31, 2011)

     5,534,054        6,228,560   
 

Held to maturity (fair value: $1,131,836 at June 30, 2012; $1,012,562 at December 31, 2011)

     1,188,465        1,077,708   
 

Other (fair value: $334,781 at June 30, 2012; $366,886 at December 31, 2011)

     334,781        366,886   
    

 

 

   

 

 

 
 

Total investment securities

     7,057,300        7,673,154   
    

 

 

   

 

 

 
 

Loans and leases

     63,095,796        60,377,875   
 

Unearned discount

     (244,524     (281,870
    

 

 

   

 

 

 
 

Loans and leases, net of unearned discount

     62,851,272        60,096,005   
 

Allowance for credit losses

     (917,028     (908,290
    

 

 

   

 

 

 
 

Loans and leases, net

     61,934,244        59,187,715   
    

 

 

   

 

 

 
 

Premises and equipment

     592,498        581,435   
 

Goodwill

     3,524,625        3,524,625   
 

Core deposit and other intangible assets

     143,713        176,394   
 

Accrued interest and other assets

     4,517,712        4,611,773   
    

 

 

   

 

 

 
 

Total assets

   $ 80,807,578        77,924,287   
    

 

 

   

 

 

 

Liabilities

      
 

Noninterest-bearing deposits

   $ 22,854,794        20,017,883   
 

NOW accounts

     1,705,198        1,912,226   
 

Savings deposits

     32,292,412        31,001,083   
 

Time deposits

     5,330,239        6,107,530   
 

Deposits at Cayman Islands office

     366,164        355,927   
    

 

 

   

 

 

 
 

Total deposits

     62,548,807        59,394,649   
    

 

 

   

 

 

 
 

Federal funds purchased and agreements to repurchase securities

     975,575        732,059   
 

Other short-term borrowings

     —          50,023   
 

Accrued interest and other liabilities

     1,965,421        1,790,121   
 

Long-term borrowings

     5,687,868        6,686,226   
    

 

 

   

 

 

 
 

Total liabilities

     71,177,671        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 June 30, 2012 and December 31, 2011; Liquidation preference of $10,000 per share: 50,000 shares at June 30, 2012 and December 31, 2011

     868,433        864,585   
 

Common stock, $.50 par, 250,000,000 shares authorized, 126,587,931 shares issued at June 30, 2012; 125,683,398 shares issued at December 31, 2011

     63,294        62,842   
 

Common stock issuable, 57,231 shares at June 30, 2012; 68,220 shares at December 31, 2011

     3,429        4,072   
 

Additional paid-in capital

     2,874,516        2,828,986   
 

Retained earnings

     6,098,084        5,867,165   
 

Accumulated other comprehensive income (loss), net

     (277,849     (356,441
    

 

 

   

 

 

 
 

Total shareholders’ equity

     9,629,907        9,271,209   
    

 

 

   

 

 

 
 

Total liabilities and shareholders’ equity

   $ 80,807,578        77,924,287   
    

 

 

   

 

 

 

 

-3-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

 

CONSOLIDATED STATEMENT OF INCOME

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

           Three months ended June 30     Six months ended June 30  

In thousands, except per share

   2012     2011     2012     2011  

Interest income

 

Loans and leases, including fees

   $ 674,549        624,247      $ 1,323,063        1,218,279   
 

Deposits at banks

     767        479        980        515   
 

Federal funds sold

     8        10        11        28   
 

Agreements to resell securities

     —          127        —          128   
 

Trading account

     318        282        635        670   
 

Investment securities

        
 

Fully taxable

     59,724        60,827        122,688        131,489   
 

Exempt from federal taxes

     2,020        2,281        4,104        4,627   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Total interest income

     737,386        688,253        1,451,481        1,355,736   
    

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

 

NOW accounts

     424        274        707        476   
 

Savings deposits

     16,940        20,757        35,123        39,996   
 

Time deposits

     12,354        19,310        25,863        38,381   
 

Deposits at Cayman Islands office

     232        193        445        587   
 

Short-term borrowings

     348        147        651        639   
 

Long-term borrowings

     59,105        61,370        120,320        120,651   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Total interest expense

     89,403        102,051        183,109        200,730   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Net interest income

     647,983        586,202        1,268,372        1,155,006   
 

Provision for credit losses

     60,000        63,000        109,000        138,000   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Net interest income after provision for credit losses

     587,983        523,202        1,159,372        1,017,006   
    

 

 

   

 

 

   

 

 

   

 

 

 

Other income

 

Mortgage banking revenues

     69,514        42,151        125,706        87,307   
 

Service charges on deposit accounts

     110,982        119,716        219,871        229,447   
 

Trust income

     122,275        75,592        239,228        104,913   
 

Brokerage services income

     16,172        14,926        30,073        29,222   
 

Trading account and foreign exchange gains

     6,238        6,798        16,809        15,077   
 

Gain (loss) on bank investment securities

     (408     110,744        (363     150,097   
 

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

     (4,072     (33,211     (24,112     (42,725
 

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

     (12,101     6,681        (3,547     154   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Net OTTI losses recognized in earnings

     (16,173     (26,530     (27,659     (42,571
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Equity in earnings of Bayview Lending Group LLC

     (6,635     (5,223     (11,387     (11,901
 

Other revenues from operations

     89,685        163,482        176,095        254,485   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Total other income

     391,650        501,656        768,373        816,076   
    

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

 

Salaries and employee benefits

     323,686        300,178        669,784        566,268   
 

Equipment and net occupancy

     65,376        59,670        130,419        116,333   
 

Printing, postage and supplies

     11,368        9,723        23,240        18,925   
 

Amortization of core deposit and other intangible assets

     15,907        14,740        32,681        27,054   
 

FDIC assessments

     24,962        26,609        53,911        45,703   
 

Other costs of operations

     186,093        165,975        357,052        302,183   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Total other expense

     627,392        576,895        1,267,087        1,076,466   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Income before taxes

     352,241        447,963        660,658        756,616   
 

Income taxes

     118,861        125,605        220,815        227,985   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Net income

   $ 233,380        322,358      $ 439,843        528,631   
    

 

 

   

 

 

   

 

 

   

 

 

 
 

Net income available to common shareholders

        
 

Basic

   $ 214,709        297,164      $ 402,947        487,283   
 

Diluted

     214,716        297,179        402,958        487,308   
 

Net income per common share

        
 

Basic

   $ 1.71        2.43      $ 3.21        4.04   
 

Diluted

     1.71        2.42        3.20        4.02   
 

Cash dividends per common share

   $ .70        .70      $ 1.40        1.40   
 

Average common shares outstanding

        
 

Basic

     125,488        122,181        125,354        120,699   
 

Diluted

     125,897        122,796        125,756        121,332   

 

-4-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

      Three months ended June 30     Six months ended June 30  

In thousands

   2012     2011     2012     2011  

Net income

   $ 233,380        322,358      $ 439,843        528,631   

Other comprehensive income, net of tax and reclassification adjustments:

        

Net unrealized gains (losses) on investment securities

     49,289        (33,550     69,371        (27,892

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

     (42     (71     (112     (141

Foreign currency translation adjustment

     (533     196        (131     196   

Defined benefit plans liability adjustment

     4,695        2,177        9,464        4,288   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     53,409        (31,248     78,592        (23,549
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 286,789        291,110      $ 518,435        505,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

-5-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

          Six months ended June 30  
In thousands          2012     2011  

Cash flows from

   Net income    $ 439,843        528,631   

operating activities

  

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

    
  

Provision for credit losses

     109,000        138,000   
  

Depreciation and amortization of premises and equipment

     41,762        38,370   
  

Amortization of capitalized servicing rights

     28,773        26,742   
  

Amortization of core deposit and other intangible assets

     32,681        27,054   
  

Provision for deferred income taxes

     12,064        (18,201
  

Asset write-downs

     39,676        48,032   
  

Net gain on sales of assets

     (3,786     (181,318
  

Net change in accrued interest receivable, payable

     1,731        4,035   
  

Net change in other accrued income and expense

     (35,590     23,766   
  

Net change in loans originated for sale

     (33,964     167,857   
  

Net change in trading account assets and liabilities

     12,438        60,210   
    

Net cash provided by operating activities

     644,628        863,178   

Cash flows from

   Proceeds from sales of investment securities     

investing activities

  

Available for sale

     48,873        1,909,223   
  

Other

     45,374        71,729   
   Proceeds from maturities of investment securities     
  

Available for sale

     741,571        751,314   
  

Held to maturity

     157,849        114,913   
   Purchases of investment securities     
  

Available for sale

     (19,808     (1,609,272
  

Held to maturity

     (269,854     (13,151
  

Other

     (13,269     (1,249
   Net increase in loans and leases      (2,805,640     (454,782
   Net (increase) decrease in interest-bearing deposits at banks      (914,757     432,037   
   Net increase in agreements to resell securities      —          (365,000
   Other investments, net      (5,436     (10,249
   Capital expenditures, net      (46,892     (13,976
  

Acquisitions, net of cash acquired Banks and bank holding companies

     —          178,940   
   Purchase of Wilmington Trust Corporation preferred stock      —          (330,000
   Proceeds from sales of real estate acquired in settlement of loans      64,735        161,514   
   Other, net      (38,849     18,322   
    

Net cash (used) provided by investing activities

     (3,056,103     840,313   

Cash flows from

   Net increase in deposits      3,162,352        566,316   

financing activities

   Net increase (decrease) in short-term borrowings      193,515        (528,035
   Payments on long-term borrowings      (1,006,539     (1,331,316
   Proceeds from issuance of preferred stock      —          495,000   
   Redemption of preferred stock      —          (370,000
   Dividends paid - common      (179,446     (173,135
   Dividends paid - preferred      (26,725     (20,046
   Other, net      238,752        56,885   
    

Net cash provided (used) by financing activities

     2,381,909        (1,304,331
   Net increase (decrease) in cash and cash equivalents      (29,566     399,160   
   Cash and cash equivalents at beginning of period      1,452,397        933,755   
     Cash and cash equivalents at end of period    $ 1,422,831        1,332,915   

Supplemental

   Interest received during the period    $ 1,457,310        1,366,981   

disclosure of cash

   Interest paid during the period      192,666        205,514   

flow information

   Income taxes paid during the period      204,249        266,240   

Supplemental schedule of noncash investing and

   Real estate acquired in settlement of loans    $ 26,623        45,774   

financing activities

   Acquisitions:     
  

Fair value of:

    
  

Assets acquired (noncash)

     —          10,666,102   
  

Liabilities assumed

     —          10,044,555   
  

Common stock issued

     —          405,557   
  

Retirement of Wilmington Trust Corporation preferred stock

     —          330,000   

 

-6-


 

M&T BANK CORPORATION AND SUBSIDIARIES

 

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

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

    —          —          —          —          528,631        (23,549     —          505,082   

Acquisition of Wilmington Trust Corporation - common stock issued

    —          2,348        —          403,209        —          —          —          405,557   

Partial redemption of Series A preferred stock

    (370,000     —          —          —          —          —          —          (370,000

Conversion of Series B preferred stock into 433,144 shares of common stock

    (26,500     192        —          21,754        —          —          4,554        —     

Issuance of Series D preferred stock

    500,000        —          —          (5,000     —          —          —          495,000   

Preferred stock cash dividends

    —          —          —          —          (20,046     —          —          (20,046

Amortization of preferred stock discount

    16,744        —          —          —          (16,744     —          —          —     

Stock-based compensation plans:

               

Compensation expense, net

    —          27        —          (10,382     —          —          31,666        21,311   

Exercises of stock options, net

    —          12        —          (8,948     —          —          30,106        21,170   

Directors’ stock plan

    —          —          —          (49     —          —          612        563   

Deferred compensation plans, net, including dividend equivalents

    —          —          (159     (219     (94     —          507        35   

Other

    —          —          —          1,022        —          —          —          1,022   

Common stock cash dividends - $1.40 per share

    —          —          —          —          (173,195     —          —          (173,195
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2011

  $ 860,901        62,777        4,030        2,800,002        5,745,253        (228,769     —          9,244,194   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          —          439,843        78,592        —          518,435   

Preferred stock cash dividends

    —          —          —          —          (26,725     —          —          (26,725

Amortization of preferred stock discount

    3,848        —          —          —          (3,848     —          —          —     

Stock-based compensation plans:

               

Compensation expense, net

    —          216        —          18,289        —          —          —          18,505   

Exercises of stock options, net

    —          227        —          24,912        —          —          —          25,139   

Directors’ stock plan

    —          4        —          764        —          —          —          768   

Deferred compensation plans, net, including dividend equivalents

    —          5        (643     549        (80     —          —          (169

Other

    —          —          —          1,016        —          —          —          1,016   

Common stock cash dividends - $1.40 per share

    —          —          —          —          (178,271     —          —          (178,271
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance - June 30, 2012

  $ 868,433        63,294        3,429        2,874,516        6,098,084        (277,849     —          9,629,907   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-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 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.

 

-8-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

The consideration paid for Wilmington Trust’s common 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 for the three months and six months ended June 30, 2011 rather than since the acquisition date on May 16, 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 recognized by Wilmington Trust during the first quarter of 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.

 

-9-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

2. Acquisitions, continued

 

 

     Pro forma
Three months ended
June 30, 2011
     Pro forma
Six months ended
June 30, 2011
 
     (in thousands)  

Total revenues (a)

   $ 1,166,694         2,208,188   

Net income

     309,527         480,948   

 

(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 systems conversions and/or integration of operations; costs related to termination of existing contractual arrangements of Wilmington Trust to purchase various services; initial marketing and 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 does not expect to incur any significant 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      Six months ended  
     June 30,
2012
     June 30,
2011
     June 30,
2012
     June 30,
2011
 
     (in thousands)  

Salaries and employee benefits

   $ 3,024         15,305         4,997         15,312   

Equipment and net occupancy

     —           25         15         104   

Printing, postage and supplies

     —           318         —           465   

Other costs of operations

     4,127         21,348         4,867         25,410   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,151         36,996         9,879         41,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-10-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities

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

 

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

June 30, 2012

           

Investment securities available for sale:

           

U.S. Treasury and federal agencies

   $ 55,484         1,115         —         $ 56,599   

Obligations of states and political subdivisions

     34,007         569         8         34,568   

Mortgage-backed securities:

           

Government issued or guaranteed

     3,840,610         218,117         227         4,058,500   

Privately issued residential

     1,252,709         5,254         189,571         1,068,392   

Privately issued commercial

     13,048         —           921         12,127   

Collateralized debt obligations

     43,749         13,079         1,730         55,098   

Other debt securities

     158,153         2,034         31,258         128,929   

Equity securities

     112,337         10,926         3,422         119,841   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,510,097         251,094         227,137         5,534,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held to maturity:

           

Obligations of states and political subdivisions

     187,936         8,375         30         196,281   

Mortgage-backed securities:

           

Government issued or guaranteed

     733,912         31,929         —           765,841   

Privately issued

     255,291         317         97,220         158,388   

Other debt securities

     11,326         —           —           11,326   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,188,465         40,621         97,250         1,131,836   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other securities

     334,781         —           —           334,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,033,343         291,715         324,387       $ 7,000,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-11-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

Gross realized gains on investment securities were $111 million and $150 million for the three-month and six-month periods ended June 30, 2011. Gross realized gains were not significant in 2012. Gross realized losses on investment securities were not significant during the three-month and six-month periods ended June 30, 2012 or 2011. During the second quarter of 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 $1.0 billion which resulted in a gain of $66 million (pre-tax). The Company also sold trust preferred securities and collateralized debt obligations during the second quarter of 2011 having an aggregate amortized cost of $136 million and $100 million, respectively, which resulted in gains of $25 million (pre-tax) and $20 million (pre-tax), respectively. During the first quarter of 2011, the Company sold residential mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac having an aggregate amortized cost of approximately $484 million which resulted in a gain of $39 million (pre-tax).

The Company recognized pre-tax other-than-temporary impairment losses of $16 million and $28 million during the three months and six months ended June 30, 2012, respectively, and $27 million and $43 million during the three months and six months ended June 30, 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 of delinquency rates, loss severities, and other estimates for future collateral performance.

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 and six months ended June 30, 2012 and 2011:

 

     Three months ended June 30  
     2012     2011  
     (in thousands)  

Beginning balance

   $ 267,473        322,719   

Additions for credit losses not previously recognized

     16,173        26,530   

Reductions for increases in cash flows

     —          (4,881

Reductions for realized losses

     (19,449     (46,227
  

 

 

   

 

 

 

Ending balance

   $ 264,197        298,141   
  

 

 

   

 

 

 
     Six months ended June 30  
     2012     2011  
     (in thousands)  

Beginning balance

   $ 285,399        327,912   

Additions for credit losses not previously recognized

     27,659        42,571   

Reductions for increases in cash flows

     —          (5,020

Reductions for realized losses

     (48,861     (67,322
  

 

 

   

 

 

 

Ending balance

   $ 264,197        298,141   
  

 

 

   

 

 

 

 

-12-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

At June 30, 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

   $ 33,314         33,367   

Due after one year through five years

     40,715         42,082   

Due after five years through ten years

     11,098         11,886   

Due after ten years

     206,266         187,859   
  

 

 

    

 

 

 
     291,393         275,194   

Mortgage-backed securities available for sale

     5,106,367         5,139,019   
  

 

 

    

 

 

 
   $ 5,397,760         5,414,213   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 30,983         31,166   

Due after one year through five years

     40,576         42,599   

Due after five years through ten years

     114,797         120,839   

Due after ten years

     12,906         13,003   
  

 

 

    

 

 

 
     199,262         207,607   

Mortgage-backed securities held to maturity

     989,203         924,229   
  

 

 

    

 

 

 
   $ 1,188,465         1,131,836   
  

 

 

    

 

 

 

 

-13-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

A summary of investment securities that as of June 30, 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)  

June 30, 2012

          

Investment securities available for sale:

          

Obligations of states and political subdivisions

   $ 171         (1     678         (7

Mortgage-backed securities:

          

Government issued or guaranteed

     15,936         (70     9,951         (157

Privately issued residential

     126,139         (1,861     841,748         (187,710

Privately issued commercial

     —           —          12,127         (921

Collateralized debt obligations

     3,106         (39     5,349         (1,691

Other debt securities

     16,858         (2,053     74,206         (29,205

Equity securities

     8,118         (1,389     2,193         (2,033
  

 

 

    

 

 

   

 

 

    

 

 

 
     170,328         (5,413     946,252         (221,724
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment securities held to maturity:

          

Obligations of states and political subdivisions

     5,598         (23     169         (7

Privately issued mortgage-backed securities

     —           —          157,659         (97,220
  

 

 

    

 

 

   

 

 

    

 

 

 
     5,598         (23     157,828         (97,227
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 175,926         (5,436     1,104,080         (318,951
  

 

 

    

 

 

   

 

 

    

 

 

 

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
  

 

 

    

 

 

   

 

 

    

 

 

 

 

-14-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

3. Investment securities, continued

 

The Company owned 290 individual investment securities with aggregate gross unrealized losses of $324 million at June 30, 2012. Approximately $288 million of the unrealized losses pertained to privately issued mortgage-backed securities with a cost basis of $1.4 billion. The Company also had $33 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 $133 million. Based on a review of each of the remaining securities in the investment securities portfolio at June 30, 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 June 30, 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 June 30, 2012, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $335 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:

 

     June 30,
2012
     December 31,
2011
 
     (in thousands)  

Outstanding principal balance

   $ 8,097,216         9,203,366   

Carrying amount:

     

Commercial, financial, leasing, etc.

     1,216,711         1,331,198   

Commercial real estate

     3,222,688         3,879,518   

Residential real estate

     814,288         915,371   

Consumer

     1,834,751         2,033,700   
  

 

 

    

 

 

 
   $ 7,088,438         8,159,787   
  

 

 

    

 

 

 

Purchased impaired loans included in the table above totaled $561 million at June 30, 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 $90 million and $171 million for the three months and six months ended June 30, 2012 and $69 million and $110 million for the three months and six months ended June 30, 2011, respectively. Reflecting an improvement in estimated cash flows on acquired loans, the Company transferred $140 million from nonaccretable balance to accretable yield during the quarter ended June 30, 2012. At December 31, 2010 and June 30, 2011, the accretable yield on acquired loans was $457 million and $1.04 billion, respectively. A summary of changes in the accretable yield for acquired loans for the three months and six months ended June 30, 2012 follows:

 

     Three months ended June 30, 2012  
     Purchased
impaired
    Other
acquired
    Total  
     (in thousands)  

Balance at beginning of period

   $ 22,565        747,466        770,031   

Interest income

     (9,621     (80,249     (89,870

Reclassifications from (to) nonaccretable balance, net

     42,655        97,165        139,820   

Other (a)

     —          (31,221     (31,221
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 55,599        733,161        788,760   
  

 

 

   

 

 

   

 

 

 

 

-15-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Six months ended June 30, 2012  
     Purchased
impaired
    Other
acquired
    Total  
     (in thousands)  

Balance at beginning of period

   $ 30,805        807,960        838,765   

Interest income

     (17,285     (153,972     (171,257

Reclassifications from (to) nonaccretable balance, net

     42,079        98,165        140,244   

Other (a)

     —          (18,992     (18,992
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 55,599        733,161        788,760   
  

 

 

   

 

 

   

 

 

 

 

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

A summary of current, past due and nonaccrual loans as of June 30, 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)  

June 30, 2012

                    

Commercial, financial, leasing, etc.

   $ 16,138,169         73,581         1,455         12,402         16,424         153,556         16,395,587   

Real estate:

                    

Commercial

     20,854,618         128,489         10,128         49,038         164,855         173,278         21,380,406   

Residential builder and developer

     761,655         47,065         2,213         18,330         264,163         240,248         1,333,674   

Other commercial construction

     2,051,194         16,174         4,352         23,158         63,446         26,303         2,184,627   

Residential

     8,563,870         252,076         251,750         41,047         47,135         174,937         9,330,815   

Residential Alt-A

     355,574         24,221         —           —           —           100,915         480,710   

Consumer:

                    

Home equity lines and loans

     6,384,785         41,795         —           15,263         4,381         54,509         6,500,733   

Automobile

     2,490,590         34,961         —           261         —           24,482         2,550,294   

Other

     2,628,257         38,085         4,700         2,988         296         20,100         2,694,426   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 60,228,712         656,447         274,598         162,487         560,700         968,328         62,851,272   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-16-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

 

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

 

     Current      30-89
Days

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

December 31, 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 were recorded at fair value.

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

 

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

Beginning balance

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

Provision for credit losses

     19,103        (3,309     5,587        38,427        192         60,000   

Net charge-offs

             

Charge-offs

     (16,078     (13,056     (11,407     (23,621     —           (64,162

Recoveries

     2,430        1,332        1,788        6,634        —           12,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (13,648     (11,724     (9,619     (16,987     —           (51,978
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

-17-


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 June 30, 2011 were as follows:

 

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

Beginning balance

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

Provision for credit losses

     6,870        22,735        13,654        19,852        (111     63,000   

Net charge-offs

            

Charge-offs

     (14,923     (15,915     (15,872     (24,940     —          (71,650

Recoveries

     2,273        3,184        2,033        5,046        —          12,536   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (12,650     (12,731     (13,839     (19,894     —          (59,114
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 209,879        401,111        87,341        137,309        71,949        907,589   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Commercial,
Financial,

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

Beginning balance

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

Provision for credit losses

     29,224        (5,569     21,817        61,965        1,563         109,000   

Net charge-offs

             

Charge-offs

     (24,115     (23,596     (24,125     (52,602     —           (124,438

Recoveries

     5,597        3,049        3,662        11,868        —           24,176   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (18,518     (20,547     (20,463     (40,734     —           (100,262
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in the allowance for credit losses for the six months ended June 30, 2011 were as follows:

 

     Commercial,
Financial,

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

Beginning balance

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

Provision for credit losses

     21,812        37,510        29,495        47,616        1,567         138,000   

Net charge-offs

             

Charge-offs

     (28,950     (40,494     (32,039     (53,261     —           (154,744

Recoveries

     4,438        3,533        3,534        9,887        —           21,392   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net charge-offs

     (24,512     (36,961     (28,505     (43,374     —           (133,352
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 209,879        401,111        87,341        137,309        71,949         907,589   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

-18-


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

 

-19-


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 June 30, 2012 and December 31, 2011 and for the three months and six months ended June 30, 2012 and June 30, 2011:

 

     June 30, 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.

   $ 118,670         139,477         39,134         118,538         145,510         48,674   

Real estate:

                 

Commercial

     116,765         148,232         19,323         102,886         128,456         17,651   

Residential builder and developer

     135,172         243,663         33,490         159,293         280,869         52,562   

Other commercial construction

     81,077         89,410         12,404         20,234         24,639         3,836   

Residential

     108,167         127,032         4,332         101,882         119,498         4,420   

Residential Alt-A

     136,995         150,849         23,000         150,396         162,978         25,000   

Consumer:

                 

Home equity lines and loans

     11,707         13,327         2,986         9,385         10,670         2,306   

Automobile

     51,649         51,649         15,324         53,710         53,710         11,468   

Other

     10,578         10,578         4,403         8,401         8,401         2,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     770,780         974,217         154,396         724,725         934,731         168,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With no related allowance recorded:

                 

Commercial, financial, leasing, etc.

     43,179         52,473         —           53,104         60,778         —     

Real estate:

                 

Commercial

     62,529         79,604         —           71,636         91,118         —     

Residential builder and developer

     110,954         128,880         —           133,156         177,277         —     

Other commercial construction

     4,976         9,386         —           86,652         89,862         —     

Residential

     17,990         24,930         —           19,686         25,625         —     

Residential Alt-A

     33,588         62,379         —           34,356         60,942         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     273,216         357,652         —           398,590         505,602         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Commercial, financial, leasing, etc.

     161,849         191,950         39,134         171,642         206,288         48,674   

Real estate:

                 

Commercial

     179,294         227,836         19,323         174,522         219,574         17,651   

Residential builder and developer

     246,126         372,543         33,490         292,449         458,146         52,562   

Other commercial construction

     86,053         98,796         12,404         106,886         114,501         3,836   

Residential

     126,157         151,962         4,332         121,568         145,123         4,420   

Residential Alt-A

     170,583         213,228         23,000         184,752         223,920         25,000   

Consumer:

                 

Home equity lines and loans

     11,707         13,327         2,986         9,385         10,670         2,306   

Automobile

     51,649         51,649         15,324         53,710         53,710         11,468   

Other

     10,578         10,578         4,403         8,401         8,401         2,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,043,996         1,331,869         154,396         1,123,315         1,440,333         168,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-20-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

 

 

     Three months ended
June 30, 2012
     Three months ended
June 30, 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.

   $ 161,311         743         743         162,827         679         666   

Real estate:

                 

Commercial

     180,199         1,238         1,238         194,508         513         483   

Residential builder and developer

     262,254         385         252         308,709         314         112   

Other commercial construction

     109,037         4,840         4,840         93,980         187         150   

Residential

     127,258         1,315         810         97,317         1,029         565   

Residential Alt-A

     174,181         1,753         527         199,056         1,991         410   

Consumer:

                 

Home equity lines and loans

     11,237         164         46         12,069         189         23   

Automobile

     52,200         871         190         58,650         984         292   

Other

     9,877         106         47         3,544         55         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,087,554         11,415         8,693         1,130,660         5,941         2,714   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Six months ended
June 30, 2012
     Six months ended
June 30, 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.

   $ 164,779         1,152         1,152         167,456         1,672         1,654   

Real estate:

                 

Commercial

     179,213         1,556         1,556         191,472         895         822   

Residential builder and developer

     271,903         726         431         317,054         839         240   

Other commercial construction

     107,151         5,010         5,010         103,751         697         471   

Residential

     126,880         2,657         1,688         90,813         2,026         1,140   

Residential Alt-A

     177,623         3,596         1,073         202,339         3,986         961   

Consumer:

                 

Home equity lines and loans

     10,593         330         88         12,098         349         48   

Automobile

     52,799         1,769         368         58,655         1,968         588   

Other

     9,080         199         86         3,304         112         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,100,021         16,995         11,452         1,146,942         12,544         5,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-21-


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. 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 June 30, 2012 and December 31, 2011.

 

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

June 30, 2012

           

Pass

   $ 15,499,951         20,403,488         989,903         1,903,981   

Criticized accrual

     742,080         803,640         103,523         254,343   

Criticized nonaccrual

     153,556         173,278         240,248         26,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,395,587         21,380,406         1,333,674         2,184,627   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 after considering such factors as payment performance, 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.

 

-22-


NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

 

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

At June 30, 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)  

June 30, 2012

              

Individually evaluated for impairment

   $ 38,961         64,143         27,258         22,713       $ 153,075   

Collectively evaluated for impairment

     205,594         275,671         62,182         141,159         684,606   

Purchased impaired

     173         1,707         3,829         480         6,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allocated

   $ 244,728         341,521         93,269         164,352         843,870   
  

 

 

    

 

 

    

 

 

    

 

 

    

Unallocated

                 73,158   
              

 

 

 

Total

               $ 917,028   
              

 

 

 

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   
              

 

 

 

 

-23-


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 as of June 30, 2012 and December 31, 2011 was as follows:

 

    

Commercial,

Financial,

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

June 30, 2012

              

Individually evaluated for impairment

   $ 161,669         504,281         295,314         73,934       $ 1,035,198   

Collectively evaluated for impairment

     16,217,494         23,901,962         9,469,076         11,666,842         61,255,374   

Purchased impaired

     16,424         492,464         47,135         4,677         560,700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,395,587         24,898,707         9,811,525         11,745,453       $ 62,851,272   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 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.

 

-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 three months ended June 30, 2012 and 2011:

 

            Recorded investment      Financial effects of
modification
 

Three months ended June 30, 2012

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

Commercial, financial, leasing, etc.

             

Principal deferral

     9       $ 10,392       $ 9,061       $ (1,331   $ —     

Other

     2         1,995         1,954         (41     —     

Real estate:

             

Commercial

             

Principal deferral

     1         2,011         1,999         (12     —     

Interest rate reduction

     1         383         430         47        (89

Combination of concession types