UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-9861
M&T BANK CORPORATION
(Exact name of registrant as specified in its charter)
New York | 16-0968385 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
One M & T Plaza Buffalo, New York |
14203 | |
(Address of principal executive offices) | (Zip Code) |
(716) 635-4000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of the registrants Common Stock, $0.50 par value, outstanding as of the close of business on October 23, 2015: 133,289,778 shares.
M&T BANK CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 2015
Table of Contents of Information Required in Report
Page | ||||||
Item 1. |
Financial Statements | |||||
CONSOLIDATED BALANCE SHEET - September 30, 2015 and December 31, 2014 |
3 | |||||
CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2015 and 2014 |
4 | |||||
5 | ||||||
CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2015 and 2014 |
6 | |||||
7 | ||||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 55 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 102 | ||||
Item 4. |
Controls and Procedures | 102 | ||||
Item 1. |
Legal Proceedings | 102 | ||||
Item 1A. |
Risk Factors | 103 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 104 | ||||
Item 3. |
Defaults Upon Senior Securities | 104 | ||||
Item 4. |
Mine Safety Disclosures | 104 | ||||
Item 5. |
Other Information | 104 | ||||
Item 6. |
Exhibits | 105 | ||||
105 | ||||||
106 |
-2-
M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, | December 31, | |||||||||
Dollars in thousands, except per share |
2015 | 2014 | ||||||||
Assets |
Cash and due from banks | $ | 1,249,704 | 1,289,965 | ||||||
Interest-bearing deposits at banks |
4,713,266 | 6,470,867 | ||||||||
Federal funds sold |
| 83,392 | ||||||||
Trading account |
340,710 | 308,175 | ||||||||
Investment securities (includes pledged securities that can be sold or repledged of $1,614,909 at September 30, 2015; $1,631,267 at December 31, 2014) |
||||||||||
Available for sale (cost: $10,923,234 at September 30, 2015; $8,919,324 at December 31, 2014) |
11,159,509 | 9,156,932 | ||||||||
Held to maturity (fair value: $3,025,687 at September 30, 2015; $3,538,282 at December 31, 2014) |
2,998,486 | 3,507,868 | ||||||||
Other (fair value: $336,544 at September 30, 2015; $328,742 at December 31, 2014) |
336,544 | 328,742 | ||||||||
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|
|
|
|||||||
Total investment securities |
14,494,539 | 12,993,542 | ||||||||
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|
|
|
|||||||
Loans and leases |
68,766,144 | 66,899,369 | ||||||||
Unearned discount |
(225,896 | ) | (230,413 | ) | ||||||
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|
|
|||||||
Loans and leases, net of unearned discount |
68,540,248 | 66,668,956 | ||||||||
Allowance for credit losses |
(933,798 | ) | (919,562 | ) | ||||||
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|
|
|||||||
Loans and leases, net |
67,606,450 | 65,749,394 | ||||||||
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|
|
|
|||||||
Premises and equipment |
581,976 | 612,984 | ||||||||
Goodwill |
3,513,325 | 3,524,625 | ||||||||
Core deposit and other intangible assets |
18,179 | 35,027 | ||||||||
Accrued interest and other assets |
5,278,913 | 5,617,564 | ||||||||
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|
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Total assets |
$ | 97,797,062 | 96,685,535 | |||||||
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Liabilities |
Noninterest-bearing deposits | $ | 28,189,330 | 26,947,880 | ||||||
NOW accounts |
2,459,527 | 2,307,815 | ||||||||
Savings deposits |
39,298,134 | 41,085,803 | ||||||||
Time deposits |
2,791,367 | 3,063,973 | ||||||||
Deposits at Cayman Islands office |
206,185 | 176,582 | ||||||||
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|
|||||||
Total deposits |
72,944,543 | 73,582,053 | ||||||||
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|
|||||||
Federal funds purchased and agreements to repurchase securities |
173,783 | 192,676 | ||||||||
Accrued interest and other liabilities |
1,582,513 | 1,567,951 | ||||||||
Long-term borrowings |
10,174,289 | 9,006,959 | ||||||||
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|
|
|||||||
Total liabilities |
84,875,128 | 84,349,639 | ||||||||
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|
|||||||
Shareholders equity |
Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at September 30, 2015 and December 31, 2014; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2015 and December 31, 2014 |
1,231,500 | 1,231,500 | |||||||
Common stock, $.50 par, 250,000,000 shares authorized, 133,274,963 shares issued at September 30, 2015; 132,312,931 shares issued at December 31, 2014 |
66,637 | 66,157 | ||||||||
Common stock issuable, 36,462 shares at September 30, 2015; 41,330 shares at December 31, 2014 |
2,341 | 2,608 | ||||||||
Additional paid-in capital |
3,511,182 | 3,409,506 | ||||||||
Retained earnings |
8,273,747 | 7,807,119 | ||||||||
Accumulated other comprehensive income (loss), net |
(163,473 | ) | (180,994 | ) | ||||||
|
|
|
|
|||||||
Total shareholders equity |
12,921,934 | 12,335,896 | ||||||||
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|||||||
Total liabilities and shareholders equity |
$ | 97,797,062 | 96,685,535 | |||||||
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-3-
M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three months ended September 30 | Nine months ended September 30 | |||||||||||||||||
In thousands, except per share |
2015 | 2014 | 2015 | 2014 | ||||||||||||||
Interest income |
Loans and leases, including fees | $ | 672,092 | 647,280 | $ | 1,981,904 | 1,937,531 | |||||||||||
Investment securities | ||||||||||||||||||
Fully taxable |
93,062 | 91,036 | 272,163 | 250,145 | ||||||||||||||
Exempt from federal taxes |
950 | 1,271 | 3,330 | 4,068 | ||||||||||||||
Deposits at banks | 3,852 | 3,198 | 10,321 | 7,617 | ||||||||||||||
Other | 70 | 238 | 749 | 904 | ||||||||||||||
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|
|
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|
|
|||||||||||
Total interest income |
770,026 | 743,023 | 2,268,467 | 2,200,265 | ||||||||||||||
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|
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|
|||||||||||
Interest expense |
NOW accounts | 360 | 394 | 1,020 | 1,021 | |||||||||||||
Savings deposits | 10,937 | 11,532 | 31,517 | 34,314 | ||||||||||||||
Time deposits | 3,643 | 3,805 | 11,073 | 11,600 | ||||||||||||||
Deposits at Cayman Islands office | 151 | 161 | 448 | 550 | ||||||||||||||
Short-term borrowings | 32 | 19 | 102 | 76 | ||||||||||||||
Long-term borrowings | 62,076 | 58,053 | 188,764 | 158,098 | ||||||||||||||
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|
|
|||||||||||
Total interest expense |
77,199 | 73,964 | 232,924 | 205,659 | ||||||||||||||
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|
|
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|
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|
|||||||||||
Net interest income | 692,827 | 669,059 | 2,035,543 | 1,994,606 | ||||||||||||||
Provision for credit losses | 44,000 | 29,000 | 112,000 | 91,000 | ||||||||||||||
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|
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Net interest income after provision for credit losses | 648,827 | 640,059 | 1,923,543 | 1,903,606 | ||||||||||||||
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|
|||||||||||
Other income |
Mortgage banking revenues | 84,035 | 93,532 | 288,238 | 269,237 | |||||||||||||
Service charges on deposit accounts | 107,259 | 110,071 | 314,860 | 321,637 | ||||||||||||||
Trust income | 113,744 | 128,671 | 356,076 | 379,816 | ||||||||||||||
Brokerage services income | 16,902 | 17,416 | 49,224 | 51,403 | ||||||||||||||
Trading account and foreign exchange gains | 8,362 | 6,988 | 20,639 | 21,477 | ||||||||||||||
Loss on bank investment securities | | | (108 | ) | | |||||||||||||
Equity in earnings of Bayview Lending Group LLC | (3,721 | ) | (4,114 | ) | (11,043 | ) | (12,623 | ) | ||||||||||
Other revenues from operations | 113,118 | 98,547 | 359,043 | 296,683 | ||||||||||||||
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|
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Total other income |
439,699 | 451,111 | 1,376,929 | 1,327,630 | ||||||||||||||
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|
|
|
|||||||||||
Other expense |
Salaries and employee benefits | 363,567 | 348,776 | 1,115,117 | 1,059,815 | |||||||||||||
Equipment and net occupancy | 68,470 | 67,713 | 201,792 | 206,964 | ||||||||||||||
Printing, postage and supplies | 8,691 | 9,184 | 27,586 | 29,320 | ||||||||||||||
Amortization of core deposit and other intangible assets | 4,090 | 7,358 | 16,848 | 26,654 | ||||||||||||||
FDIC assessments | 11,090 | 13,193 | 32,551 | 43,836 | ||||||||||||||
Other costs of operations | 197,908 | 219,135 | 642,925 | 656,664 | ||||||||||||||
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|
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Total other expense |
653,816 | 665,359 | 2,036,819 | 2,023,253 | ||||||||||||||
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|||||||||||
Income before taxes | 434,710 | 425,811 | 1,263,653 | 1,207,983 | ||||||||||||||
Income taxes | 154,309 | 150,467 | 454,951 | 419,286 | ||||||||||||||
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Net income | $ | 280,401 | 275,344 | $ | 808,702 | 788,697 | ||||||||||||
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Net income available to common shareholders | ||||||||||||||||||
Basic |
$ | 257,337 | 251,905 | $ | 739,627 | 724,307 | ||||||||||||
Diluted |
257,346 | 251,917 | 739,656 | 724,344 | ||||||||||||||
Net income per common share | ||||||||||||||||||
Basic |
$ | 1.94 | 1.92 | $ | 5.59 | 5.54 | ||||||||||||
Diluted |
1.93 | 1.91 | 5.56 | 5.50 | ||||||||||||||
Cash dividends per common share | $ | .70 | .70 | $ | 2.10 | 2.10 | ||||||||||||
Average common shares outstanding | ||||||||||||||||||
Basic |
132,630 | 131,265 | 132,347 | 130,782 | ||||||||||||||
Diluted |
133,376 | 132,128 | 133,089 | 131,698 |
-4-
M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
In thousands |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income |
$ | 280,401 | 275,344 | $ | 808,702 | 788,697 | ||||||||||
Other comprehensive income (loss), net of tax and reclassification adjustments: |
||||||||||||||||
Net unrealized gains (losses) on investment securities |
48,332 | (27,637 | ) | 1,053 | 75,229 | |||||||||||
Unrealized gains (losses) on cash flow hedges |
(24 | ) | 613 | 823 | (98 | ) | ||||||||||
Foreign currency translation adjustment |
(3 | ) | (1,817 | ) | (521 | ) | (1,504 | ) | ||||||||
Defined benefit plans liability adjustment |
5,724 | 1,000 | 16,166 | 2,999 | ||||||||||||
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|
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|
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|
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Total other comprehensive income (loss) |
54,029 | (27,841 | ) | 17,521 | 76,626 | |||||||||||
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|
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Total comprehensive income |
$ | 334,430 | 247,503 | $ | 826,223 | 865,323 | ||||||||||
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-5-
M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine months ended September 30 | ||||||||||
In thousands |
2015 | 2014 | ||||||||
Cash flows from operating activities |
Net income |
$ | 808,702 | 788,697 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||
Provision for credit losses |
112,000 | 91,000 | ||||||||
Depreciation and amortization of premises and equipment |
73,916 | 74,516 | ||||||||
Amortization of capitalized servicing rights |
36,730 | 51,572 | ||||||||
Amortization of core deposit and other intangible assets |
16,848 | 26,654 | ||||||||
Provision for deferred income taxes |
20,141 | 33,777 | ||||||||
Asset write-downs |
5,775 | 5,114 | ||||||||
Net gain on sales of assets |
(61,969 | ) | (3,771 | ) | ||||||
Net change in accrued interest receivable, payable |
(5,484 | ) | 9,638 | |||||||
Net change in other accrued income and expense |
11,200 | (89,425 | ) | |||||||
Net change in loans originated for sale |
232,974 | (224,425 | ) | |||||||
Net change in trading account assets and liabilities |
(2,993 | ) | 11,163 | |||||||
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Net cash provided by operating activities |
1,247,840 | 774,510 | ||||||||
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Cash flows from investing activities |
Proceeds from sales of investment securities |
|||||||||
Available for sale |
2,579 | 16 | ||||||||
Other |
377 | 23,309 | ||||||||
Proceeds from maturities of investment securities |
||||||||||
Available for sale |
1,343,869 | 686,183 | ||||||||
Held to maturity |
519,359 | 337,677 | ||||||||
Purchases of investment securities |
||||||||||
Available for sale |
(3,320,931 | ) | (5,310,246 | ) | ||||||
Held to maturity |
(22,592 | ) | (15,202 | ) | ||||||
Other |
(8,179 | ) | (53,264 | ) | ||||||
Net increase in loans and leases |
(2,208,660 | ) | (1,420,572 | ) | ||||||
Net (increase) decrease in interest-bearing deposits at banks |
1,757,601 | (6,024,926 | ) | |||||||
Capital expenditures, net |
(42,744 | ) | (50,400 | ) | ||||||
Net (increase) decrease in loan servicing advances |
461,700 | (340,750 | ) | |||||||
Other, net |
(75,449 | ) | 38,707 | |||||||
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Net cash used by investing activities |
(1,593,070 | ) | (12,129,468 | ) | ||||||
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Cash flows from financing activities |
Net increase (decrease) in deposits |
(636,144 | ) | 7,225,487 | ||||||
Net decrease in short-term borrowings |
(18,893 | ) | (95,846 | ) | ||||||
Proceeds from long-term borrowings |
1,500,000 | 4,345,478 | ||||||||
Payments on long-term borrowings |
(324,308 | ) | (373,642 | ) | ||||||
Proceeds from issuance of preferred stock |
| 346,500 | ||||||||
Dividends paid - common |
(281,149 | ) | (278,118 | ) | ||||||
Dividends paid - preferred |
(58,003 | ) | (46,966 | ) | ||||||
Other, net |
40,074 | 82,774 | ||||||||
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Net cash provided by financing activities |
221,577 | 11,205,667 | ||||||||
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Net decrease in cash and cash equivalents |
(123,653 | ) | (149,291 | ) | ||||||
Cash and cash equivalents at beginning of period |
1,373,357 | 1,672,934 | ||||||||
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Cash and cash equivalents at end of period |
$ | 1,249,704 | 1,523,643 | |||||||
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Supplemental disclosure of cash flow information |
Interest received during the period |
$ | 2,234,476 | 2,147,236 | ||||||
Interest paid during the period |
234,989 | 185,377 | ||||||||
Income taxes paid during the period |
373,016 | 329,621 | ||||||||
Supplemental schedule of noncash investing and financing activities |
Securitization of residential mortgage loans allocated to |
|||||||||
Available-for-sale investment securities |
$ | 51,481 | 110,971 | |||||||
Capitalized servicing rights |
528 | 1,429 | ||||||||
Real estate acquired in settlement of loans |
35,018 | 35,422 |
-6-
M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
Accumulated | ||||||||||||||||||||||||||||
other | ||||||||||||||||||||||||||||
Common | Additional | comprehensive | ||||||||||||||||||||||||||
Preferred | Common | stock | paid-in | Retained | income | |||||||||||||||||||||||
In thousands, except per share |
stock | stock | issuable | capital | earnings | (loss), net | Total | |||||||||||||||||||||
2014 |
||||||||||||||||||||||||||||
Balance - January 1, 2014 |
$ | 881,500 | 65,258 | 2,915 | 3,232,014 | 7,188,004 | (64,159 | ) | 11,305,532 | |||||||||||||||||||
Total comprehensive income |
| | | | 788,697 | 76,626 | 865,323 | |||||||||||||||||||||
Preferred stock cash dividends |
| | | | (55,560 | ) | | (55,560 | ) | |||||||||||||||||||
Issuance of Series E preferred stock |
350,000 | | | (3,500 | ) | | | 346,500 | ||||||||||||||||||||
Exercise of 395,905 Series A stock warrants into 156,521 shares of common stock |
| 78 | | (78 | ) | | | | ||||||||||||||||||||
Stock-based compensation plans: |
||||||||||||||||||||||||||||
Compensation expense, net |
| 128 | | 34,117 | | | 34,245 | |||||||||||||||||||||
Exercises of stock options, net |
| 535 | | 102,695 | | | 103,230 | |||||||||||||||||||||
Stock purchase plan |
| 43 | | 9,545 | | | 9,588 | |||||||||||||||||||||
Directors stock plan |
| 5 | | 1,266 | | | 1,271 | |||||||||||||||||||||
Deferred compensation plans, net, including dividend equivalents |
| 3 | (325 | ) | 335 | (87 | ) | | (74 | ) | ||||||||||||||||||
Other |
| | | 1,320 | | | 1,320 | |||||||||||||||||||||
Common stock cash dividends - $2.10 per share |
| | | | (278,059 | ) | | (278,059 | ) | |||||||||||||||||||
|
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|
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|
|||||||||||||||
Balance - September 30, 2014 |
$ | 1,231,500 | 66,050 | 2,590 | 3,377,714 | 7,642,995 | 12,467 | 12,333,316 | ||||||||||||||||||||
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2015 |
||||||||||||||||||||||||||||
Balance - January 1, 2015 |
$ | 1,231,500 | 66,157 | 2,608 | 3,409,506 | 7,807,119 | (180,994 | ) | 12,335,896 | |||||||||||||||||||
Total comprehensive income |
| | | | 808,702 | 17,521 | 826,223 | |||||||||||||||||||||
Preferred stock cash dividends |
| | | | (60,953 | ) | | (60,953 | ) | |||||||||||||||||||
Exercise of 2,315 Series A stock warrants into 904 shares of common stock |
| 1 | | (1 | ) | | | | ||||||||||||||||||||
Stock-based compensation plans: |
||||||||||||||||||||||||||||
Compensation expense, net |
| 143 | | 31,416 | | | 31,559 | |||||||||||||||||||||
Exercises of stock options, net |
| 285 | | 57,133 | | | 57,418 | |||||||||||||||||||||
Stock purchase plan |
| 45 | | 10,301 | | | 10,346 | |||||||||||||||||||||
Directors stock plan |
| 4 | | 1,346 | | | 1,350 | |||||||||||||||||||||
Deferred compensation plans, net, including dividend equivalents |
| 2 | (267 | ) | 290 | (76 | ) | | (51 | ) | ||||||||||||||||||
Other |
| | | 1,191 | | | 1,191 | |||||||||||||||||||||
Common stock cash dividends - $2.10 per share |
| | | | (281,045 | ) | | (281,045 | ) | |||||||||||||||||||
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Balance - September 30, 2015 |
$ | 1,231,500 | 66,637 | 2,341 | 3,511,182 | 8,273,747 | (163,473 | ) | 12,921,934 | |||||||||||||||||||
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-7-
1. Significant accounting policies
The consolidated financial statements of M&T Bank Corporation (M&T) and subsidiaries (the Company) were compiled in accordance with generally accepted accounting principles (GAAP) using the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2014 Annual Report. Additionally, effective January 1, 2015 the Company made an accounting policy election in accordance with amended accounting guidance issued by the Financial Accounting Standards Board in January 2014 to account for investments in qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The adoption of the amended guidance did not have a significant effect on the Companys financial position or results of operations, but did result in the restatement of the consolidated statement of income for the three months and nine months ended September 30, 2014 to remove $14 million and $39 million, respectively, of losses associated with qualified affordable housing projects from other costs of operations and include the amortization of the initial cost of the investment in income tax expense. The cumulative effect adjustment associated with adopting the amended guidance was not material as of the beginning of any period presented in these consolidated financial statements. See note 11 for information regarding the Companys investments in qualified affordable housing projects.
In the opinion of management, all adjustments necessary for a fair presentation have been made and, except as described above, were all of a normal recurring nature.
2. Acquisitions
On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (Hudson City), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at ..08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of September 30, 2015, total consideration to be paid was valued at approximately $5.3 billion.
The merger has received the approval of the common shareholders of M&T and Hudson City. M&T announced on September 30, 2015 that it had received the approval of the Federal Reserve to acquire Hudson City and on October 9, 2015 M&T received approval of the proposed acquisition from the New York State Department of Financial Services. The transaction is expected to be completed on or about November 1, 2015 pending the satisfaction of customary closing conditions. At September 30, 2015, Hudson City had $35.1 billion of assets, including $19.2 billion of loans and $8.3 billion of investment securities, and $30.3 billion of liabilities, including $17.9 billion of deposits.
-8-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities
The amortized cost and estimated fair value of investment securities were as follows:
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Estimated fair value |
|||||||||||||
(in thousands) | ||||||||||||||||
September 30, 2015 |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 197,764 | 1,630 | | $ | 199,394 | ||||||||||
Obligations of states and political subdivisions |
6,174 | 170 | 48 | 6,296 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
10,504,756 | 228,333 | 19,041 | 10,714,048 | ||||||||||||
Privately issued |
82 | 2 | 2 | 82 | ||||||||||||
Collateralized debt obligations |
28,467 | 22,465 | 1,056 | 49,876 | ||||||||||||
Other debt securities |
136,793 | 1,650 | 17,975 | 120,468 | ||||||||||||
Equity securities |
49,198 | 20,360 | 213 | 69,345 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
10,923,234 | 274,610 | 38,335 | 11,159,509 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Investment securities held to maturity: |
||||||||||||||||
Obligations of states and political subdivisions |
125,251 | 1,395 | 347 | 126,299 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
2,679,546 | 69,486 | 4,787 | 2,744,245 | ||||||||||||
Privately issued |
186,883 | 1,628 | 40,174 | 148,337 | ||||||||||||
Other debt securities |
6,806 | | | 6,806 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
2,998,486 | 72,509 | 45,308 | 3,025,687 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other securities |
336,544 | | | 336,544 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 14,258,264 | 347,119 | 83,643 | $ | 14,521,740 | ||||||||||
|
|
|
|
|
|
|
|
-9-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities, continued
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Estimated fair value |
|||||||||||||
(in thousands) | ||||||||||||||||
December 31, 2014 |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 161,408 | 544 | 5 | $ | 161,947 | ||||||||||
Obligations of states and political subdivisions |
8,027 | 224 | 53 | 8,198 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
8,507,571 | 223,889 | 337 | 8,731,123 | ||||||||||||
Privately issued |
104 | 2 | 3 | 103 | ||||||||||||
Collateralized debt obligations |
30,073 | 21,276 | 1,033 | 50,316 | ||||||||||||
Other debt securities |
138,240 | 1,896 | 18,648 | 121,488 | ||||||||||||
Equity securities |
73,901 | 11,020 | 1,164 | 83,757 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
8,919,324 | 258,851 | 21,243 | 9,156,932 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Investment securities held to maturity: |
||||||||||||||||
Obligations of states and political subdivisions |
148,961 | 2,551 | 189 | 151,323 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
3,149,320 | 78,485 | 7,000 | 3,220,805 | ||||||||||||
Privately issued |
201,733 | 1,143 | 44,576 | 158,300 | ||||||||||||
Other debt securities |
7,854 | | | 7,854 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
3,507,868 | 82,179 | 51,765 | 3,538,282 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other securities |
328,742 | | | 328,742 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 12,755,934 | 341,030 | 73,008 | $ | 13,023,956 | ||||||||||
|
|
|
|
|
|
|
|
There were no significant gross realized gains or losses from the sale of investment securities for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.
At September 30, 2015, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:
Amortized cost | Estimated fair value |
|||||||
(in thousands) | ||||||||
Debt securities available for sale: |
||||||||
Due in one year or less |
$ | 8,282 | 8,330 | |||||
Due after one year through five years |
197,796 | 199,712 | ||||||
Due after five years through ten years |
3,296 | 3,495 | ||||||
Due after ten years |
159,824 | 164,497 | ||||||
|
|
|
|
|||||
369,198 | 376,034 | |||||||
Mortgage-backed securities available for sale |
10,504,838 | 10,714,130 | ||||||
|
|
|
|
|||||
$ | 10,874,036 | 11,090,164 | ||||||
|
|
|
|
|||||
Debt securities held to maturity: |
||||||||
Due in one year or less |
$ | 30,523 | 30,706 | |||||
Due after one year through five years |
74,511 | 75,150 | ||||||
Due after five years through ten years |
20,217 | 20,443 | ||||||
Due after ten years |
6,806 | 6,806 | ||||||
|
|
|
|
|||||
132,057 | 133,105 | |||||||
Mortgage-backed securities held to maturity |
2,866,429 | 2,892,582 | ||||||
|
|
|
|
|||||
$ | 2,998,486 | 3,025,687 | ||||||
|
|
|
|
-10-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities, continued
A summary of investment securities that as of September 30, 2015 and December 31, 2014 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:
Less than 12 months | 12 months or more | |||||||||||||||
Fair value | Unrealized losses |
Fair value | Unrealized losses |
|||||||||||||
(in thousands) | ||||||||||||||||
September 30, 2015 |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
Obligations of states and political subdivisions |
$ | 516 | (2 | ) | 1,405 | (46 | ) | |||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
1,942,135 | (18,925 | ) | 5,503 | (116 | ) | ||||||||||
Privately issued |
| | 48 | (2 | ) | |||||||||||
Collateralized debt obligations |
5,733 | (324 | ) | 2,155 | (732 | ) | ||||||||||
Other debt securities |
19,335 | (458 | ) | 86,813 | (17,517 | ) | ||||||||||
Equity securities |
| | 212 | (213 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,967,719 | (19,709 | ) | 96,136 | (18,626 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Investment securities held to maturity: |
||||||||||||||||
Obligations of states and political subdivisions |
37,336 | (292 | ) | 4,096 | (55 | ) | ||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
16,619 | (129 | ) | 240,730 | (4,658 | ) | ||||||||||
Privately issued |
| | 118,840 | (40,174 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
53,955 | (421 | ) | 363,666 | (44,887 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,021,674 | (20,130 | ) | 459,802 | (63,513 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2014 |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 6,505 | (5 | ) | | | ||||||||||
Obligations of states and political subdivisions |
1,785 | (52 | ) | 121 | (1 | ) | ||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
39,001 | (186 | ) | 5,555 | (151 | ) | ||||||||||
Privately issued |
| | 65 | (3 | ) | |||||||||||
Collateralized debt obligations |
2,108 | (696 | ) | 5,512 | (337 | ) | ||||||||||
Other debt securities |
14,017 | (556 | ) | 92,661 | (18,092 | ) | ||||||||||
Equity securities |
2,138 | (1,164 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
65,554 | (2,659 | ) | 103,914 | (18,584 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Investment securities held to maturity: |
||||||||||||||||
Obligations of states and political subdivisions |
29,886 | (184 | ) | 268 | (5 | ) | ||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
137,413 | (361 | ) | 446,780 | (6,639 | ) | ||||||||||
Privately issued |
| | 127,512 | (44,576 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
167,299 | (545 | ) | 574,560 | (51,220 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 232,853 | (3,204 | ) | 678,474 | (69,804 | ) | |||||||||
|
|
|
|
|
|
|
|
-11-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities, continued
The Company owned 320 individual investment securities with aggregate gross unrealized losses of $84 million at September 30, 2015. Based on a review of each of the securities in the investment securities portfolio at September 30, 2015, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 30, 2015, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At September 30, 2015, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $337 million of cost method investment securities.
4. Loans and leases and the allowance for credit losses
The outstanding principal balance and the carrying amount of acquired loans that were recorded at fair value at the acquisition date and included in the consolidated balance sheet follow:
September 30, | December 31, | |||||||
2015 | 2014 | |||||||
(in thousands) | ||||||||
Outstanding principal balance |
$ | 2,410,454 | 3,070,268 | |||||
Carrying amount: |
||||||||
Commercial, financial, leasing, etc. |
103,583 | 247,820 | ||||||
Commercial real estate |
728,376 | 961,828 | ||||||
Residential real estate |
385,885 | 453,360 | ||||||
Consumer |
812,117 | 933,537 | ||||||
|
|
|
|
|||||
$ | 2,029,961 | 2,596,545 | ||||||
|
|
|
|
Purchased impaired loans included in the table above totaled $149 million at September 30, 2015 and $198 million at December 31, 2014, representing less than 1% of the Companys assets as of each date. A summary of changes in the accretable yield for acquired loans for the three months and nine months ended September 30, 2015 and 2014 follows:
Three months ended September 30 | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Purchased | Other | Purchased | Other | |||||||||||||
impaired | acquired | impaired | acquired | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at beginning of period |
$ | 77,624 | 344,989 | $ | 26,082 | 450,970 | ||||||||||
Interest income |
(5,865 | ) | (37,396 | ) | (4,149 | ) | (39,019 | ) | ||||||||
Reclassifications from nonaccretable balance |
47 | 769 | 129 | 9,673 | ||||||||||||
Other (a) |
| 4,697 | | 1,870 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 71,806 | 313,059 | $ | 22,062 | 423,494 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Nine months ended September 30 | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Purchased | Other | Purchased | Other | |||||||||||||
impaired | acquired | impaired | acquired | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at beginning of period |
$ | 76,518 | 397,379 | $ | 37,230 | 538,633 | ||||||||||
Interest income |
(16,843 | ) | (118,697 | ) | (15,583 | ) | (135,105 | ) | ||||||||
Reclassifications from nonaccretable balance |
12,131 | 27,792 | 415 | 10,448 | ||||||||||||
Other (a) |
| 6,585 | | 9,518 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 71,806 | 313,059 | $ | 22,062 | 423,494 | ||||||||||
|
|
|
|
|
|
|
|
(a) | Other changes in expected cash flows including changes in interest rates and prepayment assumptions. |
-12-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
A summary of current, past due and nonaccrual loans as of September 30, 2015 and December 31, 2014 follows:
30-89 Days past due |
90 Days or more past due and accruing |
Purchased impaired (b) |
Nonaccrual | Total | ||||||||||||||||||||||||
Current | Non- acquired |
Acquired (a) |
||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||||||||||
Commercial, financial, leasing, etc. |
$ | 19,965,307 | 29,451 | 5,882 | 3,477 | 4,645 | 224,415 | $ | 20,233,177 | |||||||||||||||||||
Real estate: |
||||||||||||||||||||||||||||
Commercial |
23,184,906 | 105,140 | 21,629 | 17,906 | 45,523 | 176,491 | 23,551,595 | |||||||||||||||||||||
Residential builder and developer |
1,479,659 | 15,951 | | 7,488 | 65,102 | 46,022 | 1,614,222 | |||||||||||||||||||||
Other commercial construction |
3,493,349 | 28,433 | 1,373 | 1,769 | 17,484 | 12,312 | 3,554,720 | |||||||||||||||||||||
Residential |
7,323,813 | 206,044 | 194,280 | 16,295 | 14,392 | 153,354 | 7,908,178 | |||||||||||||||||||||
Residential Alt-A |
226,871 | 11,662 | | | | 64,351 | 302,884 | |||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Home equity lines and loans |
5,710,632 | 38,506 | | 15,454 | 2,275 | 78,126 | 5,844,993 | |||||||||||||||||||||
Automobile |
2,319,556 | 36,867 | | 53 | | 13,892 | 2,370,368 | |||||||||||||||||||||
Other |
3,084,080 | 31,210 | 8,301 | 18,385 | | 18,135 | 3,160,111 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 66,788,173 | 503,264 | 231,465 | 80,827 | 149,421 | 787,098 | $ | 68,540,248 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Current | 30-89 Days past due |
90 Days or more past due and accruing |
Purchased impaired (b) |
Nonaccrual | Total | |||||||||||||||||||||||
Non- acquired |
Acquired (a) |
|||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||
Commercial, financial, leasing, etc. |
$ | 19,228,265 | 37,246 | 1,805 | 6,231 | 10,300 | 177,445 | $ | 19,461,292 | |||||||||||||||||||
Real estate: |
||||||||||||||||||||||||||||
Commercial |
22,208,491 | 118,704 | 22,170 | 14,662 | 51,312 | 141,600 | 22,556,939 | |||||||||||||||||||||
Residential builder and developer |
1,273,607 | 11,827 | 492 | 9,350 | 98,347 | 71,517 | 1,465,140 | |||||||||||||||||||||
Other commercial construction |
3,484,932 | 17,678 | | | 17,181 | 25,699 | 3,545,490 | |||||||||||||||||||||
Residential |
7,640,368 | 226,932 | 216,489 | 35,726 | 18,223 | 180,275 | 8,318,013 | |||||||||||||||||||||
Residential Alt-A |
249,810 | 11,774 | | | | 77,704 | 339,288 | |||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Home equity lines and loans |
5,859,378 | 42,945 | | 27,896 | 2,374 | 89,291 | 6,021,884 | |||||||||||||||||||||
Automobile |
1,931,138 | 30,500 | | 133 | | 17,578 | 1,979,349 | |||||||||||||||||||||
Other |
2,909,791 | 33,295 | 4,064 | 16,369 | | 18,042 | 2,981,561 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 64,785,780 | 530,901 | 245,020 | 110,367 | 197,737 | 799,151 | $ | 66,668,956 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Acquired loans that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately. |
(b) | Accruing loans that were impaired at acquisition date and were recorded at fair value. |
-13-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
One-to-four family residential mortgage loans held for sale were $422 million and $435 million at September 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans held for sale were $71 million at September 30, 2015 and $308 million at December 31, 2014.
Changes in the allowance for credit losses for the three months ended September 30, 2015 were as follows:
Commercial, Financial, Leasing, etc. |
Real Estate | |||||||||||||||||||||||
Commercial | Residential | Consumer | Unallocated | Total | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Beginning balance |
$ | 286,750 | 311,294 | 60,294 | 194,238 | 77,411 | $ | 929,987 | ||||||||||||||||
Provision for credit losses |
21,507 | 1,879 | (3,155 | ) | 24,448 | (679 | ) | 44,000 | ||||||||||||||||
Net charge-offs |
||||||||||||||||||||||||
Charge-offs |
(26,912 | ) | (2,203 | ) | (3,268 | ) | (20,758 | ) | | (53,141 | ) | |||||||||||||
Recoveries |
5,322 | 2,119 | 1,125 | 4,386 | | 12,952 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(21,590 | ) | (84 | ) | (2,143 | ) | (16,372 | ) | | (40,189 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 286,667 | 313,089 | 54,996 | 202,314 | 76,732 | $ | 933,798 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for credit losses for the three months ended September 30, 2014 were as follows:
Commercial, Financial, Leasing, etc. |
Real Estate | |||||||||||||||||||||||
Commercial | Residential | Consumer | Unallocated | Total | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Beginning balance |
$ | 292,251 | 311,254 | 72,404 | 165,871 | 75,886 | $ | 917,666 | ||||||||||||||||
Provision for credit losses |
2,373 | 8,046 | (3,187 | ) | 21,815 | (47 | ) | 29,000 | ||||||||||||||||
Net charge-offs |
||||||||||||||||||||||||
Charge-offs |
(15,921 | ) | (1,666 | ) | (4,193 | ) | (21,312 | ) | | (43,092 | ) | |||||||||||||
Recoveries |
7,849 | 1,267 | 2,498 | 3,445 | | 15,059 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(8,072 | ) | (399 | ) | (1,695 | ) | (17,867 | ) | | (28,033 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 286,552 | 318,901 | 67,522 | 169,819 | 75,839 | $ | 918,633 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for credit losses for the nine months ended September 30, 2015 were as follows:
Commercial, Financial, Leasing, etc. |
Real Estate | |||||||||||||||||||||||
Commercial | Residential | Consumer | Unallocated | Total | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Beginning balance |
$ | 288,038 | 307,927 | 61,910 | 186,033 | 75,654 | $ | 919,562 | ||||||||||||||||
Provision for credit losses |
32,686 | 13,769 | (571 | ) | 65,038 | 1,078 | 112,000 | |||||||||||||||||
Net charge-offs |
||||||||||||||||||||||||
Charge-offs |
(46,990 | ) | (12,352 | ) | (9,695 | ) | (64,542 | ) | | (133,579 | ) | |||||||||||||
Recoveries |
12,933 | 3,745 | 3,352 | 15,785 | | 35,815 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(34,057 | ) | (8,607 | ) | (6,343 | ) | (48,757 | ) | | (97,764 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 286,667 | 313,089 | 54,996 | 202,314 | 76,732 | $ | 933,798 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
-14-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
Changes in the allowance for credit losses for the nine months ended September 30, 2014 were as follows:
Commercial, Financial, Leasing, etc. |
Real Estate | |||||||||||||||||||||||
Commercial | Residential | Consumer | Unallocated | Total | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Beginning balance |
$ | 273,383 | 324,978 | 78,656 | 164,644 | 75,015 | $ | 916,676 | ||||||||||||||||
Provision for credit losses |
40,527 | (4,067 | ) | (916 | ) | 54,632 | 824 | 91,000 | ||||||||||||||||
Net charge-offs |
||||||||||||||||||||||||
Charge-offs |
(44,872 | ) | (7,966 | ) | (17,124 | ) | (62,407 | ) | | (132,369 | ) | |||||||||||||
Recoveries |
17,514 | 5,956 | 6,906 | 12,950 | | 43,326 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(27,358 | ) | (2,010 | ) | (10,218 | ) | (49,457 | ) | | (89,043 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 286,552 | 318,901 | 67,522 | 169,819 | 75,839 | $ | 918,633 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any loan or lease type.
In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Companys loan and lease portfolios are determined through a loan-by-loan analysis of larger balance commercial loans and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and managements classification of such loans under the Companys 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 borrowers ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for assigning grades to these loans based on standards outlined in the Companys Credit Policy. Internal loan grades are also monitored by the Companys loan review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Companys loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes at any time. Except for consumer loans and residential real estate loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Modified loans, including smaller balance homogenous loans, that are considered to be troubled
-15-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
debt restructurings are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loans expected cash flows.
Information with respect to loans and leases that were considered impaired follows.
September 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
Recorded investment |
Unpaid principal balance |
Related allowance |
Recorded investment |
Unpaid principal balance |
Related allowance |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial, financial, leasing, etc. |
$ | 144,051 | 166,877 | 35,195 | 132,340 | 165,146 | 31,779 | |||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Commercial |
105,561 | 122,369 | 18,932 | 83,955 | 96,209 | 14,121 | ||||||||||||||||||
Residential builder and developer |
6,544 | 10,276 | 788 | 17,632 | 22,044 | 805 | ||||||||||||||||||
Other commercial construction |
2,445 | 3,991 | 391 | 5,480 | 6,484 | 900 | ||||||||||||||||||
Residential |
83,349 | 101,367 | 4,775 | 88,970 | 107,343 | 4,296 | ||||||||||||||||||
Residential Alt-A |
93,168 | 107,075 | 8,500 | 101,137 | 114,565 | 11,000 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Home equity lines and loans |
23,257 | 24,239 | 3,541 | 19,771 | 20,806 | 6,213 | ||||||||||||||||||
Automobile |
23,985 | 23,985 | 5,118 | 30,317 | 30,317 | 8,070 | ||||||||||||||||||
Other |
18,870 | 18,870 | 5,486 | 18,973 | 18,973 | 5,459 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
501,230 | 579,049 | 82,726 | 498,575 | 581,887 | 82,643 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Commercial, financial, leasing, etc. |
111,023 | 133,100 | | 73,978 | 81,493 | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Commercial |
77,147 | 84,677 | | 66,777 | 78,943 | | ||||||||||||||||||
Residential builder and developer |
42,800 | 68,906 | | 58,820 | 96,722 | | ||||||||||||||||||
Other commercial construction |
10,307 | 28,480 | | 20,738 | 41,035 | | ||||||||||||||||||
Residential |
16,232 | 26,626 | | 16,815 | 26,750 | | ||||||||||||||||||
Residential Alt-A |
20,891 | 35,836 | | 26,752 | 46,964 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
278,400 | 377,625 | | 263,880 | 371,907 | | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total: |
||||||||||||||||||||||||
Commercial, financial, leasing, etc. |
255,074 | 299,977 | 35,195 | 206,318 | 246,639 | 31,779 | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Commercial |
182,708 | 207,046 | 18,932 | 150,732 | 175,152 | 14,121 | ||||||||||||||||||
Residential builder and developer |
49,344 | 79,182 | 788 | 76,452 | 118,766 | 805 | ||||||||||||||||||
Other commercial construction |
12,752 | 32,471 | 391 | 26,218 | 47,519 | 900 | ||||||||||||||||||
Residential |
99,581 | 127,993 | 4,775 | 105,785 | 134,093 | 4,296 | ||||||||||||||||||
Residential Alt-A |
114,059 | 142,911 | 8,500 | 127,889 | 161,529 | 11,000 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Home equity lines and loans |
23,257 | 24,239 | 3,541 | 19,771 | 20,806 | 6,213 | ||||||||||||||||||
Automobile |
23,985 | 23,985 | 5,118 | 30,317 | 30,317 | 8,070 | ||||||||||||||||||
Other |
18,870 | 18,870 | 5,486 | 18,973 | 18,973 | 5,459 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 779,630 | 956,674 | 82,726 | 762,455 | 953,794 | 82,643 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
-16-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
Three months ended September 30, 2015 |
Three months ended September 30, 2014 |
|||||||||||||||||||||||
Interest income recognized |
Interest income recognized |
|||||||||||||||||||||||
Average recorded investment |
Total | Cash basis |
Average recorded investment |
Total | Cash basis |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial, financial, leasing, etc. |
$ | 242,157 | 1,017 | 1,017 | 228,749 | 611 | 611 | |||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Commercial |
179,327 | 2,327 | 2,327 | 189,952 | 821 | 821 | ||||||||||||||||||
Residential builder and developer |
53,009 | 81 | 81 | 90,493 | 18 | 18 | ||||||||||||||||||
Other commercial construction |
17,236 | 1,943 | 1,943 | 58,500 | 251 | 251 | ||||||||||||||||||
Residential |
99,939 | 1,835 | 1,316 | 104,516 | 1,328 | 776 | ||||||||||||||||||
Residential Alt-A |
116,191 | 1,539 | 618 | 131,574 | 1,643 | 681 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Home equity lines and loans |
21,952 | 231 | 66 | 19,268 | 219 | 81 | ||||||||||||||||||
Automobile |
24,429 | 391 | 39 | 33,666 | 528 | 67 | ||||||||||||||||||
Other |
19,238 | 188 | 23 | 18,677 | 177 | 44 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 773,478 | 9,552 | 7,430 | 875,395 | 5,596 | 3,350 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Nine months ended September 30, 2015 |
Nine months ended September 30, 2014 |
|||||||||||||||||||||||
Interest income recognized |
Interest income recognized |
|||||||||||||||||||||||
Average recorded investment |
Total | Cash basis |
Average recorded investment |
Total | Cash basis |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial, financial, leasing, etc. |
$ | 226,243 | 2,123 | 2,123 | 171,227 | 1,379 | 1,379 | |||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Commercial |
161,834 | 4,433 | 4,433 | 194,337 | 2,616 | 2,616 | ||||||||||||||||||
Residential builder and developer |
64,165 | 275 | 275 | 94,453 | 131 | 131 | ||||||||||||||||||
Other commercial construction |
22,130 | 2,166 | 2,166 | 74,531 | 1,694 | 1,694 | ||||||||||||||||||
Residential |
101,997 | 4,639 | 3,011 | 132,606 | 7,784 | 6,146 | ||||||||||||||||||
Residential Alt-A |
120,710 | 4,799 | 1,962 | 135,374 | 5,002 | 1,900 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Home equity lines and loans |
20,619 | 656 | 179 | 17,902 | 540 | 182 | ||||||||||||||||||
Automobile |
26,521 | 1,257 | 136 | 36,560 | 1,742 | 228 | ||||||||||||||||||
Other |
19,053 | 547 | 86 | 18,229 | 517 | 145 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 763,272 | 20,895 | 14,371 | 875,219 | 21,405 | 14,421 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Companys Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. The carrying value of residential real estate loans and home equity loans and lines of credit for which a partial charge-off has been recognized aggregated $59 million and $20 million, respectively, at September 30, 2015 and $63 million and $18 million,
-17-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
respectively, at December 31, 2014. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance totaled $20 million and $28 million, respectively, at September 30, 2015 and $27 million and $28 million, respectively, at December 31, 2014.
In accordance with the previously described policies, the Company utilizes a loan grading system that is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible pass loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as criticized and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as nonaccrual if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger balance criticized commercial loans and commercial real estate loans are individually reviewed by centralized loan review personnel each quarter to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. Smaller balance criticized loans are analyzed by business line risk management areas to ensure proper loan grade classification. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Companys commercial loans and commercial real estate loans.
Real Estate | ||||||||||||||||
Commercial, | Residential | Other | ||||||||||||||
Financial, | Builder and | Commercial | ||||||||||||||
Leasing, etc. | Commercial | Developer | Construction | |||||||||||||
(in thousands) | ||||||||||||||||
September 30, 2015 |
||||||||||||||||
Pass |
$ | 19,223,102 | 22,479,501 | 1,507,057 | 3,447,841 | |||||||||||
Criticized accrual |
785,660 | 895,603 | 61,143 | 94,567 | ||||||||||||
Criticized nonaccrual |
224,415 | 176,491 | 46,022 | 12,312 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 20,233,177 | 23,551,595 | 1,614,222 | 3,554,720 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2014 |
||||||||||||||||
Pass |
$ | 18,695,440 | 21,837,022 | 1,347,778 | 3,347,522 | |||||||||||
Criticized accrual |
588,407 | 578,317 | 45,845 | 172,269 | ||||||||||||
Criticized nonaccrual |
177,445 | 141,600 | 71,517 | 25,699 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 19,461,292 | 22,556,939 | 1,465,140 | 3,545,490 | |||||||||||
|
|
|
|
|
|
|
|
The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes managements subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining
-18-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Companys loan portfolio that may not be specifically identifiable.
The allocation of the allowance for credit losses summarized on the basis of the Companys impairment methodology was as follows:
Commercial, Financial, |
Real Estate | |||||||||||||||||||
Leasing, etc. | Commercial | Residential | Consumer | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 35,195 | 19,743 | 13,275 | 14,145 | $ | 82,358 | |||||||||||||
Collectively evaluated for impairment |
250,271 | 292,214 | 39,804 | 186,706 | 768,995 | |||||||||||||||
Purchased impaired |
1,201 | 1,132 | 1,917 | 1,463 | 5,713 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Allocated |
$ | 286,667 | 313,089 | 54,996 | 202,314 | 857,066 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Unallocated |
76,732 | |||||||||||||||||||
|
|
|||||||||||||||||||
Total |
$ | 933,798 | ||||||||||||||||||
|
|
|||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 31,779 | 15,490 | 14,703 | 19,742 | $ | 81,714 | |||||||||||||
Collectively evaluated for impairment |
251,607 | 291,244 | 45,061 | 165,140 | 753,052 | |||||||||||||||
Purchased impaired |
4,652 | 1,193 | 2,146 | 1,151 | 9,142 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Allocated |
$ | 288,038 | 307,927 | 61,910 | 186,033 | 843,908 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Unallocated |
75,654 | |||||||||||||||||||
|
|
|||||||||||||||||||
Total |
$ | 919,562 | ||||||||||||||||||
|
|
-19-
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 Companys impairment methodology was as follows:
Commercial, Financial, |
Real Estate | |||||||||||||||||||
Leasing, etc. | Commercial | Residential | Consumer | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 255,074 | 243,743 | 213,640 | 66,112 | $ | 778,569 | |||||||||||||
Collectively evaluated for impairment |
19,973,458 | 28,348,685 | 7,983,030 | 11,307,085 | 67,612,258 | |||||||||||||||
Purchased impaired |
4,645 | 128,109 | 14,392 | 2,275 | 149,421 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 20,233,177 | 28,720,537 | 8,211,062 | 11,375,472 | $ | 68,540,248 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2014 |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 206,318 | 252,347 | 232,398 | 69,061 | $ | 760,124 | |||||||||||||
Collectively evaluated for impairment |
19,244,674 | 27,148,382 | 8,406,680 | 10,911,359 | 65,711,095 | |||||||||||||||
Purchased impaired |
10,300 | 166,840 | 18,223 | 2,374 | 197,737 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 19,461,292 | 27,567,569 | 8,657,301 | 10,982,794 | $ | 66,668,956 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
During the normal course of business, the Company modifies loans to maximize recovery efforts. If the borrower is experiencing financial difficulty and a concession is granted, the Company considers such modifications as troubled debt restructurings and classifies those loans as either nonaccrual loans or renegotiated loans. The types of concessions that the Company grants typically include principal deferrals and interest rate concessions, but may also include other types of concessions.
-20-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
The tables below summarize the Companys loan modification activities that were considered troubled debt restructurings for the three months ended September 30, 2015 and 2014:
Recorded investment | Financial effects of modification |
|||||||||||||||||||
Three months ended September 30, 2015 |
Number | Pre- modification |
Post- modification |
Recorded investment (a) |
Interest (b) |
|||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Commercial, financial, leasing, etc. |
||||||||||||||||||||
Principal deferral |
36 | $ | 7,893 | $ | 7,419 | $ | (474 | ) | $ | | ||||||||||
Combination of concession types |
1 | 31 | 31 | | (6 | ) | ||||||||||||||
Real estate: |
||||||||||||||||||||
Commercial |
||||||||||||||||||||
Principal deferral |
15 | 4,230 | 4,208 | (22 | ) | | ||||||||||||||
Combination of concession types |
1 | 1,156 | 1,169 | 13 | (54 | ) | ||||||||||||||
Other commercial construction |
||||||||||||||||||||
Principal deferral |
3 | 296 | 390 | 94 | | |||||||||||||||
Residential |
||||||||||||||||||||
Principal deferral |
31 | 3,540 | 3,743 | 203 | | |||||||||||||||
Other |
1 | 267 | 267 | | | |||||||||||||||
Combination of concession types |
10 | 1,296 | 1,380 | 84 | (178 | ) | ||||||||||||||
Residential Alt-A |
||||||||||||||||||||
Principal deferral |
1 | 265 | 276 | 11 | | |||||||||||||||
Combination of concession types |
4 | 605 | 662 | 57 | (91 | ) | ||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity lines and loans |
||||||||||||||||||||
Principal deferral |
4 | 727 | 727 | | | |||||||||||||||
Combination of concession types |
22 | 2,003 | 2,003 | | (199 | ) | ||||||||||||||
Automobile |
||||||||||||||||||||
Principal deferral |
35 | 316 | 316 | | | |||||||||||||||
Other |
15 | 93 | 93 | | | |||||||||||||||
Combination of concession types |
25 | 471 | 471 | | (17 | ) | ||||||||||||||
Other |
||||||||||||||||||||
Principal deferral |
24 | 352 | 352 | | | |||||||||||||||
Other |
5 | 33 | 33 | | | |||||||||||||||
Combination of concession types |
12 | 117 | 117 | | (12 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
245 | $ | 23,691 | $ | 23,657 | $ | (34 | ) | $ | (557 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. |
(b) | Represents the present value of interest rate concessions discounted at the effective rate of the original loan. |
-21-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
Recorded investment | Financial effects of modification |
|||||||||||||||||||
Three months ended September 30, 2014 |
Number | Pre- modification |
Post- modification |
Recorded investment (a) |
Interest (b) |
|||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Commercial, financial, leasing, etc. |
||||||||||||||||||||
Principal deferral |
15 | $ | 1,305 | $ | 1,300 | $ | (5 | ) | $ | | ||||||||||
Real estate: |
||||||||||||||||||||
Commercial |
||||||||||||||||||||
Principal deferral |
8 | 2,081 | 2,068 | (13 | ) | | ||||||||||||||
Other |
1 | 650 | | (650 | ) | | ||||||||||||||
Combination of concession types |
4 | 483 | 478 | (5 | ) | (95 | ) | |||||||||||||
Residential builder and developer |
||||||||||||||||||||
Principal deferral |
1 | 241 | 241 | | | |||||||||||||||
Other commercial construction |
||||||||||||||||||||
Principal deferral |
1 | 145 | 142 | (3 | ) | | ||||||||||||||
Residential |
||||||||||||||||||||
Principal deferral |
3 | 98 | 97 | (1 | ) | | ||||||||||||||
Combination of concession types |
8 | 1,100 | 1,136 | 36 | (135 | ) | ||||||||||||||
Residential Alt-A |
||||||||||||||||||||
Combination of concession types |
3 | 349 | 369 | 20 | (64 | ) | ||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity lines and loans |
||||||||||||||||||||
Combination of concession types |
5 | 519 | 519 | | (67 | ) | ||||||||||||||
Automobile |
||||||||||||||||||||
Principal deferral |
45 | 1,003 | 1,003 | | | |||||||||||||||
Interest rate reduction |
3 | 30 | 30 | | (2 | ) | ||||||||||||||
Other |
7 | 96 | 96 | | | |||||||||||||||
Combination of concession types |
19 | 348 | 348 | | (21 | ) | ||||||||||||||
Other |
||||||||||||||||||||
Principal deferral |
6 | 48 | 48 | | | |||||||||||||||
Interest rate reduction |
1 | 2 | 2 | | | |||||||||||||||
Combination of concession types |
24 | 511 | 511 | | (121 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
154 | $ | 9,009 | $ | 8,388 | $ | (621 | ) | $ | (505 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. |
(b) | Represents the present value of interest rate concessions discounted at the effective rate of the original loan. |
-22-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
The tables below summarize the Companys loan modification activities that were considered troubled debt restructurings for the nine months ended September 30, 2015 and 2014:
Recorded investment | Financial effects of modification |
|||||||||||||||||||
Nine months ended September 30, 2015 |
Number | Pre- modification |
Post- modification |
Recorded investment (a) |
Interest (b) |
|||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Commercial, financial, leasing, etc. |
||||||||||||||||||||
Principal deferral |
87 | $ | 25,483 | $ | 24,331 | $ | (1,152 | ) | $ | | ||||||||||
Interest rate reduction |
1 | 99 | 99 | | (19 | ) | ||||||||||||||
Other |
2 | 8,991 | 8,883 | (108 | ) | | ||||||||||||||
Combination of concession types |
6 | 25,075 | 24,884 | (191 | ) | (245 | ) | |||||||||||||
Real estate: |
||||||||||||||||||||
Commercial |
||||||||||||||||||||
Principal deferral |
37 | 47,005 | 45,569 | (1,436 | ) | | ||||||||||||||
Combination of concession types |
6 | 3,238 | 3,242 | 4 | (159 | ) | ||||||||||||||
Residential builder and developer |
||||||||||||||||||||
Principal deferral |
2 | 10,650 | 10,598 | (52 | ) | | ||||||||||||||
Other commercial construction |
||||||||||||||||||||
Principal deferral |
3 | 296 | 390 | 94 | | |||||||||||||||
Residential |
||||||||||||||||||||
Principal deferral |
50 | 4,954 | 5,239 | 285 | | |||||||||||||||
Other |
1 | 267 | 267 | | | |||||||||||||||
Combination of concession types |
22 | 2,551 | 2,795 | 244 | (356 | ) | ||||||||||||||
Residential Alt-A |
||||||||||||||||||||
Principal deferral |
2 | 426 | 437 | 11 | | |||||||||||||||
Combination of concession types |
7 | 1,239 | 1,298 | 59 | (121 | ) | ||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity lines and loans |
||||||||||||||||||||
Principal deferral |
6 | 1,946 | 1,946 | | | |||||||||||||||
Combination of concession types |
41 | 3,555 | 3,555 | | (424 | ) | ||||||||||||||
Automobile |
||||||||||||||||||||
Principal deferral |
133 | 1,234 | 1,234 | | | |||||||||||||||
Interest rate reduction |
7 | 137 | 137 | | (10 | ) | ||||||||||||||
Other |
38 | 134 | 134 | | | |||||||||||||||
Combination of concession types |
42 | 693 | 693 | | (28 | ) | ||||||||||||||
Other |
||||||||||||||||||||
Principal deferral |
73 | 1,418 | 1,418 | | | |||||||||||||||
Other |
12 | 113 | 113 | | | |||||||||||||||
Combination of concession types |
35 | 384 | 384 | | (44 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
613 | $ | 139,888 | $ | 137,646 | $ | (2,242 | ) | $ | (1,406 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. |
(b) | Represents the present value of interest rate concessions discounted at the effective rate of the original loan. |
-23-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
Recorded investment | Financial effects of modification |
|||||||||||||||||||
Nine months ended September 30, 2014 |
Number | Pre- modification |
Post- modification |
Recorded investment (a) |
Interest (b) |
|||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Commercial, financial, leasing, etc. |
||||||||||||||||||||
Principal deferral |
66 | $ | 20,673 | $ | 20,499 | $ | (174 | ) | $ | | ||||||||||
Other |
1 | 19,593 | 19,593 | | | |||||||||||||||
Combination of concession types |
5 | 9,836 | 9,766 | (70 | ) | (14 | ) | |||||||||||||
Real estate: |
||||||||||||||||||||
Commercial |
||||||||||||||||||||
Principal deferral |
32 | 17,452 | 17,384 | (68 | ) | | ||||||||||||||
Other |
1 | 650 | | (650 | ) | | ||||||||||||||
Interest rate reduction |
1 | 255 | 252 | (3 | ) | (48 | ) | |||||||||||||
Combination of concession types |
6 | 892 | 940 | 48 | (208 | ) | ||||||||||||||
Residential builder and developer |
||||||||||||||||||||
Principal deferral |
2 | 1,639 | 1,639 | | | |||||||||||||||
Other commercial construction |
||||||||||||||||||||
Principal deferral |
4 | 6,703 | 6,611 | (92 | ) | | ||||||||||||||
Residential |
||||||||||||||||||||
Principal deferral |
19 | 1,842 | 1,926 | 84 | | |||||||||||||||
Interest rate reduction |
1 | 98 | 104 | 6 | (32 | ) | ||||||||||||||
Other |
1 | 188 | 188 | | | |||||||||||||||
Combination of concession types |
30 | 4,211 | 4,287 | 76 | (483 | ) | ||||||||||||||
Residential Alt-A |
||||||||||||||||||||
Principal deferral |
5 | 828 | 900 | 72 | | |||||||||||||||
Combination of concession types |
19 | 3,101 | 3,134 | 33 | (345 | ) | ||||||||||||||
Consumer: |
||||||||||||||||||||
Home equity lines and loans |
||||||||||||||||||||
Principal deferral |
3 | 280 | 280 | | | |||||||||||||||
Interest rate reduction |
5 | 341 | 341 | | (76 | ) | ||||||||||||||
Combination of concession types |
41 | 4,147 | 4,147 | | (443 | ) | ||||||||||||||
Automobile |
||||||||||||||||||||
Principal deferral |
168 | 2,599 | 2,599 | | | |||||||||||||||
Interest rate reduction |
6 | 90 | 90 | | (5 | ) | ||||||||||||||
Other |
26 | 204 | 204 | | | |||||||||||||||
Combination of concession types |
65 | 939 | 939 | | (83 | ) | ||||||||||||||
Other |
||||||||||||||||||||
Principal deferral |
21 | 141 | 141 | | | |||||||||||||||
Interest rate reduction |
4 | 293 | 293 | | (63 | ) | ||||||||||||||
Other |
1 | 45 | 45 | | | |||||||||||||||
Combination of concession types |
57 | 1,883 | 1,883 | | (585 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
590 | $ | 98,923 | $ | 98,185 | $ | (738 | ) | $ | (2,385 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. |
(b) | Represents the present value of interest rate concessions discounted at the effective rate of the original loan. |
Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loans expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loans observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended September 30, 2015 and 2014 and for which there was a subsequent payment default during the nine-month periods ended September 30, 2015 and 2014, respectively, were not material.
-24-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
Effective January 1, 2015, the Company adopted amended accounting and disclosure guidance for reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amended guidance clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The adoption resulted in an insignificant increase in other real estate owned. The amount of foreclosed residential real estate property held by the Company was $43 million and $44 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, there were $151 million in loans secured by residential real estate that were in the process of foreclosure.
5. Borrowings
During February 2015, M&T Bank issued $1.5 billion of fixed rate senior notes pursuant to a Bank Note Program, of which $750 million have a 2.10% interest rate and mature in 2020 and $750 million have a 2.90% interest rate and mature in 2025.
M&T had $513 million of fixed and floating rate junior subordinated deferrable interest debentures (Junior Subordinated Debentures) outstanding at September 30, 2015 which are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (Capital Securities) and common securities (Common Securities). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trusts securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.
Holders of the Capital Securities receive preferential cumulative cash distributions unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures as allowed by the terms of each such debenture, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. In general, the agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T.
The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2033) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval.
-25-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. Borrowings, continued
On April 15, 2015, M&T redeemed all of the issued and outstanding Capital Securities issued by M&T Capital Trust I, M&T Capital Trust II and M&T Capital Trust III, and the related Junior Subordinated Debentures held by those respective trusts. In the aggregate, $323 million of Junior Subordinated Debentures were redeemed. In February 2014, M&T redeemed all of the issued and outstanding 8.5% $350 million Capital Securities issued by M&T Capital Trust IV and the related Junior Subordinated Debentures held by M&T Capital Trust IV.
Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of September 30, 2015 and December 31, 2014. The agreements reflect various repurchase dates in 2016 and 2017 and are subject to legally enforceable master netting arrangements, however, the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $1.5 billion at each of September 30, 2015 and December 31, 2014.
6. Shareholders equity
M&T is authorized to issue 1,000,000 shares of preferred stock with a $1.00 par value per share. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference, but have no general voting rights.
Issued and outstanding preferred stock of M&T as of September 30, 2015 and December 31, 2014 is presented below:
Shares issued and outstanding |
Carrying value |
|||||||
(dollars in thousands) | ||||||||
Series A (a) |
||||||||
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference per share |
230,000 | $ | 230,000 | |||||
Series C (a) |
||||||||
Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000 liquidation preference per share |
151,500 | $ | 151,500 | |||||
Series D (b) |
||||||||
Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, $10,000 liquidation preference per share |
50,000 | $ | 500,000 | |||||
Series E (c) |
||||||||
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock Series E, $1,000 liquidation preference per share |
350,000 | $ | 350,000 |
(a) | Dividends, if declared, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 719,175 at September 30, 2015 and 721,490 at December 31, 2014. |
-26-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Shareholders equity, continued
(b) | Dividends, if declared, are paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&Ts option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence. |
(c) | Dividends, if declared, are paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month London Interbank Offered Rate (LIBOR) plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&Ts option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence. |
In addition to the Series A warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at September 30, 2015 and December 31, 2014. The obligation under that warrant was assumed by M&T in an acquisition.
7. Pension plans and other postretirement benefits
The Company provides defined benefit pension and other postretirement benefits (including health care and life insurance benefits) to qualified retired employees. Net periodic defined benefit cost for defined benefit plans consisted of the following:
Pension benefits | Other postretirement benefits |
|||||||||||||||
Three months ended September 30 | ||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost |
$ | 5,916 | 5,130 | 188 | 151 | |||||||||||
Interest cost on projected benefit obligation |
17,754 | 17,290 | 651 | 695 | ||||||||||||
Expected return on plan assets |
(23,527 | ) | (22,892 | ) | | | ||||||||||
Amortization of prior service credit |
(1,501 | ) | (1,638 | ) | (340 | ) | (340 | ) | ||||||||
Amortization of net actuarial loss |
11,207 | 3,624 | 26 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
$ | 9,849 | 1,514 | 525 | 506 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pension benefits | Other postretirement benefits |
|||||||||||||||
Nine months ended September 30 | ||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost |
$ | 17,748 | 15,390 | 562 | 453 | |||||||||||
Interest cost on projected benefit obligation |
53,261 | 51,871 | 1,953 | 2,084 | ||||||||||||
Expected return on plan assets |
(70,578 | ) | (68,676 | ) | | | ||||||||||
Amortization of prior service credit |
(4,504 | ) | (4,914 | ) | (1,019 | ) | (1,019 | ) | ||||||||
Amortization of net actuarial loss |
33,619 | 10,871 | 79 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
$ | 29,546 | 4,542 | 1,575 | 1,518 | |||||||||||
|
|
|
|
|
|
|
|
-27-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. Pension plans and other postretirement benefits, continued
Expense incurred in connection with the Companys defined contribution pension and retirement savings plans totaled $14,281,000 and $13,558,000 for the three months ended September 30, 2015 and 2014, respectively, and $44,377,000 and $41,963,000 for the nine months ended September 30, 2015 and 2014, respectively.
8. Earnings per common share
The computations of basic earnings per common share follow:
Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(in thousands, except per share) | ||||||||||||||||
Income available to common shareholders: |
||||||||||||||||
Net income |
$ | 280,401 | 275,344 | $ | 808,702 | 788,697 | ||||||||||
Less: Preferred stock dividends (a) |
(20,318 | ) | (20,443 | ) | (60,953 | ) | (55,560 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to common equity |
260,083 | 254,901 | 747,749 | 733,137 | ||||||||||||
Less: Income attributable to unvested stock-based compensation awards |
(2,746 | ) | (2,996 | ) | (8,122 | ) | (8,830 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to common shareholders |
$ | 257,337 | 251,905 | $ | 739,627 | 724,307 | ||||||||||
Weighted-average shares outstanding: |
||||||||||||||||
Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards |
134,049 | 132,832 | 133,805 | 132,372 | ||||||||||||
Less: Unvested stock-based compensation awards |
(1,419 | ) | (1,567 | ) | (1,458 | ) | (1,590 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average shares outstanding |
132,630 | 131,265 | 132,347 | 130,782 | ||||||||||||
Basic earnings per common share |
$ | 1.94 | 1.92 | $ | 5.59 | 5.54 |
(a) | Including impact of not as yet declared cumulative dividends. |
-28-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. Earnings per common share, continued
The computations of diluted earnings per common share follow:
Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(in thousands, except per share) | ||||||||||||||||
Net income available to common equity |
$ | 260,083 | 254,901 | $ | 747,749 | 733,137 | ||||||||||
Less: Income attributable to unvested stock-based compensation awards |
(2,737 | ) | (2,984 | ) | (8,093 | ) | (8,793 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to common shareholders |
$ | 257,346 | 251,917 | $ | 739,656 | 724,344 | ||||||||||
Adjusted weighted-average shares outstanding: |
||||||||||||||||
Common and unvested stock-based compensation awards |
134,049 | 132,832 | 133,805 | 132,372 | ||||||||||||
Less: Unvested stock-based compensation awards |
(1,419 | ) | (1,567 | ) | (1,458 | ) | (1,590 | ) | ||||||||
Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock |
746 | 863 | 742 | 916 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted weighted-average shares outstanding |
133,376 | 132,128 | 133,089 | 131,698 | ||||||||||||
Diluted earnings per common share |
$ | 1.93 | 1.91 | $ | 5.56 | 5.50 |
GAAP defines unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities that shall be included in the computation of earnings per common share pursuant to the two-class method. The Company has issued stock-based compensation awards in the form of restricted stock and restricted stock units, which, in accordance with GAAP, are considered participating securities.
Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 1.5 million and 1.7 million common shares during the three-month periods ended September 30, 2015 and 2014, respectively, and 1.9 million and 2.1 million common shares during the nine-month periods ended September 30, 2015 and 2014, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.
-29-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. Comprehensive income
The following table displays the components of other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income (loss) to net income:
Investment Securities | ||||||||||||||||||||||||||||
With OTTI (a) |
All other |
Defined benefit plans |
Other | Total amount before tax |
Income tax |
Net | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance January 1, 2015 |
$ | 7,438 | 201,828 | (503,027 | ) | (4,082 | ) | $ | (297,843 | ) | 116,849 | $ | (180,994 | ) | ||||||||||||||
Other comprehensive income before reclassifications: |
||||||||||||||||||||||||||||
Unrealized holding gains (losses), net |
9,699 | (11,139 | ) | | | (1,440 | ) | 952 | (488 | ) | ||||||||||||||||||
Foreign currency translation adjustment |
| | | (735 | ) | (735 | ) | 214 | (521 | ) | ||||||||||||||||||
Gains on cash flow hedges |
| | | 1,453 | 1,453 | (568 | ) | 885 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total other comprehensive income before reclassifications |
9,699 | (11,139 | ) | | 718 | (722 | ) | 598 | (124 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income: |
||||||||||||||||||||||||||||
Accretion of unrealized holding losses on held-to-maturity (HTM) securities |
| 2,417 | | | 2,417 | (b) | (944 | ) | 1,473 | |||||||||||||||||||
Losses realized in net income |
| 108 | | | 108 | (c) | (40 | ) | 68 | |||||||||||||||||||
Accretion of net gain on terminated cash flow hedges |
| | | (102 | ) | (102 | )(d) | 40 | (62 | ) | ||||||||||||||||||
Amortization of prior service credit |
| | (5,523 | ) | | (5,523 | )(e) | 2,359 | (3,164 | ) | ||||||||||||||||||
Amortization of actuarial losses |
| | 33,698 | | 33,698 | (e) | (14,368 | ) | 19,330 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total reclassifications |
| 2,525 | 28,175 | (102 | ) | 30,598 | (12,953 | ) | 17,645 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total gain (loss) during the period |
9,699 | (8,614 | ) | 28,175 | 616 | 29,876 | (12,355 | ) | 17,521 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance September 30, 2015 |
$ | 17,137 | 193,214 | (474,852 | ) | (3,466 | ) | $ | (267,967 | ) | 104,494 | $ | (163,473 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-30-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. Comprehensive income, continued
Investment Securities | ||||||||||||||||||||||||||||
With OTTI (a) |
All other |
Defined benefit plans |
Other | Total amount before tax |
Income tax |
Net | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Balance January 1, 2014 |
$ | 37,255 | 18,450 | (161,617 | ) | 115 | $ | (105,797 | ) | 41,638 | $ | (64,159 | ) | |||||||||||||||
Other comprehensive income before reclassifications: |
||||||||||||||||||||||||||||
Unrealized holding gains, net |
12,038 | 109,263 | | | 121,301 | (47,615 | ) | 73,686 | ||||||||||||||||||||
Foreign currency translation adjustment |
| | | (2,314 | ) | (2,314 | ) | 810 | (1,504 | ) | ||||||||||||||||||
Unrealized losses on cash flow hedges |
| | | (162 | ) | (162 | ) | 64 | (98 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total other comprehensive income before reclassifications |
12,038 | 109,263 | | (2,476 | ) | 118,825 | (46,741 | ) | 72,084 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income: |
||||||||||||||||||||||||||||
Accretion of unrealized holding losses on HTM securities |
1 | 2,539 | | | 2,540 | (b) | (997 | ) | 1,543 | |||||||||||||||||||
Amortization of prior service credit |
| | (5,933 | ) | | (5,933 | )(e) | 2,328 | (3,605 | ) | ||||||||||||||||||
Amortization of actuarial losses |
| | 10,871 | | 10,871 | (e) | (4,267 | ) | 6,604 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total reclassifications |
1 | 2,539 | 4,938 | | 7,478 | (2,936 | ) | 4,542 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total gain (loss) during the period |
12,039 | 111,802 | 4,938 | (2,476 | ) | 126,303 | (49,677 | ) | 76,626 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance September 30, 2014 |
$ | 49,294 | 130,252 | (156,679 | ) | (2,361 | ) | $ | 20,506 | (8,039 | ) | $ | 12,467 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Other-than-temporary impairment |
(b) | Included in interest income |
(c) | Included in loss on bank investment securities |
(d) | Included in interest expense |
(e) | Included in salaries and employee benefits expense |
Accumulated other comprehensive income (loss), net consisted of the following:
Investment securities | Defined benefit |
|||||||||||||||||||
With OTTI | All other | plans | Other | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance December 31, 2014 |
$ | 4,518 | 122,683 | (305,589 | ) | (2,606 | ) | $ | (180,994 | ) | ||||||||||
Net gain (loss) during period |
5,926 | (4,873 | ) | 16,166 | 302 | 17,521 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance September 30, 2015 |
$ | 10,444 | 117,810 | (289,423 | ) | (2,304 | ) | $ | (163,473 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
-31-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. Derivative financial instruments
As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Companys portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Companys credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant as of September 30, 2015.
The net effect of interest rate swap agreements was to increase net interest income by $11 million for each of the three-month periods ended September 30, 2015 and 2014 and $33 million and $34 million for the nine-month periods ended September 30, 2015 and 2014, respectively.
Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:
Notional amount |
Average maturity |
Weighted- average rate |
||||||||||||||
Fixed | Variable | |||||||||||||||
(in thousands) | (in years) | |||||||||||||||
September 30, 2015 |
||||||||||||||||
Fair value hedges: |
||||||||||||||||
Fixed rate long-term borrowings (a) |
$ | 1,400,000 | 1.9 | 4.42 | % | 1.29 | % | |||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2014 |
||||||||||||||||
Fair value hedges: |
||||||||||||||||
Fixed rate long-term borrowings (a) |
$ | 1,400,000 | 2.7 | 4.42 | % | 1.19 | % | |||||||||
|
|
|
|
|
|
|
|
(a) | Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate. |
The use of cash flow hedges to manage the variability of cash flows associated with the then-forecasted issuance of long-term debt did not have a significant impact on the Companys consolidated financial position or results of operations.
The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale.
Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $17.6 billion at each of September 30, 2015 and December 31, 2014. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.6 billion and $1.3 billion at September 30, 2015 and December 31, 2014, respectively.
-32-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. Derivative financial instruments, continued
Information about the fair values of derivative instruments in the Companys consolidated balance sheet and consolidated statement of income follows:
Asset derivatives | Liability derivatives | |||||||||||||||
Fair value | Fair value | |||||||||||||||
September 30, 2015 |
December 31, 2014 |
September 30, 2015 |
December 31, 2014 |
|||||||||||||
(in thousands) | ||||||||||||||||
Derivatives designated and qualifying as hedging instruments |
||||||||||||||||
Fair value hedges: |
||||||||||||||||
Interest rate swap agreements (a) |
$ | 60,782 | 73,251 | $ | | | ||||||||||
Commitments to sell real estate loans (a) |
899 | 728 | 5,142 | 4,217 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
61,681 | 73,979 | 5,142 | 4,217 | |||||||||||||
Derivatives not designated and qualifying as hedging instruments |
||||||||||||||||
Mortgage-related commitments to originate real estate loans for sale (a) |
17,832 | 17,396 | 185 | 49 | ||||||||||||
Commitments to sell real estate loans (a) |
26 | 754 | 4,162 | 4,330 | ||||||||||||
Trading: |
||||||||||||||||
Interest rate contracts (b) |
268,332 | 215,614 | 221,626 | 173,513 | ||||||||||||
Foreign exchange and other option and futures contracts (b) |
13,404 | 31,112 | 11,380 | 29,950 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
299,594 | 264,876 | 237,353 | 207,842 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivatives |
$ | 361,275 | 338,855 | $ | 242,495 | 212,059 | ||||||||||
|
|
|
|
|
|
|
|
(a) | Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities. |
(b) | Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities. |
-33-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. Derivative financial instruments, continued
Amount of gain (loss) recognized | ||||||||||||||||
Three months ended September 30, 2015 |
Three months ended September 30, 2014 |
|||||||||||||||
Derivative | Hedged item | Derivative | Hedged item | |||||||||||||
(in thousands) | ||||||||||||||||
Derivatives in fair value hedging relationships |
||||||||||||||||
Interest rate swap agreements: |
||||||||||||||||
Fixed rate long-term borrowings (a) |
$ | (2,719 | ) | 2,382 | $ | (16,792 | ) | 16,380 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||
Trading: |
||||||||||||||||
Interest rate contracts (b) |
$ | 4,120 | $ | 132 | ||||||||||||
Foreign exchange and other option and futures contracts (b) |
2,441 | (781 | ) | |||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 6,561 | $ | (649 | ) | |||||||||||
|
|
|
|
Amount of gain (loss) recognized | ||||||||||||||||
Nine months ended September 30, 2015 |
Nine months ended September 30, 2014 |
|||||||||||||||
Derivative | Hedged item | Derivative | Hedged item | |||||||||||||
(in thousands) | ||||||||||||||||
Derivatives in fair value hedging relationships |
||||||||||||||||
Interest rate swap agreements: |
||||||||||||||||
Fixed rate long-term borrowings (a) |
$ | (12,469 | ) | 11,495 | $ | (26,627 | ) | 25,658 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||
Trading: |
||||||||||||||||
Interest rate contracts (b) |
$ | 6,552 | $ | 1,214 | ||||||||||||
Foreign exchange and other option and futures contracts (b) |
1,563 | (6,597 | ) | |||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 8,115 | $ | (5,383 | ) | |||||||||||
|
|
|
|
(a) | Reported as other revenues from operations. |
(b) | Reported as trading account and foreign exchange gains. |
-34-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. Derivative financial instruments, continued
In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $23 million and $28 million at September 30, 2015 and December 31, 2014, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.
The Company does not offset derivative asset and liability positions in its consolidated financial statements. The Companys exposure to credit risk by entering into derivative contracts is mitigated through master netting agreements and collateral posting requirements. Master netting agreements covering interest rate and foreign exchange contracts with the same party include a right to set-off that becomes enforceable in the event of default, early termination or under other specific conditions.
The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $96 million and $161 million at September 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $91 million and $103 million at September 30, 2015 and December 31, 2014, respectively. The Company was required to post collateral relating to those positions of $81 million and $90 million at September 30, 2015 and December 31, 2014, respectively. Certain of the Companys derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Companys debt rating were to fall below specified ratings, the counterparties to the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on September 30, 2015 was $17 million, for which the Company had posted collateral of $11 million in the normal course of business. If the credit-risk-related contingent features had been triggered on September 30, 2015, the maximum amount of additional collateral the Company would have been required to post to counterparties was $6 million.
The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $40 million and $104 million at September 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $35 million and $46 million at September 30, 2015 and December 31, 2014, respectively. Counterparties posted collateral relating to those positions of $35 million and $46 million at September 30, 2015 and December 31, 2014, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Companys credit risk standards and often contain collateral provisions.
In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative financial instruments
-35-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. Derivative financial instruments, continued
cleared through clearinghouses was a net liability position of $96 million and $35 million at September 30, 2015 and December 31, 2014, respectively. Collateral posted with clearinghouses was $143 million and $61 million at September 30, 2015 and December 31, 2014, respectively.
11. Variable interest entities and asset securitizations
During the three and nine months ended September 30, 2015, the Company securitized approximately $15 million and $51 million, respectively, of one-to-four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with the Government National Mortgage Association (Ginnie Mae) and retained the resulting securities in its investment securities portfolio. In similar transactions for the three months and nine months ended September 30, 2014, the Company securitized $35 million and $110 million, respectively, of one-to-four family residential real estate loans. Gains associated with those transactions were not significant.
In accordance with GAAP, the Company determined that it was the primary beneficiary of a residential mortgage loan securitization trust considering its role as servicer and its retained subordinated interests in the trust. As a result, the Company has included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. At September 30, 2015 and December 31, 2014, the carrying values of the loans in the securitization trust were $84 million and $98 million, respectively. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to M&T at September 30, 2015 and December 31, 2014 was $13 million and $15 million, respectively. Because the transaction was non-recourse, the Companys maximum exposure to loss as a result of its association with the trust at September 30, 2015 is limited to realizing the carrying value of the loans less the amount of the mortgage-backed securities held by the third parties.
As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Companys consolidated financial statements. At September 30, 2015 and December 31, 2014, the Company included the junior subordinated debentures as long-term borrowings in its consolidated balance sheet and recognized $24 million and $34 million, respectively, in other assets for its investment in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&Ts repayment of the junior subordinated debentures associated with preferred capital securities described in note 5.
The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.2 billion at September 30, 2015 and December 31, 2014, respectively. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Companys investments in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Companys maximum exposure to loss of its investments in such partnerships was $301 million, including $85 million of unfunded commitments, at September 30, 2015 and $243 million, including $56
-36-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. Variable interest entities and asset securitizations, continued
million of unfunded commitments, at December 31, 2014. Contingent commitments to provide additional capital contributions to these partnerships were not material at September 30, 2015. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Companys involvement with such entities. The Company, in its position as limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Companys consolidated financial statements. As described in note 1, effective January 1, 2015 the Company retrospectively adopted for all periods presented amended accounting guidance on the accounting for investments in qualified affordable housing projects whereby the Companys investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company amortized $10 million and $31 million of its investments in qualified affordable housing projects to income tax expense during the three months and nine months ended September 30, 2015, respectively, and recognized $15 million and $44 million of tax credits and other tax benefits during those respective periods. Similarly, for the three months and nine months ended September 30, 2014, the Company amortized $14 million and $39 million, respectively, of its investments in qualified affordable housing projects to income tax expense, and recognized $18 million and $53 million of tax credits and other tax benefits during those respective periods.
12. Fair value measurements
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at September 30, 2015.
Pursuant to GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.
| Level 1 Valuation is based on quoted prices in active markets for identical assets and liabilities. |
| Level 2 Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market. |
| Level 3 Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Companys own estimates about the assumptions that market participants would use to value the asset or liability. |
When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. The following is
-37-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
a description of the valuation methodologies used for the Companys assets and liabilities that are measured on a recurring basis at estimated fair value.
Trading account assets and liabilities
Trading account assets and liabilities consist primarily of interest rate swap agreements and foreign exchange contracts with customers who require such services with offsetting positions with third parties to minimize the Companys risk with respect to such transactions. The Company generally determines the fair value of its derivative trading account assets and liabilities using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. Mutual funds held in connection with deferred compensation arrangements have been classified as Level 1 valuations. Valuations of investments in municipal and other bonds can generally be obtained through reference to quoted prices in less active markets for the same or similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.
Investment securities available for sale
The majority of the Companys available-for-sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Certain investments in mutual funds and equity securities are actively traded and, therefore, have been classified as Level 1 valuations.
Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at September 30, 2015 and December 31, 2014. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR ranging from 4% to 10%, with a weighted-average of 8%, was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At September 30, 2015, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $28 million and $50 million, respectively, and at December 31, 2014 were $30 million and $50 million, respectively. Securities backed by trust preferred securities issued by financial institutions and other entities constituted all of the available-for-sale investment securities classified as Level 3 valuations.
The Company ensures an appropriate control framework is in place over the valuation processes and techniques used for significant Level 3 fair value measurements. Internal pricing models used for significant valuation measurements have generally been subjected to validation procedures including testing of mathematical constructs, review of valuation methodology and significant assumptions used.
Real estate loans held for sale
The Company utilizes commitments to sell real estate loans to hedge the exposure to changes in fair value of real estate loans held for sale. The carrying value of hedged real estate loans held for sale includes changes in
-38-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
estimated fair value during the hedge period. Typically, the Company attempts to hedge real estate loans originated for sale from the date of close through the sale date. The fair value of hedged real estate loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans with similar characteristics and, accordingly, such loans have been classified as a Level 2 valuation.
Commitments to originate real estate loans for sale and commitments to sell real estate loans
The Company enters into various commitments to originate real estate loans for sale and commitments to sell real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value on the consolidated balance sheet. The estimated fair values of such commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans to certain government-sponsored entities and other parties. The fair valuations of commitments to sell real estate loans generally result in a Level 2 classification. The estimated fair value of commitments to originate real estate loans for sale are adjusted to reflect the Companys anticipated commitment expirations. The estimated commitment expirations are considered significant unobservable inputs contributing to the Level 3 classification of commitments to originate real estate loans for sale. Significant unobservable inputs used in the determination of estimated fair value of commitments to originate real estate loans for sale are included in the accompanying table of significant unobservable inputs to Level 3 measurements.
Interest rate swap agreements used for interest rate risk management
The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. The Company generally determines the fair value of its interest rate swap agreements using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap agreement assets and has considered its own credit risk in the valuation of its interest rate swap agreement liabilities.
-39-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
The following tables present assets and liabilities at September 30, 2015 and December 31, 2014 measured at estimated fair value on a recurring basis:
Fair value measurements at September 30, 2015 |
Level 1 (a) | Level 2 (a) | Level 3 | |||||||||||||
(in thousands) | ||||||||||||||||
Trading account assets |
$ | 340,710 | 48,006 | 292,704 | | |||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury and federal agencies |
199,394 | | 199,394 | | ||||||||||||
Obligations of states and political subdivisions |
6,296 | | 6,296 | | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
10,714,048 | | 10,714,048 | | ||||||||||||
Privately issued |
82 | | | 82 | ||||||||||||
Collateralized debt obligations |
49,876 | | | 49,876 | ||||||||||||
Other debt securities |
120,468 | | 120,468 | | ||||||||||||
Equity securities |
69,345 | 40,370 | 28,975 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
11,159,509 | 40,370 | 11,069,181 | 49,958 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate loans held for sale |
493,453 | | 493,453 | | ||||||||||||
Other assets (b) |
79,539 | | 61,707 | 17,832 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 12,073,211 | 88,376 | 11,917,045 | 67,790 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading account liabilities |
$ | 233,006 | | 233,006 | | |||||||||||
Other liabilities (b) |
9,489 | | 9,304 | 185 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 242,495 | | 242,310 | 185 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Fair value measurements at December 31, 2014 |
Level 1 (a) | Level 2 (a) | Level 3 | |||||||||||||
(in thousands) | ||||||||||||||||
Trading account assets |
$ | 308,175 | 51,416 | 256,759 | | |||||||||||
Investment securities available for sale: |
||||||||||||||||
U.S. Treasury and federal agencies |
161,947 | | 161,947 | | ||||||||||||
Obligations of states and political subdivisions |
8,198 | | 8,198 | | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Government issued or guaranteed |
8,731,123 | | 8,731,123 | | ||||||||||||
Privately issued |
103 | | | 103 | ||||||||||||
Collateralized debt obligations |
50,316 | | | 50,316 | ||||||||||||
Other debt securities |
121,488 | | 121,488 | | ||||||||||||
Equity securities |
83,757 | 64,841 | 18,916 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
9,156,932 | 64,841 | 9,041,672 | 50,419 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate loans held for sale |
742,249 | | 742,249 | | ||||||||||||
Other assets (b) |
92,129 | | 74,733 | 17,396 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 10,299,485 | 116,257 | 10,115,413 | 67,815 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading account liabilities |
$ | 203,464 | | 203,464 | | |||||||||||
Other liabilities (b) |
8,596 | | 8,547 | 49 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 212,060 | | 212,011 | 49 | |||||||||||
|
|
|
|
|
|
|
|
-40-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
(a) | There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2015 and the year ended December 31, 2014. |
(b) | Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3). |
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended September 30, 2015 were as follows:
Investment securities available for sale | ||||||||||||
Privately issued mortgage-backed securities |
Collateralized debt obligations |
Other assets and other liabilities |
||||||||||
(in thousands) | ||||||||||||
Balance June 30, 2015 |
$ | 88 | $ | 50,483 | $ | 11,206 | ||||||
Total gains (losses) realized/unrealized: |
||||||||||||
Included in earnings |
| | 21,709 | (a) | ||||||||
Included in other comprehensive income |
| (472 | )(d) | | ||||||||
Settlements |
(6 | ) | (135 | ) | | |||||||
Transfers in and/or out of Level 3 (b) |
| | (15,268 | )(c) | ||||||||
|
|
|
|
|
|
|||||||
Balance September 30, 2015 |
$ | 82 | $ | 49,876 | $ | 17,647 | ||||||
|
|
|
|
|
|
|||||||
Changes in unrealized gains included in earnings related to assets still held at September 30, 2015 |
$ | | $ | | $ | 15,488 | (a) | |||||
|
|
|
|
|
|
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended September 30, 2014 were as follows:
Investment securities available for sale | ||||||||||||
Privately issued mortgage-backed securities |
Collateralized debt obligations |
Other assets and other liabilities |
||||||||||
(in thousands) | ||||||||||||
Balance June 30, 2014 |
$ | 119 | $ | 56,200 | $ | 22,023 | ||||||
Total gains (losses) realized/unrealized: |
||||||||||||
Included in earnings |
| | 9,657 | (a) | ||||||||
Included in other comprehensive income |
| 2,201 | (d) | | ||||||||
Settlements |
(7 | ) | (3,593 | ) | | |||||||
Transfers in and/or out of Level 3 (b) |
| | (15,188 | )(c) | ||||||||
|
|
|
|
|
|
|||||||
Balance September 30, 2014 |
$ | 112 | $ | 54,808 | $ | 16,492 | ||||||
|
|
|
|
|
|
|||||||
Changes in unrealized gains included in earnings related to assets still held at September 30, 2014 |
$ | | $ | | $ | 12,421 | (a) | |||||
|
|
|
|
|
|
-41-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the nine months ended September 30, 2015 were as follows:
Investment securities available for sale | ||||||||||||
Privately issued mortgage-backed securities |
Collateralized debt obligations |
Other assets and other liabilities |
||||||||||
(in thousands) | ||||||||||||
Balance January 1, 2015 |
$ | 103 | $ | 50,316 | $ | 17,347 | ||||||
Total gains (losses) realized/unrealized: |
||||||||||||
Included in earnings |
| | 67,611 | (a) | ||||||||
Included in other comprehensive income |
| 5,153 | (d) | | ||||||||
Settlements |
(21 | ) | (5,593 | ) | | |||||||
Transfers in and/or out of Level 3 (b) |
| | (67,311 | )(c) | ||||||||
|
|
|
|
|
|
|||||||
Balance September 30, 2015 |
$ | 82 | $ | 49,876 | $ | 17,647 | ||||||
|
|
|
|
|
|
|||||||
Changes in unrealized gains included in earnings related to assets still held at September 30, 2015 |
$ | | $ | | $ | 15,965 | (a) | |||||
|
|
|
|
|
|
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the nine months ended September 30, 2014 were as follows:
Investment securities available for sale | ||||||||||||
Privately issued mortgage-backed securities |
Collateralized debt obligations |
Other assets and other liabilities |
||||||||||
(in thousands) | ||||||||||||
Balance January 1, 2014 |
$ | 1,850 | $ | 63,083 | $ | 3,941 | ||||||
Total gains (losses) realized/unrealized: |
||||||||||||
Included in earnings |
| | 63,557 | (a) | ||||||||
Included in other comprehensive income |
272 | (d) | 11,333 | (d) | | |||||||
Settlements |
(2,010 | ) | (19,608 | ) | | |||||||
Transfers in and/or out of Level 3 (b) |
| | (51,006 | )(c) | ||||||||
|
|
|
|
|
|
|||||||
Balance September 30, 2014 |
$ | 112 | $ | 54,808 | $ | 16,492 | ||||||
|
|
|
|
|
|
|||||||
Changes in unrealized gains included in earnings related to assets still held at September 30, 2014 |
$ | | $ | | $ | 17,773 | (a) | |||||
|
|
|
|
|
|
-42-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
(a) | Reported as mortgage banking revenues in the consolidated statement of income and includes the fair value of commitment issuances and expirations. |
(b) | The Companys policy for transfers between fair value levels is to recognize the transfer as of the actual date of the event or change in circumstances that caused the transfer. |
(c) | Transfers out of Level 3 consist of interest rate locks transferred to closed loans. |
(d) | Reported as net unrealized gains (losses) on investment securities in the consolidated statement of comprehensive income. |
The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The more significant of those assets follow.
Loans
Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 10% to 90% at September 30, 2015. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $177 million at September 30, 2015 ($106 million and $71 million of which were classified as Level 2 and Level 3, respectively), $173 million at December 31, 2014 ($94 million and $79 million of which were classified as Level 2 and Level 3, respectively) and $196 million at September 30, 2014 ($112 million and $84 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on September 30, 2015 were decreases of $11 million and $53 million for the three- and nine-month periods ended September 30, 2015, respectively. Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on September 30, 2014 were decreases of $23 million and $46 million for the three- and nine-month periods ended September 30, 2014, respectively.
Assets taken in foreclosure of defaulted loans
Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken in
-43-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
foreclosure of defaulted loans subject to nonrecurring fair value measurement were $15 million and $21 million at September 30, 2015 and September 30, 2014, respectively. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three-month and nine-month periods ended September 30, 2015 and 2014.
Significant unobservable inputs to Level 3 measurements
The following tables present quantitative information about significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at September 30, 2015 and December 31, 2014:
Fair value at September 30, 2015 |
Valuation technique |
Unobservable input/assumptions |
Range (weighted- average) |
|||||||||||||
(in thousands) | ||||||||||||||||
Recurring fair value measurements |
||||||||||||||||
Privately issued mortgagebacked securities |
$ | 82 | |
Two independent pricing quotes |
|
| | |||||||||
Collateralized debt obligations |
49,876 | Discounted cash flow | Probability of default | 12%-57% (33%) | ||||||||||||
Loss severity | 100% | |||||||||||||||
Net other assets (liabilities)(a) |
17,647 | Discounted cash flow | |
Commitment expirations |
|
0%-66% (38%) | ||||||||||
Fair value at December 31, 2014 |
Valuation technique |
Unobservable input/assumptions |
Range (weighted- average) |
|||||||||||||
(in thousands) | ||||||||||||||||
Recurring fair value measurements |
||||||||||||||||
Privately issued mortgagebacked securities |
$ | 103 | |
Two independent pricing quotes |
|
| | |||||||||
Collateralized debt obligations |
50,316 | Discounted cash flow | Probability of default | 12%-57% (36%) | ||||||||||||
Loss severity | 100% | |||||||||||||||
Net other assets (liabilities)(a) |
17,347 | Discounted cash flow | |
Commitment expirations |
|
0%-96% (17%) |
(a) | Other Level 3 assets (liabilities) consist of commitments to originate real estate loans. |
-44-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
Sensitivity of fair value measurements to changes in unobservable inputs
An increase (decrease) in the probability of default and loss severity for collateralized debt securities would generally result in a lower (higher) fair value measurement.
An increase (decrease) in the estimate of expirations for commitments to originate real-estate loans would generally result in a lower (higher) fair value measurement. Estimated commitment expirations are derived considering loan type, changes in interest rates and remaining length of time until closing.
Disclosures of fair value of financial instruments
The carrying amounts and estimated fair value for financial instrument assets (liabilities) are presented in the following table:
September 30, 2015 | ||||||||||||||||||||
Carrying amount |
Estimated fair value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 1,249,704 | $ | 1,249,704 | $ | 1,193,831 | $ | 55,873 | $ | | ||||||||||
Interest-bearing deposits at banks |
4,713,266 | 4,713,266 | | 4,713,266 | | |||||||||||||||
Trading account assets |
340,710 | 340,710 | 48,006 | 292,704 | | |||||||||||||||
Investment securities |
14,494,539 | 14,521,740 | 40,370 | 14,283,075 | 198,295 | |||||||||||||||
Loans and leases: |
||||||||||||||||||||
Commercial loans and leases |
20,233,177 | 19,920,031 | | | 19,920,031 | |||||||||||||||
Commercial real estate loans |
28,720,537 | 28,633,973 | | 71,357 | 28,562,616 | |||||||||||||||
Residential real estate loans |
8,211,062 | 8,302,630 | | 4,918,613 | 3,384,017 | |||||||||||||||
Consumer loans |
11,375,472 | 11,280,973 | | | 11,280,973 | |||||||||||||||
Allowance for credit losses |
(933,798 | ) | | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans and leases, net |
67,606,450 | 68,137,607 | | 4,989,970 | 63,147,637 | |||||||||||||||
Accrued interest receivable |
242,935 | 242,935 | | 242,935 | | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Noninterest-bearing deposits |
$ | (28,189,330 | ) | $ | (28,189,330 | ) | $ | | $ | (28,189,330 | ) | $ | | |||||||
Savings deposits and NOW accounts |
(41,757,661 | ) | (41,757,661 | ) | | (41,757,661 | ) | | ||||||||||||
Time deposits |
(2,791,367 | ) | (2,810,224 | ) | | (2,810,224 | ) | | ||||||||||||
Deposits at Cayman Islands office |
(206,185 | ) | (206,185 | ) | | (206,185 | ) | | ||||||||||||
Short-term borrowings |
(173,783 | ) | (173,783 | ) | | (173,783 | ) | | ||||||||||||
Long-term borrowings |
(10,174,289 | ) | (10,219,180 | ) | | (10,219,180 | ) | | ||||||||||||
Accrued interest payable |
(73,475 | ) | (73,475 | ) | | (73,475 | ) | | ||||||||||||
Trading account liabilities |
(233,006 | ) | (233,006 | ) | | (233,006 | ) | | ||||||||||||
Other financial instruments: |
||||||||||||||||||||
Commitments to originate real estate loans for sale |
$ | 17,647 | $ | 17,647 | $ | | $ | | $ | 17,647 | ||||||||||
Commitments to sell real estate loans |
(8,379 | ) | (8,379 | ) | | (8,379 | ) | | ||||||||||||
Other credit-related commitments |
(118,656 | ) | (118,656 | ) | | | (118,656 | ) | ||||||||||||
Interest rate swap agreements used for interest rate risk management |
60,782 | 60,782 | | 60,782 | |
-45-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
December 31, 2014 | ||||||||||||||||||||
Carrying amount |
Estimated fair value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 1,373,357 | $ | 1,373,357 | $ | 1,296,923 | $ | 76,434 | $ | | ||||||||||
Interest-bearing deposits at banks |
6,470,867 | 6,470,867 | | 6,470,867 | | |||||||||||||||
Trading account assets |
308,175 | 308,175 | 51,416 | 256,759 | | |||||||||||||||
Investment securities |
12,993,542 | 13,023,956 | 64,841 | 12,750,396 | 208,719 | |||||||||||||||
Loans and leases: |
||||||||||||||||||||
Commercial loans and leases |
19,461,292 | 19,188,574 | | | 19,188,574 | |||||||||||||||
Commercial real estate loans |
27,567,569 | 27,487,818 | | 307,667 | 27,180,151 | |||||||||||||||
Residential real estate loans |
8,657,301 | 8,729,056 | | 5,189,086 | 3,539,970 | |||||||||||||||
Consumer loans |
10,982,794 | 10,909,623 | | | 10,909,623 | |||||||||||||||
Allowance for credit losses |
(919,562 | ) | | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans and leases, net |
65,749,394 | 66,315,071 | | 5,496,753 | 60,818,318 | |||||||||||||||
Accrued interest receivable |
227,348 | 227,348 | | 227,348 | | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Noninterest-bearing deposits |
$ | (26,947,880 | ) | $ | (26,947,880 | ) | $ | | $ | (26,947,880 | ) | $ | | |||||||
Savings deposits and NOW accounts |
(43,393,618 | ) | (43,393,618 | ) | | (43,393,618 | ) | | ||||||||||||
Time deposits |
(3,063,973 | ) | (3,086,126 | ) | | (3,086,126 | ) | | ||||||||||||
Deposits at Cayman Islands office |
(176,582 | ) | (176,582 | ) | | (176,582 | ) | | ||||||||||||
Short-term borrowings |
(192,676 | ) | (192,676 | ) | | (192,676 | ) | | ||||||||||||
Long-term borrowings |
(9,006,959 | ) | (9,139,789 | ) | | (9,139,789 | ) | | ||||||||||||
Accrued interest payable |
(63,372 | ) | (63,372 | ) | | (63,372 | ) | | ||||||||||||
Trading account liabilities |
(203,464 | ) | (203,464 | ) | | (203,464 | ) | | ||||||||||||
Other financial instruments: |
||||||||||||||||||||
Commitments to originate real estate loans for sale |
$ | 17,347 | $ | 17,347 | $ | | $ | | $ | 17,347 | ||||||||||
Commitments to sell real estate loans |
(7,065 | ) | (7,065 | ) | | (7,065 | ) | | ||||||||||||
Other credit-related commitments |
(119,079 | ) | (119,079 | ) | | | (119,079 | ) | ||||||||||||
Interest rate swap agreements used for interest rate risk management |
73,251 | 73,251 | | 73,251 | |
With the exception of marketable securities, certain off-balance sheet financial instruments and one-to-four family residential mortgage loans originated for sale, the Companys financial instruments are not readily marketable and market prices do not exist. The Company, in attempting to comply with the provisions of GAAP that require disclosures of fair value of financial instruments, has not attempted to market its financial instruments to potential buyers, if any exist. Since negotiated prices in illiquid markets depend greatly upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. The following assumptions, methods and calculations were used in determining the estimated fair value of financial instruments not measured at fair value in the consolidated balance sheet.
Cash and cash equivalents, interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable
Due to the nature of cash and cash equivalents and the near maturity of interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable, the Company estimated that the carrying amount of such instruments approximated estimated fair value.
-46-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
Investment securities
Estimated fair values of investments in readily marketable securities were generally based on quoted market prices. Investment securities that were not readily marketable were assigned amounts based on estimates provided by outside parties or modeling techniques that relied upon discounted calculations of projected cash flows or, in the case of other investment securities, which include capital stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York, at an amount equal to the carrying amount.
Loans and leases
In general, discount rates used to calculate values for loan products were based on the Companys pricing at the respective period end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses. However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Companys loans and leases would seek.
Deposits
Pursuant to GAAP, the estimated fair value ascribed to noninterest-bearing deposits, savings deposits and NOW accounts must be established at carrying value because of the customers ability to withdraw funds immediately. Time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to time deposits were based on discounted cash flow calculations using prevailing market interest rates based on the Companys pricing at the respective date for deposits with comparable remaining terms to maturity.
The Company believes that deposit accounts have a value greater than that prescribed by GAAP. The Company feels, however, that the value associated with these deposits is greatly influenced by characteristics of the buyer, such as the ability to reduce the costs of servicing the deposits and deposit attrition which often occurs following an acquisition.
Long-term borrowings
The amounts assigned to long-term borrowings were based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for borrowings of similar terms and credit risk.
Other commitments and contingencies
As described in note 13, in the normal course of business, various commitments and contingent liabilities are outstanding, such as loan commitments, credit guarantees and letters of credit. The Companys pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide for relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Companys loan commitments, credit guarantees and letters of credit are competitive with other financial institutions operating in markets served by the Company. The Company believes that the carrying amounts, which are included in other liabilities, are reasonable estimates of the fair value of these financial instruments.
The Company does not believe that the estimated information presented herein is representative of the earnings power or value of the Company. The preceding analysis, which is inherently limited in depicting fair value, also does not consider any value associated with existing customer relationships nor the ability of the Company to create value through loan origination, deposit gathering or fee generating activities.
-47-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.
13. Commitments and contingencies
In the normal course of business, various commitments and contingent liabilities are outstanding. The following table presents the Companys significant commitments. Certain of these commitments are not included in the Companys consolidated balance sheet.
September 30, | December 31, | |||||||
2015 | 2014 | |||||||
(in thousands) | ||||||||
Commitments to extend credit |
||||||||
Home equity lines of credit |
$ | 5,535,704 | 6,194,516 | |||||
Commercial real estate loans to be sold |
89,374 | 212,257 | ||||||
Other commercial real estate and construction |
5,356,256 | 4,834,699 | ||||||
Residential real estate loans to be sold |
587,206 | 432,352 | ||||||
Other residential real estate |
674,338 | 524,399 | ||||||
Commercial and other |
12,144,962 | 11,080,856 | ||||||
Standby letters of credit |
3,441,337 | 3,706,888 | ||||||
Commercial letters of credit |
44,082 | 46,965 | ||||||
Financial guarantees and indemnification contracts |
2,922,743 | 2,490,050 | ||||||
Commitments to sell real estate loans |
977,822 | 1,237,294 |
Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, whereas commercial letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and a third party. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on managements assessment of the customers creditworthiness.
-48-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. Commitments and contingencies, continued
Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in financial guarantees and indemnification contracts are loan principal amounts sold with recourse in conjunction with the Companys involvement in the Fannie Mae Delegated Underwriting and Servicing program. The Companys maximum credit risk for recourse associated with loans sold under this program totaled approximately $2.5 billion and $2.4 billion at September 30, 2015 and December 31, 2014, respectively.
Since many loan commitments, standby letters of credit, and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows.
The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the fair value of real estate loans held for sale. Such commitments are considered derivatives and along with commitments to originate real estate loans to be held for sale are generally recorded in the consolidated balance sheet at estimated fair market value.
The Company also has commitments under long-term operating leases.
The Company is contractually obligated to repurchase previously sold residential real estate loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan documentation. When required to do so, the Company may reimburse loan purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues by an estimate for losses related to its obligations to loan purchasers. The amount of those charges is based on the volume of loans sold, the level of reimbursement requests received from loan purchasers and estimates of losses that may be associated with previously sold loans. Subject to the outcome of the matter discussed in the following paragraph, at September 30, 2015, management believes that any further liability arising out of the Companys obligation to loan purchasers is not material to the Companys consolidated financial position.
The Company is the subject of an investigation by government agencies relating to the origination of Federal Housing Administration (FHA) insured residential home loans and residential home loans sold to The Federal Home Loan Mortgage Corporation (Freddie Mac) and The Federal National Mortgage Association (Fannie Mae). A number of other U.S. financial institutions have announced similar investigations. Regarding FHA loans, the U.S. Department of Housing and Urban Development (HUD) Office of Inspector General and the U.S. Department of Justice (collectively, the Government) are investigating whether the Company complied with underwriting guidelines concerning certain loans where HUD paid FHA insurance claims. The Company is fully cooperating with the investigation. The Government has advised the Company that based upon its review of a sample of loans for which an FHA insurance claim was paid by HUD, some of the loans do not meet underwriting guidelines. The Company, based on its own review of the sample, does not agree with the sampling methodology and loan analysis employed by the Government. Regarding loans originated by the Company and sold to Freddie Mac and Fannie Mae, the investigation concerns whether the mortgages sold to Freddie Mac and Fannie Mae comply with applicable underwriting guidelines. The Company is also cooperating with that portion of the investigation. The investigation could lead to claims by the Government under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allow treble and other special damages substantially in excess of actual losses. Remedies in these proceedings or settlements may include restitution, fines, penalties, or alterations in the
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. Commitments and contingencies, continued
Companys business practices. The Company and the Government continue settlement discussions regarding the investigation.
M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Companys liabilities and contingencies in connection with such proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Companys consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
14. Segment information
Reportable segments have been determined based upon the Companys internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.
The financial information of the Companys segments was compiled utilizing the accounting policies described in note 22 to the Companys consolidated financial statements as of and for the year ended December 31, 2014. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, the financial information of the reported segments is not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. Effective January 1, 2015, the Company made certain changes to its methodology for measuring segment profit and loss. Those changes in the measurement of segment profitability were largely the result of updated funds transfer pricing and various cost allocation reviews. The most significant changes to the funds transfer pricing resulted from ascribing a longer duration to non-maturity deposits, which significantly benefitted the Retail Banking segment. The cost allocation review having the largest impact related to a branch cost study. That study consisted of transaction reviews and time studies which resulted in a higher cost allocation from the Retail Banking segment to the Business Banking segment. In addition, effective July 1, 2015, the Company changed its internal profitability reporting to move a builder and developer lending unit from the Residential Mortgage Banking segment to the Commercial Real Estate segment. Accordingly, financial information presented herein for the periods prior to July 1, 2015 has been reclassified to conform to the current presentation. Total revenues and net income decreased in the Residential Banking segment and increased in the Commercial Real Estate segment for the three months ended September 30, 2014 by $5 million and $2 million, respectively, and for the nine months ended September 30, 2014 by $13 million and $5 million, respectively. The impact of the change
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. Segment information, continued
to total revenues and net income for the second quarter of 2015 was $6 million and $3 million, respectively, and for the first half of 2015 was $12 million and $5 million, respectively. Prior period financial information has been restated to reflect the changes noted to provide segment information on a comparable basis, as noted in the following tables.
Three months ended September 30, 2014 | ||||||||||||
Net income (loss) as previously reported |
Impact of changes | Net income (loss) as restated |
||||||||||
(in thousands) | ||||||||||||
Business Banking |
$ | 30,905 | (5,867 | ) | 25,038 | |||||||
Commercial Banking |
101,740 | (1,035 | ) | 100,705 | ||||||||
Commercial Real Estate |
78,581 | 95 | 78,676 | |||||||||
Discretionary Portfolio |
8,279 | 4,216 | 12,495 | |||||||||
Residential Mortgage Banking |
25,021 | (2,272 | ) | 22,749 | ||||||||
Retail Banking |
32,901 | 39,156 | 72,057 | |||||||||
All Other |
(2,083 | ) | (34,293 | ) | (36,376 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 275,344 | | 275,344 | ||||||||
|
|
|
|
|
|
|||||||
Nine months ended September 30, 2014 | ||||||||||||
Net income (loss) as previously reported |
Impact of changes | Net income (loss) as restated |
||||||||||
(in thousands) | ||||||||||||
Business Banking |
$ | 87,263 | (13,500 | ) | 73,763 | |||||||
Commercial Banking |
306,863 | (3,226 | ) | 303,637 | ||||||||
Commercial Real Estate |
230,668 | (414 | ) | 230,254 | ||||||||
Discretionary Portfolio |
34,538 | 4,360 | 38,898 | |||||||||
Residential Mortgage Banking |
72,144 | (7,464 | ) | 64,680 | ||||||||
Retail Banking |
94,646 | 119,418 | 214,064 | |||||||||
All Other |
(37,425 | ) | (99,174 | ) | (136,599 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 788,697 | | 788,697 | ||||||||
|
|
|
|
|
|
As also described in note 22 to the Companys 2014 consolidated financial statements, neither goodwill nor core deposit and other intangible assets (and the amortization charges associated with such assets) resulting from acquisitions of financial institutions have been allocated to the Companys reportable segments, but are included in the All Other category. The Company does, however, assign such intangible assets to business units for purposes of testing for impairment.
-51-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. Segment information, continued
Information about the Companys segments is presented in the following table:
Three months ended September 30 | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Total revenues (a) |
Inter- segment revenues |
Net income (loss) |
Total revenues (a) |
Inter- segment revenues |
Net income (loss) |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Business Banking |
$ | 112,650 | 1,167 | 23,995 | $ | 113,425 | 1,082 | 25,038 | ||||||||||||||||
Commercial Banking |
270,554 | 1,097 | 108,422 | 247,282 | 1,281 | 100,705 | ||||||||||||||||||
Commercial Real Estate |
181,478 | 469 | 85,312 | 170,772 | 442 | 78,676 | ||||||||||||||||||
Discretionary Portfolio |
13,773 | (5,365 | ) | 5,113 | 24,835 | (5,478 | ) | 12,495 | ||||||||||||||||
Residential Mortgage Banking |
99,518 | 12,918 | 21,150 | 104,092 | 12,875 | 22,749 | ||||||||||||||||||
Retail Banking |
308,520 | 3,292 | 64,721 | 316,052 | 3,735 | 72,057 | ||||||||||||||||||
All Other |
146,033 | (13,578 | ) | (28,312 | ) | 143,712 | (13,937 | ) | (36,376 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,132,526 | | 280,401 | $ | 1,120,170 | | 275,344 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30 | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Total revenues (a) |
Inter- segment revenues |
Net income (loss) |
Total revenues (a) |
Inter- segment revenues |
Net income (loss) |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Business Banking |
$ | 332,341 | 3,334 | 74,160 | 337,929 | 3,359 | 73,763 | |||||||||||||||||
Commercial Banking |
774,392 | 3,281 | 312,926 | 748,978 | 3,834 | 303,637 | ||||||||||||||||||
Commercial Real Estate |
535,909 | 978 | 250,501 | 500,814 | 1,315 | 230,254 | ||||||||||||||||||
Discretionary Portfolio |
49,724 | (16,184 | ) | 21,823 | 79,404 | (15,799 | ) | 38,898 | ||||||||||||||||
Residential Mortgage Banking |
310,843 | 36,741 | 75,462 | 299,237 | 34,395 | 64,680 | ||||||||||||||||||
Retail Banking |
914,484 | 9,688 | 202,415 | 934,386 | 11,137 | 214,064 | ||||||||||||||||||
All Other |
494,779 | (37,838 | ) | (128,585 | ) | 421,488 | (38,241 | ) | (136,599 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,412,472 | | 808,702 | 3,322,236 | | 788,697 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
-52-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. Segment information, continued
Average total assets (b) | ||||||||||||
Nine months ended September 30 |
Year ended December 31 |
|||||||||||
2015 | 2014 | 2014 | ||||||||||
(in millions) | ||||||||||||
Business Banking |
$ | 5,321 | 5,287 | 5,281 | ||||||||
Commercial Banking |
24,041 | 22,805 | 22,892 | |||||||||
Commercial Real Estate |
18,632 | 17,187 | 17,370 | |||||||||
Discretionary Portfolio |
23,153 | 20,306 | 20,798 | |||||||||
Residential Mortgage Banking |
3,007 | 3,016 | 3,076 | |||||||||
Retail Banking |
10,912 | 10,348 | 10,449 | |||||||||
All Other |
12,279 | 11,003 | 12,277 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 97,345 | 89,952 | 92,143 | ||||||||
|
|
|
|
|
|
(a) | Total revenues are comprised of net interest income and other income. Net interest income is the difference between taxable-equivalent interest earned on assets and interest paid on liabilities owed by a segment and a funding charge (credit) based on the Companys internal funds transfer pricing and allocation methodology. Segments are charged a cost to fund any assets (e.g. loans) and are paid a funding credit for any funds provided (e.g. deposits). The taxable-equivalent adjustment aggregated $6,248,000 and $5,841,000 for the three-month periods ended September 30, 2015 and 2014, respectively, and $18,106,000 and $17,635,000 for the nine-month periods ended September 30, 2015 and 2014, respectively, and is eliminated in All Other total revenues. Intersegment revenues are included in total revenues of the reportable segments. The elimination of intersegment revenues is included in the determination of All Other total revenues. |
(b) | Average assets of the Commercial Real Estate and Residential Mortgage Banking segments for the nine months ended September 30, 2014 and the year ended December 31, 2014 differ by $246 million and $257 million, respectively, from the previously reported balances reflecting the change in the Companys internal profitability reporting for a builder and developer lending unit which moved assets held by that unit from the Residential Mortgage Banking Segment to the Commercial Real Estate Segment. |
15. Relationship with Bayview Lending Group LLC and Bayview Financial Holdings, L.P.
M&T holds a 20% minority interest in Bayview Lending Group LLC (BLG), a privately-held commercial mortgage company. M&T recognizes income or loss from BLG using the equity method of accounting. The carrying value of that investment was $33 million at September 30, 2015.
Bayview Financial Holdings, L.P. (together with its affiliates, Bayview Financial), a privately-held specialty mortgage finance company, is BLGs majority investor. In addition to their common investment in BLG, the Company and Bayview Financial conduct other business activities with each other. The Company has obtained loan servicing rights for mortgage loans from BLG and Bayview Financial having outstanding principal balances of $4.3 billion and $4.8 billion at September 30, 2015 and December 31, 2014, respectively. Revenues from those servicing rights were $6 million for each of the quarters ended September 30, 2015 and 2014, respectively, and $17 million and $20 million for the nine months ended September 30, 2015 and 2014, respectively. The Company sub-services residential real estate loans for Bayview Financial having outstanding principal
-53-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
15. Relationship with Bayview Lending Group LLC and Bayview Financial Holdings, L.P., continued
balances totaling $39.5 billion and $41.3 billion at September 30, 2015 and December 31, 2014, respectively. Revenues earned for sub-servicing loans for Bayview Financial were $26 million and $29 million for the three-month periods ended September 30, 2015 and 2014, respectively, and $91 million and $82 million for the nine-month periods ended September 30, 2015 and 2014, respectively. In addition, the Company held $187 million and $202 million of mortgage-backed securities in its held-to-maturity portfolio at September 30, 2015 and December 31, 2014, respectively, that were securitized by Bayview Financial.
16. Sale of trust accounts
In April 2015, the Company sold the trade processing business within the retirement services division of its Institutional Client Services business. That sale resulted in an after-tax gain of $23 million ($45 million pre-tax) that reflected the allocation of approximately $11 million of previously recorded goodwill to the divested business. Revenues of the sold business had been included in trust income and were $9 million during the three months ended March 31, 2015; $8 million and $26 million during the three months and nine months ended September 30, 2014, respectively; and $34 million during the year ended December 31, 2014. After considering related expenses, net income attributable to the business that was sold was not material to the consolidated results of operations of the Company in any of those periods.
-54-
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
Net income for M&T Bank Corporation (M&T) in the third quarter of 2015 was $280 million or $1.93 of diluted earnings per common share, compared with $275 million or $1.91 of diluted earnings per common share in the year-earlier quarter. During the second quarter of 2015, net income totaled $287 million or $1.98 of diluted earnings per common share. Basic earnings per common share were $1.94 in the recent quarter, compared with $1.92 in the third quarter of 2014 and $1.99 in the second quarter of 2015. For the first nine months of 2015, net income was $809 million or $5.56 of diluted earnings per common share, compared with $789 million or $5.50 of diluted earnings per common share during the similar period of 2014. Basic earnings per common share were $5.59 and $5.54 for the first nine months of 2015 and 2014, respectively.
The annualized rate of return on average total assets for M&T and its consolidated subsidiaries (the Company) in the recent quarter was 1.13%, compared with 1.17% in the third quarter of 2014 and 1.18% in the second quarter of 2015. The annualized rate of return on average common shareholders equity was 8.93% in the third quarter of 2015, compared with 9.18% and 9.37% in the year-earlier quarter and in 2015s second quarter, respectively. During the nine-month period ended September 30, 2015, the annualized rates of return on average assets and average common shareholders equity were 1.11% and 8.77%, respectively, compared with 1.17% and 9.07%, respectively, in the first nine months of 2014.
Results for the second quarter of 2015 reflected two noteworthy items. In early April 2015, the Company sold the trade processing business within the retirement services division of its Institutional Client Services business. That sale resulted in an after-tax gain of approximately $23 million ($45 million pre-tax). Also during the second quarter of 2015, the Company made $40 million of tax-deductible cash contributions to The M&T Charitable Foundation. The after-tax impact of those two items lowered net income and diluted earnings per common share during each of the second quarter of 2015 and the nine month period ended September 30, 2015 by approximately $1 million and $.01.
On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (Hudson City), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. The merger has received the approval of the common shareholders of M&T and Hudson City. M&T announced on September 30, 2015 that it had received the approval of the Federal Reserve to acquire Hudson City and on October 9, 2015 M&T announced that it had received the approval of the New York State Department of Financial Services. The transaction is expected to be completed on or about November 1, 2015, pending the satisfaction of customary closing conditions.
Pursuant to the terms of the agreement, Hudson City common shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). The estimated purchase price considering the closing price of M&Ts common stock of $121.95 on September 30, 2015 was $5.3 billion.
As of September 30, 2015, Hudson City had $35.1 billion of assets, including $19.2 billion of loans (predominantly residential real estate
-55-
loans) and $7.9 billion of investment securities, and $30.3 billion of liabilities, including $17.9 billion of deposits.
Effective January 1, 2015, the Company elected to account for its investments in qualified affordable housing projects using the proportional amortization method as allowed by the Financial Accounting Standards Board (FASB). Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The adoption is required to be applied retrospectively. As a result, financial statements for periods prior to 2015 have been restated. The adoption did not have a significant effect on the Companys consolidated financial position or results of operations, but the restatement of the consolidated statement of income for the three- and nine- month periods ended September 30, 2014 resulted in the removal of $14 million and $39 million, respectively, of losses associated with qualified affordable housing projects from other costs of operations and added the amortization of the initial cost of the investment of a similar amount to income tax expense. The similar restatement for the fourth quarter of 2014 also reflected approximately $14 million of amortization.
Recent Legislative and Regulatory Developments
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that was signed into law on July 21, 2010 has and will continue to significantly change the bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, and the system of regulatory oversight of the Company. In addition, other reforms have been adopted or are being considered by other regulators and policy makers. As required by the Dodd-Frank Act, various federal regulatory agencies have proposed or adopted a broad range of implementing rules and regulations and have prepared numerous studies and reports for Congress. However, given that many of the new and proposed rules are highly complex, the full impact of regulatory reform will not be known until the rules are implemented and market practices develop under the final regulations.
A discussion of the provisions of the Dodd-Frank Act is included in Part I, Item 1 of M&Ts Form 10-K for the year ended December 31, 2014.
The Company is subject to the Federal Reserves revised comprehensive risk-based capital and leverage framework for U.S. banking organizations (the New Capital Rules), subject to certain transitional provisions. These rules went into effect as to M&T on January 1, 2015. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including M&T and M&T Bank, as compared to the U.S. general risk-based capital rules that were applicable to M&T and M&T Bank through December 31, 2014.
The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies Tier 1 capital, subject to phase-out in the case of bank holding companies, such as M&T, that had $15 billion or more in total consolidated assets as of December 31, 2009. As a result, beginning in 2015 25% of M&Ts trust preferred securities are includable in Tier 1 capital, and in 2016 and thereafter, none of M&Ts trust preferred securities will be includable in Tier 1 capital. Trust preferred securities no longer included in M&Ts Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out and irrespective of whether such securities otherwise meet the revised definition of Tier 2 capital set forth in the New Capital Rules. On April 15, 2015, in accordance with its 2015 capital plan, M&T redeemed the junior subordinated debentures associated with $310 million of trust
-56-
preferred securities of M&T Capital Trust I, II and III. A detailed discussion of the New Capital Rules is included in Part I, Item 1 of M&Ts Form 10-K for the year ended December 31, 2014 under the heading Capital Requirements. A further discussion of the Companys regulatory capital ratios is presented herein under the heading Capital.
The Company is also subject to the provisions of the Dodd-Frank Act commonly referred to as the Volcker Rule which became effective in July 2015 (subject to a conformance period, as applicable). Pursuant to the Volcker Rule, banking entities are generally prohibited from engaging in proprietary trading and owning or sponsoring private equity or hedge funds, which are covered funds under that rule. Under the Volcker Rule, the Company is now required to be in compliance with the prohibition on proprietary trading and covered funds established after December 31, 2013. The Federal Reserve extended the compliance period to July 21, 2016 for investments in and relationships with covered funds that existed prior to January 1, 2014. The Federal Reserve has indicated that it intends to further extend that compliance period to July 21, 2017.
The Company believes that it has not engaged in any significant amount of proprietary trading as defined in the Volcker Rule. A review of the Companys investments was undertaken to determine if any meet the Volcker Rules definition of covered funds. Based on that review, the Company believes that any impact related to investments considered to be covered funds would not have a material effect on the Companys consolidated financial condition or its results of operations. Nevertheless, the Company may be required to divest certain investments subject to the Volcker Rule by the end of the compliance period, as extended.
On September 3, 2014, various federal banking regulators adopted final rules (Final LCR Rule) implementing a U.S. version of the Basel Committees Liquidity Coverage Ratio requirement (LCR) including the modified version applicable to bank holding companies, including M&T, with $50 billion in total consolidated assets that are not advanced approaches institutions. The LCR is intended to ensure that banks hold a sufficient amount of high quality liquid assets (HQLA) to cover the anticipated net cash outflows during a hypothetical acute 30-day stress scenario. The LCR is the ratio of an institutions amount of HQLA (the numerator) over projected net cash outflows over the 30-day period (the denominator), in each case, as calculated pursuant to the Final LCR Rule. Once fully phased-in, a subject institution must maintain an LCR equal to at least 100% in order to satisfy this regulatory requirement. Only specific classes of assets, including U.S. Treasury securities, other U.S. government obligations and agency mortgage-backed securities, qualify under the rule as HQLA, with classes of assets deemed relatively less liquid and/or subject to a greater degree of credit risk subject to certain haircuts and caps for purposes of calculating the numerator under the Final LCR Rule.
The initial compliance date for the modified LCR is January 1, 2016, with the requirement fully phased-in by January 1, 2017. The Company intends to comply with the LCR as it is phased in. A detailed discussion of the LCR and its requirements is included in Part I, Item 1 of M&Ts Form 10-K for the year ended December 31, 2014 under the heading Liquidity Ratios under Basel III.
On June 17, 2013, M&T and M&T Bank, the principal bank subsidiary of M&T, entered into a written agreement with the Federal Reserve Bank of New York. Under the terms of the agreement, M&T and M&T Bank were required to submit to the Federal Reserve Bank of New York a revised compliance risk management program designed to ensure compliance with the Bank Secrecy Act and anti-money-laundering laws and regulations (BSA/AML) and to take certain other steps to enhance their compliance practices. M&T and M&T Bank
-57-
have made significant progress towards implementing a program commensurate with the expanded scale and scope of the combined organization as recognized by the Board of Governors of the Federal Reserve System in its Order approving M&T and M&T Banks applications to acquire Hudson City and Hudson City Savings Bank. M&T and M&T Bank will continue to resolve all outstanding issues in the written agreement.
Supplemental Reporting of Non-GAAP Results of Operations
M&T consistently provides supplemental reporting of its results on a net operating or tangible basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and gains and expenses, if any, associated with merging acquired operations into the Company, since such items are considered by management to be nonoperating in nature. As a result of business combinations and other acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $3.5 billion at September 30, 2015 and $3.6 billion at each of September 30, 2014 and December 31, 2014. Included in such intangible assets was goodwill of $3.5 billion at each of those dates. Amortization of core deposit and other intangible assets, after tax effect, totaled $3 million ($.02 per diluted common share) in the recent quarter and $4 million ($.03 per diluted common share) during each of the year-earlier quarter and the second quarter of 2015. For the nine-month periods ended September 30, 2015 and 2014, amortization of core deposit and other intangible assets, after tax effect, totaled $10 million ($.08 per diluted common share) and $16 million ($.12 per diluted common share), respectively. There were no merger-related expenses during the first nine months of 2015 or 2014. Although net operating income as defined by M&T is not a GAAP measure, M&Ts management believes that this information helps investors understand the effect of acquisition activity in reported results.
Net operating income was $283 million in the recent quarter, compared with $280 million in the third quarter of 2014. Diluted net operating earnings per common share for the third quarter of 2015 were $1.95, compared with $1.94 in the year-earlier quarter. Net operating income and diluted net operating earnings per common share were $290 million and $2.01, respectively, in the second quarter of 2015. For the first nine months of 2015, net operating income and diluted net operating earnings per common share were $819 million and $5.64, respectively, compared with $805 million and $5.62, respectively, in the corresponding 2014 period.
Net operating income in the recent quarter expressed as an annualized rate of return on average tangible assets was 1.18%, compared with 1.24% in each of the year-earlier quarter and second quarter of 2015. Net operating income represented an annualized return on average tangible common equity of 12.98% in the recently completed quarter, compared with 13.80% in the third quarter of 2014 and 13.76% in 2015s second quarter. For the first nine months of 2015, net operating income represented an annualized return on average tangible assets and average tangible common shareholders equity of 1.17% and 12.89%, respectively, compared with 1.25% and 13.84%, respectively, in the similar period of 2014.
Reconciliations of GAAP amounts with corresponding non-GAAP amounts are provided in table 2.
Taxable-equivalent Net Interest Income
Taxable-equivalent net interest income totaled $699 million in the third quarter of 2015, 4% higher than $675 million in the year-earlier quarter. That improvement reflects the impact of a $5.7 billion or 7% rise in average earning
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assets that was partially offset by a 9 basis point (hundredths of one percent) narrowing of the Companys net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets, to 3.14% in the recent quarter. The increase in average earning assets was attributable to higher average balances of loans and leases of $3.1 billion, investment securities of $1.7 billion and interest-bearing deposits at banks of $977 million. Lower yields on average investment securities and average loans and leases outstanding contributed to the narrowing of the net interest margin. Taxable-equivalent net interest income increased 1% in the recent quarter from $689 million in the second quarter of 2015, largely due to one additional day in the recent quarter and growth in average loans outstanding of $179 million. The benefit from that growth and, to a lesser extent, growth in other earning assets was mitigated by a narrowing of the net interest margin in the recent quarter to 3.14% from 3.17% in the second quarter of 2015.
For the first nine months of 2015, taxable-equivalent net interest income was $2.05 billion, up 2% from $2.01 billion in the similar period of 2014. That increase was attributable to higher average earning assets, which rose $7.4 billion or 9% to $87.0 billion in the first nine months of 2015, offset in part by a 22 basis point narrowing of the net interest margin to 3.16% in 2015 from 3.38% in 2014. That narrowing reflected lower yields on average loans outstanding and the impact of additions to the investment securities portfolio that were predominantly funded through the issuance of long-term borrowings. Those securities were added to facilitate compliance with upcoming Liquidity Coverage Ratio requirements.
Average loans and leases totaled $67.8 billion in the recent quarter, an increase of 5% as compared with $64.8 billion in the third quarter of 2014. Commercial loans and leases averaged $19.9 billion in the third quarter of 2015, up $1.0 billion or 6% from $18.9 billion in the year-earlier quarter. Average commercial real estate loans aggregated $28.3 billion in the recent quarter, an increase of $1.8 billion, or 7%, from $26.5 billion in the third quarter of 2014. Average residential real estate loans outstanding declined $285 million to $8.3 billion in 2015s third quarter from $8.6 billion in the year-earlier quarter. Included in that portfolio were loans originated for sale, which averaged $466 million in the recently completed quarter, compared with $424 million in the third quarter of 2014. Consumer loans averaged $11.3 billion in the recent quarter, $500 million or 5% higher than $10.8 billion in the third quarter of 2014. That growth reflects a $503 million increase in average automobile loan balances.
Average loan and lease balances in the recent quarter rose $179 million from the second quarter of 2015. Average commercial real estate loans increased $101 million from 2015s second quarter and average balances of consumer loans rose $211 million, while average outstanding commercial loan and lease balances decreased $35 million and average residential real estate loans declined $98 million. Management has chosen not to replace run-off in the residential real estate loan portfolio in advance of the Hudson City merger, as its portfolio is almost entirely comprised of residential mortgage loans. The commercial loan and lease portfolio decrease reflected the usual seasonal slowdown in loans to automobile dealers to finance their floor plan inventory. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.
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AVERAGE LOANS AND LEASES
(net of unearned discount)
Dollars in millions
Percent increase (decrease) from |
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3rd Qtr. 2015 |
3rd Qtr. 2014 |
2nd Qtr. 2015 |
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Commercial, financial, etc. |
$ | 19,939 | 6 | % | | % | ||||||
Real estate commercial |
28,309 | 7 | | |||||||||
Real estate consumer |
8,348 | (3 | ) | (1 | ) | |||||||
Consumer |
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Automobile |
2,271 | 28 | 8 | |||||||||
Home equity lines |
5,620 | (2 | ) | (1 | ) | |||||||
Home equity loans |
234 | (23 | ) | (6 | ) | |||||||
Other |
3,128 | 7 | 3 | |||||||||
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Total consumer |
11,253 | 5 | 2 | |||||||||
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Total |
$ | 67,849 | 5 | % | | % | ||||||
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For the first nine months of 2015, average loans and leases aggregated $67.4 billion, up $3.1 billion or 5% from $64.3 billion in the corresponding 2014 period. The most significant factors contributing to that increase were growth in the commercial real estate and commercial loan and lease portfolios.
The investment securities portfolio averaged $14.4 billion in the recent quarter, up $1.7 billion or 13% from $12.8 billion in the third quarter of 2014 and $246 million or 2% above the $14.2 billion averaged in the second quarter of 2015. For the first nine months of 2015 and 2014, investment securities averaged $14.0 billion and $11.0 billion, respectively. Each of those increases from the respective prior periods reflects the net effect of purchases, partially offset by maturities and paydowns of mortgage-backed securities. The Company purchased approximately $4.6 billion of Fannie Mae securities and $602 million of Ginnie Mae securities that were added to the investment securities portfolio during 2014, and another $2.7 billion of Fannie Mae securities and $548 million of Ginnie Mae securities were purchased during the first nine months of 2015. Those purchases reflect increased holdings of investment securities to satisfy the requirements of the LCR that will become effective in January 2016.
The investment securities portfolio is largely comprised of residential mortgage-backed securities, debt securities issued by municipalities, trust preferred securities issued by certain financial institutions, and shorter-term U.S. Treasury and federal agency notes. When purchasing investment securities, the Company considers its liquidity position and its overall interest-rate risk profile as well as the adequacy of expected returns relative to the risks assumed, including prepayments. In managing its investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio in connection with a business combination.
The Company regularly reviews its investment securities for declines in value below amortized cost that might be characterized as other than temporary. There were no other-than-temporary impairment charges recognized in either of the first nine months of 2015 or 2014. Additional information about the investment securities portfolio is included in notes 3 and 12 of Notes to Financial Statements.
Other earning assets include deposits at the Federal Reserve Bank of New York and other banks, trading account assets, federal funds sold and agreements to resell securities. Those other earning assets in the aggregate averaged $6.2 billion in the recent quarter, compared with $5.2 billion and $5.5 billion in the third quarter of 2014 and the second quarter of 2015, respectively.
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Interest-bearing deposits at banks are the largest component of those other earning assets and averaged $6.1 billion in the third quarter of 2015, compared with $5.1 billion in the year-earlier quarter and $5.3 billion in 2015s second quarter. For the nine-month periods ended September 30, 2015 and 2014, average balances of other earning assets were $5.6 billion and $4.3 billion, respectively, including $5.5 billion and $4.1 billion, respectively, of interest-bearing deposits at banks. The amounts of investment securities and other earning assets held by the Company are influenced by such factors as demand for loans, which generally yield more than investment securities and other earning assets, liquidity requirements, ongoing repayments, the levels of deposits, and management of balance sheet size and resulting capital ratios.
As a result of the changes described herein, average earning assets aggregated $88.4 billion in the third quarter of 2015, compared with $82.8 billion in the year-earlier quarter and $87.3 billion in the second quarter of 2015. Average earning assets totaled $87.0 billion and $79.6 billion during the nine-month periods ended September 30, 2015 and 2014, respectively.
The most significant source of funding for the Company is core deposits. The Company considers noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and time deposits of $250,000 or less as core deposits. The Companys branch network is its principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Average core deposits totaled $72.0 billion in the third quarter of 2015, up 4% from $69.1 billion in the year-earlier quarter and 1% higher than $71.2 billion in the second quarter of 2015. The low interest rate environment in recent years has resulted in a shift in customer savings trends, as average time deposits have continued to decline. The growth in average core deposits from the year-earlier quarter reflects increases of approximately $1.2 billion in each of commercial customer deposits and trust demand deposits. When compared with the second quarter of 2015, average balances of commercial customer deposits were $1.1 billion higher in the recent quarter and trust demand deposits increased by $469 million. Those increases were partially offset by a $578 million seasonal decline in municipal deposits during the third quarter of 2015. The following table provides an analysis of quarterly changes in the components of average core deposits. For the nine-month periods ended September 30, 2015 and 2014, core deposits averaged $71.1 billion and $67.5 billion, respectively.
AVERAGE CORE DEPOSITS
Dollars in millions
Percent increase (decrease) from |
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3rd Qtr. 2015 |
3rd Qtr. 2014 |
2nd Qtr. 2015 |
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NOW accounts |
$ | 1,289 | 27 | % | (1 | )% | ||||||
Savings deposits |
40,049 | | (1 | ) | ||||||||
Time deposits |
2,449 | (15 | ) | (5 | ) | |||||||
Noninterest-bearing deposits |
28,251 | 12 | 6 | |||||||||
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Total |
$ | 72,038 | 4 | % | 1 | % | ||||||
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The Company has additional funding sources including branch-related time deposits over $250,000, deposits associated with the Companys Cayman Islands office, and brokered deposits. Time deposits over $250,000 averaged $350 million in the third quarter of 2015, compared with $361 million and $353 million in the third quarter of 2014 and the second quarter of 2015, respectively. Cayman Islands office deposits averaged $206 million, $325 million and $212 million for the three-month periods ended September 30, 2015, September 30, 2014 and June 30, 2015, respectively. Brokered time deposits were not significant in the quarters ended September 30, 2015, September 30, 2014 or June 30, 2015. The Company has brokered NOW and brokered money-market deposit accounts, which in the aggregate averaged $1.2 billion during the recent quarter, compared with $1.0 billion and $1.1
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billion during the third quarter of 2014 and the second quarter of 2015, respectively. The levels of brokered deposit accounts reflect the demand for such deposits, largely resulting from the desire of brokerage firms to earn reasonable yields while ensuring that customer deposits are fully insured. The level of Cayman Islands office deposits is also reflective of customer demand. Additional amounts of Cayman Islands office deposits and brokered deposits may be added in the future depending on market conditions, including demand by customers and other investors for those deposits, and the cost of funds available from alternative sources at the time.
The Company also uses borrowings from banks, securities dealers, various Federal Home Loan Banks, the Federal Reserve Bank of New York and others as sources of funding. Average short-term borrowings totaled $174 million in the recent quarter, compared with $181 million in the third quarter of 2014 and $195 million in the second quarter of 2015. Short-term borrowings were largely comprised of unsecured federal funds borrowings, which generally mature on the next business day.
Long-term borrowings averaged $10.1 billion in the recent quarter, compared with $8.5 billion in the third quarter of 2014 and $10.2 billion in the second quarter of 2015. During 2013, M&T Bank initiated a Bank Note Program whereby M&T Bank may offer unsecured senior and subordinated notes. Average balances of the unsecured senior notes issued under that program were $5.5 billion during each of the two most recent quarters and $3.6 billion during the third quarter of 2014. During February 2015, M&T Bank issued $1.5 billion of senior notes of which $750 million mature in 2020 and $750 million mature in 2025. The proceeds from the issuances of borrowings under the Bank Note Program have been predominantly utilized to purchase high-quality liquid assets that will meet the requirements of the LCR. Also included in average long-term borrowings were amounts borrowed from the Federal Home Loan Banks of New York, Atlanta and Pittsburgh of $1.2 billion in each of the recent quarter, the third quarter of 2014 and the second quarter of 2015. Subordinated capital notes included in long-term borrowings averaged $1.5 billion in each of the two most recent quarters and $1.6 billion in the quarter ended September 30, 2014. Junior subordinated debentures associated with trust preferred securities that were included in average long-term borrowings were $513 million in the most recent quarter, compared with $834 million in the third quarter of 2014 and $562 million in the second quarter of 2015. In accordance with its 2015 capital plan, on April 15, 2015 M&T redeemed the junior subordinated debentures associated with the $310 million of trust preferred securities of M&T Capital Trusts I, II and III. Those borrowings had a weighted-average interest rate of 8.24%. Further information regarding junior subordinated debentures is provided in note 5 of Notes to Financial Statements. Also included in long-term borrowings were agreements to repurchase securities, which averaged $1.4 billion during each of the third quarters of 2015 and 2014 and the second quarter of 2015. The agreements have various repurchase dates through 2017, however, the contractual maturities of the underlying securities extend beyond such repurchase dates. The Company has utilized interest rate swap agreements to modify the repricing characteristics of certain components of long-term debt. As of September 30, 2015, interest rate swap agreements were used to hedge approximately $1.4 billion of outstanding fixed rate long-term borrowings. Further information on interest rate swap agreements is provided in note 10 of Notes to Financial Statements.
Changes in the composition of the Companys earning assets and interest-bearing liabilities, as discussed herein, as well as changes in interest rates and spreads, can impact net interest income. Net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities, was 2.93% in the third quarter of 2015, compared with 3.05% in the third quarter of 2014 and 2.97% in the second quarter of 2015. The yield on earning assets during the
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recent quarter was 3.48%, down 11 basis points from 3.59% in the year-earlier quarter, while the rate paid on interest-bearing liabilities increased 1 basis point to .55% from .54% in the third quarter of 2014. In the second quarter of 2015, the yield on earning assets was 3.52% and the rate paid on interest-bearing liabilities was .55%. For the first nine months of 2015, the net interest spread was 2.96%, down 23 basis points from the year-earlier period. The yield on earning assets and the rate paid on interest-bearing liabilities for the nine-month period ended September 30, 2015 were 3.51% and .55%, respectively, compared with 3.72% and .53%, respectively, in the first nine months of 2014. The narrowing of the net interest spread in the 2015 periods as compared with the three months and nine months ended September 30, 2014 reflects the higher level of deposits held at the Federal Reserve Bank of New York, higher average balances of investment securities and long-term borrowings, and the ongoing impact of the low interest rate environment on the yields earned on investment securities and loans.
Net interest-free funds consist largely of noninterest-bearing demand deposits and shareholders equity, partially offset by bank owned life insurance and non-earning assets, including goodwill and core deposit and other intangible assets. Net interest-free funds averaged $32.6 billion in the recent quarter, compared with $28.4 billion in the third quarter of 2014 and $30.8 billion in the second quarter of 2015. The increase in average net interest-free funds in the recent quarter as compared with the third quarter of 2014 was predominantly the result of higher average balances of noninterest-bearing deposits. Such deposits averaged $28.3 billion, $25.1 billion and $26.8 billion in the quarters ended September 30, 2015, September 30, 2014 and June 30, 2015, respectively. The growth in average noninterest-bearing deposits from the year-earlier quarter and the second quarter of 2015 reflects increases in commercial customer deposits of approximately $1.5 billion and $930 million, respectively, and trust demand deposits of approximately $1.2 billion and $469 million, respectively. During the first nine months of 2015 and 2014, average net interest-free funds were $30.9 billion and $28.0 billion, respectively. That increase was also reflective of higher average balances of noninterest-bearing deposits, which totaled $26.9 billion and $24.9 billion during the first nine months of 2015 and 2014, respectively. Goodwill and core deposit and other intangible assets averaged $3.5 billion during each of the two most recent quarters, compared with $3.6 billion in the quarter ended September 30, 2014. Goodwill was reduced by approximately $11 million during the second quarter of 2015 as a result of the previously noted sale of the Companys trade processing business in that quarter. The cash surrender value of bank owned life insurance averaged $1.7 billion in each of the three-month periods ended September 30, 2015, September 30, 2014 and June 30, 2015. Increases in the cash surrender value of bank owned life insurance and benefits received are not included in interest income, but rather are recorded in other revenues from operations. The contribution of net interest-free funds to net interest margin was .21% in the recent quarter, compared with .18% in the third quarter of 2014 and .20% in the second quarter of 2015. That contribution for the first nine months of 2015 and 2014 was .20% and .19%, respectively.
Reflecting the changes to the net interest spread and the contribution of interest-free funds as described herein, the Companys net interest margin was 3.14% in the recent quarter, compared with 3.23% in the third quarter of 2014 and 3.17% in the second quarter of 2015. During the nine-month periods ended September 30, 2015 and 2014, the net interest margin was 3.16% and 3.38%, respectively. Future changes in market interest rates or spreads, as well as changes in the composition of the Companys portfolios of earning assets and interest-bearing liabilities that result in reductions in spreads, could adversely impact the Companys net interest income and net interest margin. In particular, the relatively low interest rate environment continues to exert downward pressure on yields on loans, investment
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securities and other earning assets.
Management assesses the potential impact of future changes in interest rates and spreads by projecting net interest income under several interest rate scenarios. In managing interest rate risk, the Company has utilized interest rate swap agreements to modify the repricing characteristics of certain portions of its interest-bearing liabilities. Periodic settlement amounts arising from these agreements are reflected in the rates paid on interest-bearing liabilities. The notional amount of interest rate swap agreements entered into for interest rate risk management purposes was $1.4 billion at each of September 30, 2015, September 30, 2014 and June 30, 2015. Under the terms of those interest rate swap agreements, the Company received payments based on the outstanding notional amount at fixed rates and made payments at variable rates. Those interest rate swap agreements were designated as fair value hedges of certain fixed rate long-term borrowings.
In a fair value hedge, the fair value of the derivative (the interest rate swap agreement) and changes in the fair value of the hedged item are recorded in the Companys consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in other revenues from operations in the Companys consolidated statement of income. The amounts of hedge ineffectiveness recognized during the quarters ended September 30, 2015 and 2014 and the quarter ended June 30, 2015 were not material to the Companys consolidated results of operations. The estimated aggregate fair value of interest rate swap agreements designated as fair value hedges represented gains of approximately $61 million at September 30, 2015, $76 million at September 30, 2014, $64 million at June 30, 2015 and $73 million at December 31, 2014. The fair values of such interest rate swap agreements were substantially offset by changes in the fair values of the hedged items. The changes in the fair values of the interest rate swap agreements and the hedged items primarily result from the effects of changing interest rates and spreads. The Companys credit exposure as of September 30, 2015 with respect to the estimated fair value of interest rate swap agreements used for managing interest rate risk has been substantially mitigated through master netting arrangements with trading account interest rate contracts with the same counterparty as well as counterparty postings of $35 million of collateral with the Company.
The weighted-average rates to be received and paid under interest rate swap agreements currently in effect were 4.42% and 1.29%, respectively, at September 30, 2015. The average notional amounts of interest rate swap agreements entered into for interest rate risk management purposes, the related effect on net interest income and margin, and the weighted-average interest rates paid or received on those swap agreements are presented in the accompanying table. Additional information about the Companys use of interest rate swap agreements and other derivatives is included in note 10 of Notes to Financial Statements.
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INTEREST RATE SWAP AGREEMENTS
Dollars in thousands
Three months ended September 30 | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Amount | Rate(a) | Amount | Rate(a) | |||||||||||||
Increase (decrease) in: |
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Interest income |
$ | | | % | $ | | | % | ||||||||
Interest expense |
(10,999 | ) | (.08 | ) | (11,227 | ) | (.08 | ) | ||||||||
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Net interest income/margin |
$ | 10,999 | .05 | % | $ | 11,227 | .05 | % | ||||||||
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Average notional amount |
$ | 1,400,000 | $ | 1,547,826 | ||||||||||||
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Rate received (b) |
4.42 | % | 4.00 | % | ||||||||||||
Rate paid (b) |
1.25 | % | 1.07 | % | ||||||||||||
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Nine months ended September 30 | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Amount | Rate(a) | Amount | Rate(a) | |||||||||||||
Increase (decrease) in: |
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Interest income |
$ | | | % | $ | | | % | ||||||||
Interest expense |
(33,419 | ) | (.08 | ) | (33,783 | ) | (.09 | ) | ||||||||
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Net interest income/margin |
$ | 33,419 | .06 | % | $ | 33,783 | .06 | % | ||||||||
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Average notional amount |
$ | 1,400,000 | $ | 1,457,143 | ||||||||||||
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Rate received (b) |
4.42 | % | 4.25 | % | ||||||||||||
Rate paid (b) |
1.22 | % | 1.14 | % | ||||||||||||
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(a) | Computed as an annualized percentage of average earning assets or interest-bearing liabilities. |
(b) | Weighted-average rate paid or received on interest rate swap agreements in effect during the period. |
As a financial intermediary, the Company is exposed to various risks, including liquidity and market risk. Liquidity refers to the Companys ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future obligations, including demands for loans and deposit withdrawals, funding operating costs, and other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. M&Ts banking subsidiaries have access to additional funding sources through borrowings from the FHLB of New York, lines of credit with the Federal Reserve Bank of New York, the previously noted Bank Note Program, and other available borrowing facilities. The Company has, from time to time, issued subordinated capital notes to provide liquidity and enhance regulatory capital ratios. Such notes generally qualify under the Federal Reserve Boards risk-based capital guidelines for inclusion in the Companys capital. However, pursuant to the Dodd-Frank Act, junior subordinated debentures associated with trust preferred securities are being phased-out of the definition of Tier 1 capital. Effective January 1, 2015, 75% of such junior subordinated debentures are excluded from the Companys Tier 1 capital, and beginning January 1, 2016, 100% will be excluded. The amounts excluded from Tier 1 capital are includable in total capital.
The Company has informal and sometimes reciprocal sources of funding available through various arrangements for unsecured short-term borrowings from a wide group of banks and other financial institutions. Short-term federal funds borrowings totaled $122 million, $114 million and $135 million at September 30, 2015, September 30, 2014 and December 31, 2014, respectively. In general, those borrowings were unsecured and matured on the
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next business day. In addition to satisfying customer demand, Cayman Islands office deposits may be used by the Company as an alternative to short-term borrowings. Cayman Islands office deposits totaled $206 million at September 30, 2015, $242 million at September 30, 2014 and $177 million at December 31, 2014. The Company has also benefited from the placement of brokered deposits. The Company has brokered NOW and brokered money-market deposit accounts which aggregated $1.2 billion at September 30, 2015, $1.0 billion at September 30, 2014 and $1.1 billion at December 31, 2014. Brokered time deposits were not a significant source of funding as of those dates.
The Companys ability to obtain funding from these or other sources could be negatively impacted should the Company experience a substantial deterioration in its financial condition or its debt ratings, or should the availability of short-term funding become restricted due to a disruption in the financial markets. The Company attempts to quantify such credit-event risk by modeling scenarios that estimate the liquidity impact resulting from a short-term ratings downgrade over various grading levels. Such impact is estimated by attempting to measure the effect on available unsecured lines of credit, available capacity from secured borrowing sources and securitizable assets. In addition to deposits and borrowings, other sources of liquidity include maturities of investment securities and other earning assets, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services.
Certain customers of the Company obtain financing through the issuance of variable rate demand bonds (VRDBs). The VRDBs are generally enhanced by letters of credit provided by M&T Bank. M&T Bank oftentimes acts as remarketing agent for the VRDBs and, at its discretion, may from time-to-time own some of the VRDBs while such instruments are remarketed. When this occurs, the VRDBs are classified as trading account assets in the Companys consolidated balance sheet. Nevertheless, M&T Bank is not contractually obligated to purchase the VRDBs. The value of VRDBs in the Companys trading account totaled $2 million at September 30, 2014, while there were no outstanding VRDBs in the Companys trading account at September 30, 2015 or December 31, 2014. The total amount of VRDBs outstanding backed by M&T Bank letters of credit was $1.8 billion at September 30, 2015, compared with $1.7 billion at September 30, 2014 and $2.0 billion at December 31, 2014. M&T Bank also serves as remarketing agent for most of those bonds.
The Company enters into contractual obligations in the normal course of business which require future cash payments. Such obligations include, among others, payments related to deposits, borrowings, leases and other contractual commitments. Off-balance sheet commitments to customers may impact liquidity, including commitments to extend credit, standby letters of credit, commercial letters of credit, financial guarantees and indemnification contracts, and commitments to sell real estate loans. Because many of these commitments or contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. Further discussion of these commitments is provided in note 13 of Notes to Financial Statements.
M&Ts primary source of funds to pay for operating expenses, shareholder dividends and treasury stock repurchases has historically been the receipt of dividends from its banking subsidiaries, which are subject to various regulatory limitations. Dividends from any banking subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current year and the two preceding years. For purposes of that test, at September 30, 2015 approximately $1.5 billion was available for payment of dividends to M&T from banking subsidiaries. Information regarding the long-term debt obligations of M&T is included in note 5 of Notes to Financial Statements.
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Management closely monitors the Companys liquidity position on an ongoing basis for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs anticipated in the normal course of business. Management does not anticipate engaging in any activities, either currently or in the long-term, for which adequate funding would not be available and would therefore result in a significant strain on liquidity at either M&T or its subsidiary banks. Banking regulators have finalized rules requiring a banking company to maintain a minimum amount of liquid assets to withstand a standardized supervisory liquidity stress scenario. The effective date for those rules for the Company is January 1, 2016, subject to a phase-in period. The Company has taken steps as noted herein to enhance its liquidity and will take further action, as necessary, to comply with the final regulations when they take effect.
Market risk is the risk of loss from adverse changes in the market prices and/or interest rates of the Companys financial instruments. The primary market risk the Company is exposed to is interest rate risk. Interest rate risk arises from the Companys core banking activities of lending and deposit-taking, because assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and derivatives used to hedge interest rate risk. Managements philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans and investment securities, and expected maturities of investment securities, loans and deposits. Management uses a value of equity model to supplement the modeling technique described above. Those supplemental analyses are based on discounted cash flows associated with on- and off-balance sheet financial instruments. Such analyses are modeled to reflect changes in interest rates and provide management with a long-term interest rate risk metric.
The Companys Asset-Liability Committee, which includes members of senior management, monitors the sensitivity of the Companys net interest income to changes in interest rates with the aid of a computer model that forecasts net interest income under different interest rate scenarios. In modeling changing interest rates, the Company considers different yield curve shapes that consider both parallel (that is, simultaneous changes in interest rates at each point on the yield curve) and non-parallel (that is, allowing interest rates at points on the yield curve to vary by different amounts) shifts in the yield curve. In utilizing the model, projections of net interest income calculated under the varying interest rate scenarios are compared to a base interest rate scenario that is reflective of current interest rates. The model considers the impact of ongoing lending and deposit-gathering activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments and intends to do so in the future. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and adding to, modifying or terminating existing interest rate swap agreements or other financial instruments used for interest rate risk management purposes.
The accompanying table as of September 30, 2015 and December 31, 2014 displays the estimated impact on net interest income from non-trading
-67-
financial instruments in the base scenario described above resulting from parallel changes in interest rates across repricing categories during the first modeling year.
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
Dollars in thousands
Calculated increase (decrease) in projected net interest income |
||||||||
Changes in interest rates |
September 30, 2015 |
December 31, 2014 |
||||||
+200 basis points |
$ | 276,710 | 246,028 | |||||
+100 basis points |
159,469 | 134,393 | ||||||
-100 basis points |
(85,404 | ) | (74,634 | ) |
The Company utilized many assumptions to calculate the impact that changes in interest rates may have on net interest income. The more significant of those assumptions included the rate of prepayments of mortgage-related assets, cash flows from derivative and other financial instruments held for non-trading purposes, loan and deposit volumes and pricing, and deposit maturities. In the scenarios presented, the Company also assumed gradual increases in interest rates during a twelve-month period of 100 and 200 basis points, as compared with the assumed base scenario, as well as a gradual decrease of 100 basis points. In the second quarter of 2015, the Company suspended the -200 basis points scenario due to the persistent low level of interest rates. This scenario will be reinstated if and when interest rates rise sufficiently to make the analysis more meaningful. In the declining rate scenario, the rate changes may be limited to lesser amounts such that interest rates remain positive on all points of the yield curve. The assumptions used in interest rate sensitivity modeling are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly from those presented due to the timing, magnitude and frequency of changes in interest rates and changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions, such as those previously described, which management may take to counter such changes.
Changes in fair value of the Companys financial instruments can also result from a lack of trading activity for similar instruments in the financial markets. That impact is most notable on the values assigned to some of the Companys investment securities. Information about the fair valuation of such securities is presented herein under the heading Capital and in notes 3 and 12 of Notes to Financial Statements.
The Company engages in limited trading account activities to meet the financial needs of customers and to fund the Companys obligations under certain deferred compensation plans. Financial instruments utilized in trading account activities consist predominantly of interest rate contracts, such as swap agreements, and forward and futures contracts related to foreign currencies. The Company generally mitigates the foreign currency and interest rate risk associated with trading account activities by entering into offsetting positions that are also included in the trading account. The fair values of the offsetting trading account positions associated with interest rate contracts and foreign currency and other option and futures contracts are presented in note 10 of Notes to Financial Statements. The amounts of gross and net trading account positions, as well as the type of trading account activities conducted by the Company, are subject to a well-defined series of potential loss exposure limits established by management and approved by M&Ts Board of Directors. However, as with any non-government guaranteed financial instrument, the Company is exposed to credit risk associated with counterparties to the Companys trading account activities.
-68-
The notional amounts of interest rate contracts entered into for trading account purposes aggregated $17.6 billion at each of September 30, 2015 and December 31, 2014, compared with $17.2 billion at September 30, 2014. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes totaled $1.6 billion, $1.0 billion and $1.3 billion at September 30, 2015, September 30, 2014 and December 31, 2014, respectively. Although the notional amounts of these contracts are not recorded in the consolidated balance sheet, the fair values of all financial instruments used for trading account activities are recorded in the consolidated balance sheet. The fair values of all trading account assets and liabilities totaled $341 million and $233 million, respectively, at September 30, 2015, $297 million and $182 million, respectively, at September 30, 2014, and $308 million and $203 million, respectively, at December 31, 2014. Included in trading account assets at September 30, 2015 were assets related to deferred compensation plans totaling $23 million, compared with $26 million at September 30, 2014 and $27 million at December 31, 2014. Changes in the fair values of such assets are recorded as trading account and foreign exchange gains in the consolidated statement of income. Included in other liabilities in the consolidated balance sheet at September 30, 2015 were $27 million of liabilities related to deferred compensation plans, compared with $30 million at each of September 30, 2014 and December 31, 2014. Changes in the balances of such liabilities due to the valuation of allocated investment options to which the liabilities are indexed are recorded in other costs of operations in the consolidated statement of income.
Given the Companys policies, limits and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading account activities was not material, however, as previously noted, the Company is exposed to credit risk associated with counterparties to transactions related to the Companys trading account activities. Additional information about the Companys use of derivative financial instruments in its trading account activities is included in note 10 of Notes to Financial Statements.
Provision for Credit Losses
The Company maintains an allowance for credit losses that in managements judgment appropriately reflects losses inherent in the loan and lease portfolio. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. The provision for credit losses in the third quarter of 2015 was $44 million, compared with $29 million in the year-earlier quarter and $30 million in the second quarter of 2015. For the nine-month periods ended September 30, 2015 and 2014, the provision for credit losses was $112 million and $91 million, respectively. Net loan charge-offs were $40 million in the recent quarter, up from $28 million in the third quarter of 2014 and $21 million in the second quarter of 2015. The higher level of net loan charge-offs in 2015s third quarter reflected an increase in net commercial loan and lease charge-offs to $22 million from $8 million in last years third quarter and $4 million in the second quarter of 2015. The largest individual charge-off in the recent quarter was $6 million related to a loan with a general contractor in the greater New York City region. No other individual charge-offs were greater than $3 million and there was no concentration of charge-offs in any particular region or industry. Net charge-offs as an annualized percentage of average loans and leases were .24% in the third quarter of 2015, compared with .17% and .13% in the third quarter of 2014 and the second quarter of 2015, respectively. Net charge-offs for the nine-month periods ended September 30 aggregated $98 million in 2015 and $89 million in 2014, representing an annualized rate of .19% of average loans and leases in each respective period. A summary of net charge-offs by loan type is presented in the accompanying table.
-69-
NET CHARGE-OFFS
BY LOAN/LEASE TYPE
In thousands
2015 | ||||||||||||||||
1st Qtr. | 2nd Qtr. | 3rd Qtr. | Year to-date |
|||||||||||||
Commercial, financial, leasing, etc. |
$ | 8,411 | 4,056 | 21,590 | 34,057 | |||||||||||
Real estate: |
||||||||||||||||
Commercial |
6,094 | 2,429 | 84 | 8,607 | ||||||||||||
Residential |
2,129 | 2,071 | 2,143 | 6,343 | ||||||||||||
Consumer |
19,555 | 12,830 | 16,372 | 48,757 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 36,189 | 21,386 | 40,189 | 97,764 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
2014 | ||||||||||||||||
1st Qtr. | 2nd Qtr. | 3rd Qtr. | Year to-date |
|||||||||||||
Commercial, financial, leasing, etc. |
$ | 9,146 | 10,140 | 8,072 | 27,358 | |||||||||||
Real estate: |
||||||||||||||||
Commercial |
289 | 1,322 | 399 | 2,010 | ||||||||||||
Residential |
5,822 | 2,701 | 1,695 | 10,218 | ||||||||||||
Consumer |
16,651 | 14,939 | 17,867 | 49,457 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 31,908 | 29,102 | 28,033 | 89,043 | ||||||||||||
|
|
|
|
|
|
|
|
Included in net charge-offs of consumer loans and leases were net charge-offs during the quarters ended September 30, 2015, September 30, 2014 and June 30, 2015, respectively, of: automobile loans of $2 million, $3 million and $2 million; recreational vehicle loans of $3 million, $2 million and $2 million; and home equity loans and lines of credit, including Alt-A second lien loans, of $3 million, $5 million and $3 million. Alt-A loans represent loans secured by residential real estate that at origination typically included some form of limited borrower documentation requirements as compared with more traditional loans. Loans in the Companys Alt-A portfolio were originated by the Company prior to 2008.
Loans acquired in connection with acquisition transactions subsequent to 2008 were recorded at fair value with no carry-over of any previously recorded allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans and discounting those cash flows at then-current interest rates. The excess of expected cash flows over the carrying value of the loans is recognized as interest income over the lives of loans. The difference between contractually required payments and the cash flows expected to be collected is referred to as the nonaccretable balance and is not recorded on the consolidated balance sheet. The nonaccretable balance reflects estimated future credit losses and other contractually required payments that the Company does not expect to collect. The Company regularly evaluates the reasonableness of its cash flow projections. Any decreases to the expected cash flows require the Company to evaluate the need for an additional allowance for credit losses and could lead to charge-offs of acquired loan balances. Any significant increases in expected cash flows result in additional interest income to be recognized over the then-remaining lives of the loans. The carrying amount of loans obtained in acquisitions subsequent to 2008 was $2.0 billion, $2.9 billion and $2.6 billion at September 30, 2015, September 30, 2014 and December 31, 2014, respectively. The portion of the nonaccretable balance related to remaining principal losses as well as life-to-date principal losses charged against the nonaccretable balance as of
-70-
September 30, 2015 and December 31, 2014 are presented in the accompanying table.
Nonaccretable balance - principal | ||||||||||||||||
Remaining balance | Life-to-date charges | |||||||||||||||
September 30, 2015 |
December 31, 2014 |
September 30, 2015 |
December 31, 2014 |
|||||||||||||
(in thousands) | ||||||||||||||||
Commercial, financing, leasing, etc. |
$ | 18,300 | 19,589 | 78,613 | 78,736 | |||||||||||
Commercial real estate |
54,530 | 70,261 | 263,524 | 276,681 | ||||||||||||
Residential real estate |
13,742 | 15,958 | 60,824 | 59,552 | ||||||||||||
Consumer |
25,684 | 29,582 | 80,216 | 77,819 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 112,256 | 135,390 | 483,177 | 492,788 | |||||||||||
|
|
|
|
|
|
|
|
Nonaccrual loans totaled $787 million or 1.15% of total loans and leases outstanding at September 30, 2015, compared with $848 million or 1.29% at September 30, 2014, $799 million or 1.20% at December 31, 2014 and $797 million or 1.17% at June 30, 2015. The decline in nonaccrual loans at the most recent quarter-end as compared with September 30, 2014 was largely due to lower commercial real estate loans, including residential builder and developer and construction loans, and residential real estate loans, partially offset by an increase in commercial loans in nonaccrual status.
Accruing loans past due 90 days or more (excluding acquired loans) were $231 million, or .34% of total loans and leases at September 30, 2015, compared with $313 million or .48% at September 30, 2014, $245 million or .37% at December 31, 2014 and $239 million or .35% at June 30, 2015. Those loans included loans guaranteed by government-related entities of $194 million at September 30, 2015, $265 million at September 30, 2014, $218 million at December 31, 2014 and $207 million at June 30, 2015. Such guaranteed loans included one-to-four family residential real estate loans serviced by the Company that were repurchased to reduce servicing costs, including a requirement to advance principal and interest payments that had not been received from individual mortgagors. Despite the loans being purchased by the Company, the insurance or guarantee by the applicable government-related entity remains in force. The outstanding principal balances of the repurchased loans that are guaranteed by government-related entities totaled $182 million at September 30, 2015, $237 million at September 30, 2014, $196 million at December 31, 2014 and $195 million at June 30, 2015. The remaining accruing loans past due 90 days or more not guaranteed by government-related entities were loans considered to be with creditworthy borrowers that were in the process of collection or renewal. Acquired accruing loans past due 90 days or more are loans that could not be specifically identified as impaired as of the acquisition date, but were recorded at estimated fair value as of such date. Such loans totaled $81 million at September 30, 2015, compared with $132 million at September 30, 2014, $110 million at December 31, 2014 and $79 million at June 30, 2015.
Purchased impaired loans are loans obtained in acquisition transactions subsequent to 2008 that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all outstanding principal and contractually required interest payments. Those loans were impaired at the date of acquisition, were recorded at estimated fair value and were generally delinquent in payments, but, in accordance with GAAP, the Company continues to accrue interest income on such loans based on the estimated expected cash flows associated with the loans. The carrying amount of such loans was $149 million at September 30, 2015, or .22% of total loans. Purchased impaired loans totaled $237 million and $198 million at September 30 and December 31, 2014, respectively. The declines in such loans from the respective 2014 dates were predominantly the result of payments received from customers.
-71-
In an effort to assist borrowers, the Company modified the terms of select loans. If the borrower was experiencing financial difficulty and a concession was granted, the Company considers such modifications as troubled debt restructurings. Loan modifications included such actions as the extension of loan maturity dates and the lowering of interest rates and monthly payments. The objective of the modifications was to increase loan repayments by customers and thereby reduce net charge-offs. In accordance with GAAP, the modified loans are included in impaired loans for purposes of determining the level of the allowance for credit losses. Information about modifications of loans that are considered troubled debt restructurings is included in note 4 of Notes to Financial Statements.
Residential real estate loans modified under specified loss mitigation programs prescribed by government guarantors have not been included in renegotiated loans because the loan guarantee remains in full force and, accordingly, the Company has not granted a concession with respect to the ultimate collection of the original loan balance. Such loans aggregated $153 million, $142 million and $149 million at September 30, 2015, September 30, 2014 and December 31, 2014, respectively.
Nonaccrual commercial loans and leases totaled $224 million at September 30, 2015, $191 million at September 30, 2014, $177 million at December 31, 2014 and $210 million at June 30, 2015. The largest individual commercial loans placed in nonaccrual status during 2015 were $24 million with a multi-regional automobile rental agency and $19 million with a commercial maintenance services provider with operations in New Jersey and Pennsylvania. Commercial real estate loans classified as nonaccrual aggregated $235 million at September 30, 2015, $274 million a year earlier, $239 million at December 31, 2014 and $246 million at June 30, 2015. Included in those amounts were nonaccrual loans to residential homebuilders and developers of $46 million and $73 million at September 30, 2015 and September 30, 2014, respectively, $72 million at December 31, 2014 and $57 million at June 30, 2015. Information about the location of nonaccrual and charged-off loans to residential real estate builders and developers as of and for the three-month period ended September 30, 2015 is presented in the accompanying table.
RESIDENTIAL BUILDER AND DEVELOPER LOANS, NET OF UNEARNED DISCOUNT
September 30, 2015 | Quarter ended September 30, 2015 |
|||||||||||||||||||
Nonaccrual | Net charge-offs (recoveries) |
|||||||||||||||||||
Outstanding balances(a) |
Balances | Percent of outstanding balances |
Balances | Annualized percent of average outstanding balances |
||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
New York |
$ | 646,045 | $ | 4,711 | .73 | % | $ | 1,439 | .77 | % | ||||||||||
Pennsylvania |
146,223 | 26,668 | 18.24 | (71 | ) | (.20 | ) | |||||||||||||
Mid-Atlantic |
450,578 | 16,009 | 3.55 | (135 | ) | (.12 | ) | |||||||||||||
Other |
393,454 | 1,411 | .36 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,636,300 | $ | 48,799 | 2.98 | % | $ | 1,233 | .29 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Includes approximately $22 million of loans not secured by real estate, of which approximately $3 million were in nonaccrual status. |
Residential real estate loans classified as nonaccrual were $218 million at September 30, 2015, compared with $264 million at September 30, 2014, $258 million at December 31, 2014, and $233 million at June 30, 2015. Included in
-72-
residential real estate loans classified as nonaccrual were Alt-A loans of $64 million at September 30, 2015, compared with $80 million at September 30, 2014, $78 million at December 31, 2014 and $68 million at June 30, 2015. Residential real estate loans past due 90 days or more and accruing interest (excluding acquired loans) totaled $194 million at September 30, 2015, compared with $264 million at September 30, 2014, $216 million at December 31, 2014 and $207 million at June 30, 2015. A substantial portion of such amounts related to loans guaranteed by government-related entities. Information about location of nonaccrual and charged-off residential real estate loans as of and for the quarter ended September 30, 2015 is presented in the accompanying table.
Nonaccrual consumer loans totaled $110 million and $119 million at September 30, 2015 and 2014, respectively, compared with $125 million at December 31, 2014 and $108 million at June 30, 2015. Included in nonaccrual consumer loans and leases at September 30, 2015, September 30, 2014, December 31, 2014 and June 30, 2015 were automobile loans of $14 million, $17 million, $18 million and $15 million, respectively; recreational vehicle loans of $8 million, $10 million, $11 million and $8 million, respectively; and outstanding balances of home equity loans and lines of credit, including junior lien Alt-A loans, of $78 million, $85 million, $89 million and $78 million, respectively. Information about the location of nonaccrual and charged-off home equity loans and lines of credit as of and for the quarter ended September 30, 2015 is presented in the accompanying table.
-73-
SELECTED RESIDENTIAL REAL ESTATE-RELATED LOAN DATA
September 30, 2015 | Quarter ended September 30, 2015 |
|||||||||||||||||||
Nonaccrual | Net charge-offs (recoveries) |
|||||||||||||||||||
Outstanding balances |
Balances | Percent of outstanding balances |
Balances | Annualized percent of average outstanding balances |
||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Residential mortgages: |
||||||||||||||||||||
New York |
$ | 3,399,963 | $ | 57,685 | 1.70 | % | $ | 987 | .11 | % | ||||||||||
Pennsylvania |
1,071,686 | 16,266 | 1.52 | 512 | .19 | |||||||||||||||
Mid-Atlantic |
1,979,162 | 31,579 | 1.60 | 502 | .10 | |||||||||||||||
Other |
1,424,201 | 46,243 | 3.25 | 196 | .05 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 7,875,012 | $ | 151,773 | 1.93 | % | $ | 2,197 | .11 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Residential construction: |
||||||||||||||||||||
New York |
$ | 7,248 | $ | 168 | 2.31 | % | $ | 29 | 1.55 | % | ||||||||||
Pennsylvania |
3,734 | 776 | 20.79 | 2 | .24 | |||||||||||||||
Mid-Atlantic |
9,930 | | | | | |||||||||||||||
Other |
12,254 | 637 | 5.20 | 13 | .44 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 33,166 | $ | 1,581 | 4.77 | % | $ | 44 | .54 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Alt-A first mortgages: |
||||||||||||||||||||
New York |
$ | 52,605 | $ | 16,358 | 31.10 | % | $ | 109 | .82 | % | ||||||||||
Pennsylvania |
9,054 | 2,115 | 23.36 | 69 | 2.92 | |||||||||||||||
Mid-Atlantic |
61,469 | 7,825 | 12.73 | (381 | ) | (2.42 | ) | |||||||||||||
Other |
179,756 | 38,053 | 21.17 | 105 | .23 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 302,884 | $ | 64,351 | 21.25 | % | $ | (98 | ) | (.13 | )% | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Alt-A junior lien: |
||||||||||||||||||||
New York |
$ | 941 | $ | 19 | 1.98 | % | $ | | | % | ||||||||||
Pennsylvania |
348 | 34 | 9.83 | | | |||||||||||||||
Mid-Atlantic |
2,492 | 113 | 4.52 | | | |||||||||||||||
Other |
6,000 | 429 | 7.16 | 20 | 1.32 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 9,781 | $ | 595 | 6.08 | % | $ | 20 | .79 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
First lien home equity loans: |
||||||||||||||||||||
New York |
$ | 14,245 | $ | 3,600 | 25.27 | % | $ | (3 | ) | (.09 | )% | |||||||||
Pennsylvania |
46,369 | 3,006 | 6.48 | 98 | .81 | |||||||||||||||
Mid-Atlantic |
64,513 | 1,418 | 2.20 | 25 | .15 | |||||||||||||||
Other |
865 | 132 | 15.32 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 125,992 | $ | 8,156 | 6.47 | % | $ | 120 | .36 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
First lien home equity lines: |
||||||||||||||||||||
New York |
$ | 1,339,394 | $ | 13,844 | 1.03 | % | $ | 744 | .22 | % | ||||||||||
Pennsylvania |
839,265 | 6,320 | .75 | 310 | .15 | |||||||||||||||
Mid-Atlantic |
862,510 | 4,472 | .52 | 190 | .09 | |||||||||||||||
Other |
35,114 | 1,401 | 3.99 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 3,076,283 | $ | 26,037 | .85 | % | $ | 1,244 | .16 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Junior lien home equity loans: |
||||||||||||||||||||
New York |
$ | 12,750 | $ | 3,291 | 25.81 | % | $ | 36 | 1.10 | % | ||||||||||
Pennsylvania |
16,141 | 748 | 4.63 | 29 | .70 | |||||||||||||||
Mid-Atlantic |
55,615 | 1,875 | 3.37 | (9 | ) | (.07 | ) | |||||||||||||
Other |
6,797 | 810 | 11.92 | (6 | ) | (.32 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 91,303 | $ | 6,724 | 7.36 | % | $ | 50 | .21 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Junior lien home equity lines: |
||||||||||||||||||||
New York |
$ | 936,375 | $ | 23,758 | 2.54 | % | $ | 1,120 | .47 | % | ||||||||||
Pennsylvania |
381,831 | 3,703 | .97 | 41 | .04 | |||||||||||||||
Mid-Atlantic |
1,156,670 | 7,283 | .63 | 865 | .30 | |||||||||||||||
Other |
66,758 | 1,870 | 2.80 | (87 | ) | (.52 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,541,634 | $ | 36,614 | 1.44 | % | $ | 1,939 | .30 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
-74-
Real estate and other foreclosed assets were $66 million at September 30, 2015, compared with $68 million at September 30, 2014, and $64 million at each of December 31, 2014 and June 30, 2015. At September 30, 2015, foreclosed assets included $43 million of residential real estate properties.
A comparative summary of nonperforming assets and certain past due loan data and credit quality ratios is presented in the accompanying table.
NONPERFORMING ASSET AND PAST DUE, RENEGOTIATED AND IMPAIRED LOAN DATA
Dollars in thousands
2015 Quarters | 2014 Quarters | |||||||||||||||||||
Third | Second | First | Fourth | Third | ||||||||||||||||
Nonaccrual loans |
$ | 787,098 | 797,146 | 790,586 | 799,151 | 847,784 | ||||||||||||||
Real estate and other foreclosed assets |
66,144 | 63,734 | 62,578 | 63,635 | 67,629 | |||||||||||||||
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Total nonperforming assets |
$ | 853,242 | 860,880 | 853,164 | 862,786 | 915,413 | ||||||||||||||
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Accruing loans past due 90 days or more(a) |
$ | 231,465 | 238,568 | 236,621 | 245,020 | 312,990 | ||||||||||||||
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Government guaranteed loans included in totals above: |
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Nonaccrual loans |
$ | 48,955 | 58,259 | 60,508 | 69,095 | 68,586 | ||||||||||||||
Accruing loans past due 90 days or more |
193,998 | 206,775 | 193,618 | 217,822 | 265,333 | |||||||||||||||
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Renegotiated loans |
$ | 189,639 | 197,145 | 198,911 | 202,633 | 209,099 | ||||||||||||||
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Acquired accruing loans past due 90 days or more(b) |
$ | 80,827 | 78,591 | 80,110 | 110,367 | 132,147 | ||||||||||||||
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Purchased impaired loans(c): |
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Outstanding customer balance |
$ | 278,979 | 312,507 | 335,079 | 369,080 | 429,915 | ||||||||||||||
Carrying amount |
149,421 | 169,240 | 184,018 | 197,737 | 236,662 | |||||||||||||||
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Nonaccrual loans to total loans and leases, net of unearned discount |
1.15 | % | 1.17 | % | 1.18 | % | 1.20 | % | 1.29 | % | ||||||||||
Nonperforming assets to total net loans and leases and real estate and other foreclosed assets |
1.24 | % | 1.26 | % | 1.27 | % | 1.29 | % | 1.39 | % | ||||||||||
Accruing loans past due 90 days or more (a) to total loans and leases, net of unearned discount |
.34 | % | .35 | % | .35 | % | .37 | % | .48 | % | ||||||||||
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(a) | Excludes acquired loans. Predominantly residential mortgage loans. |
(b) | Acquired loans that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately. |
(c) | Accruing loans that were impaired at acquisition date and recorded at fair value. |
Management determined the allowance for credit losses by performing ongoing evaluations of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the economic environment in which borrowers
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operate, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or indemnifications. Management evaluated the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet repayment obligations when quantifying the Companys exposure to credit losses and the allowance for such losses as of each reporting date. Factors also considered by management when performing its assessment, in addition to general economic conditions and the other factors described above, included, but were not limited to: (i) the impact of residential real estate values on the Companys portfolio of loans to residential real estate builders and developers and other loans secured by residential real estate; (ii) the concentrations of commercial real estate loans in the Companys loan portfolio; (iii) the amount of commercial and industrial loans to businesses in areas of New York State outside of the New York City metropolitan area and in central Pennsylvania that have historically experienced less economic growth and vitality than the vast majority of other regions of the country; (iv) the repayment performance associated with the Companys first and second lien loans secured by residential real estate; and (v) the size of the Companys portfolio of loans to individual consumers, which historically have experienced higher net charge-offs as a percentage of loans outstanding than other loan types. The level of the allowance is adjusted based on the results of managements analysis.
Management cautiously and conservatively evaluated the allowance for credit losses as of September 30, 2015 in light of: (i) residential real estate values and the level of delinquencies of loans secured by residential real estate; (ii) economic conditions in the markets served by the Company; (iii) continuing weakness in industrial employment in upstate New York and central Pennsylvania; (iv) the significant subjectivity involved in commercial real estate valuations; and (v) the amount of loan growth experienced by the Company. While there has been general improvement in economic conditions, concerns continue to exist about the strength and sustainability of such improvements; the troubled state of financial and credit markets, including the impact international economic conditions could have on the U.S. economy; Federal Reserve positioning of monetary policy; low levels of workforce participation; and continued stagnant population growth in the upstate New York and central Pennsylvania regions (approximately 60% of the Companys loans are to customers in New York State and Pennsylvania).
The Company utilizes a loan grading system which is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible pass loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as criticized and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as nonaccrual if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. Criticized commercial loans and commercial real estate loans were $2.3 billion at each of September 30, 2015 and June 30, 2015, compared with $2.0 billion at September 30, 2014 and $1.8 billion at December 31, 2014. Increases in criticized loan balances since December 31, 2014 included approximately $251 million categorized as commercial real estate loans and $244 million as commercial loans. Approximately 98% of loan balances added to the criticized category during the first nine months of 2015 were less than 90 days past due and 96% had a current payment status. Given payment performance, amount of supporting collateral, and, in certain instances, the existence of loan guarantees, the incremental impact to the allowance for credit losses resulting from the increase to the criticized loan category was not material. The borrower industries most significantly impacting the higher level of criticized loans were investment real estate, services and
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manufacturing. The metropolitan New York City region was most affected by the increases. Loan officers with the support of loan review personnel in different geographic locations are responsible to review and reassign loan grades to pass and criticized loans based on their detailed knowledge of individual borrowers and their judgment of the impact on such borrowers resulting from changing conditions in their respective geographic regions. At least annually, updated financial information is obtained from commercial borrowers associated with pass grade loans and additional analysis is performed. On a quarterly basis, the Companys centralized loan review department reviews all criticized commercial loans and commercial real estate loans greater than $1 million to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. For criticized nonaccrual loans, additional meetings are held with loan officers and their managers, workout specialists and senior management to discuss each of the relationships. In analyzing criticized loans, borrower-specific information is reviewed, including operating results, future cash flows, recent developments and the borrowers outlook, and other pertinent data. The timing and extent of potential losses, considering collateral valuation and other factors, and the Companys potential courses of action are reviewed. To the extent that these loans are collateral-dependent, they are evaluated based on the fair value of the loans collateral as estimated at or near the financial statement date. As the quality of a loan deteriorates to the point of classifying the loan as criticized, the process of obtaining updated collateral valuation information is usually initiated, unless it is not considered warranted given factors such as the relative size of the loan, the characteristics of the collateral or the age of the last valuation. In those cases where current appraisals may not yet be available, prior appraisals are utilized with adjustments, as deemed necessary, for estimates of subsequent declines in value as determined by line of business and/or loan workout personnel in the respective geographic regions. Those adjustments are reviewed and assessed for reasonableness by the Companys loan review department. Accordingly, for real estate collateral securing larger commercial loans and commercial real estate loans, estimated collateral values are based on current appraisals and estimates of value. For non-real estate loans, collateral is assigned a discounted estimated liquidation value and, depending on the nature of the collateral, is verified through field exams or other procedures. In assessing collateral, real estate and non-real estate values are reduced by an estimate of selling costs. With regard to residential real estate loans, the Companys loss identification and estimation techniques make reference to loan performance and house price data in specific areas of the country where collateral that was securing the Companys residential real estate loans was located. For residential real estate-related loans, including home equity loans and lines of credit, the excess of the loan balance over the net realizable value of the property collateralizing the loan is charged-off when the loan becomes 150 days delinquent. That charge-off is based on recent indications of value from external parties that are generally obtained shortly after a loan is classified as nonaccrual. At September 30, 2015, approximately 55% of the Companys home equity portfolio consisted of first lien loans and lines of credit. Of the remaining junior lien loans in the portfolio, approximately 73% (or approximately 33% of the aggregate home equity portfolio) consisted of junior lien loans that were behind a first lien mortgage loan that was not owned or serviced by the Company. To the extent known by the Company, if a senior lien loan would be on nonaccrual status because of payment delinquency, even if such senior lien loan was not owned by the Company, the junior lien loan or line that is owned by the Company is placed on nonaccrual status. At September 30, 2015, the balance of junior lien loans and lines that were in nonaccrual status solely as a result of first lien loan performance was $22 million, compared with $26 million at September 30, 2014, $24 million at December 31, 2014 and $22 million at June 30, 2015. In monitoring the credit quality of its home equity portfolio for purposes of determining the allowance for credit losses, the Company reviews delinquency and nonaccrual information and considers recent charge-off experience. Additionally, the Company generally
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evaluates home equity loans and lines of credit that are more than 150 days past due for collectibility on a loan-by-loan basis and the excess of the loan balance over the net realizable value of the property collateralizing the loan is charged-off at that time. In determining the amount of such charge-offs, if the Company does not know the amount of the remaining first lien mortgage loan (typically because the Company does not own or service the first lien loan), the Company assumes that the first lien mortgage loan has had no principal amortization since the origination of the junior lien loan. Similarly, data used in estimating incurred losses for purposes of determining the allowance for credit losses also assumes no reductions in outstanding principal of first lien loans since the origination of the junior lien loan. Home equity line of credit terms vary but such lines are generally originated with an open draw period of ten years followed by an amortization period of up to twenty years. At September 30, 2015, approximately 88% of all outstanding balances of home equity lines of credit related to lines that were still in the draw period, the weighted-average remaining draw periods were approximately five years, and approximately 10% were making contractually allowed payments that do not include any repayment of principal.
Factors that influence the Companys credit loss experience include overall economic conditions affecting businesses and consumers, generally, but also residential and commercial real estate valuations, in particular, given the size of the Companys real estate loan portfolios. Commercial real estate valuations can be highly subjective, as they are based upon many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, interest rates and, in many cases, the results of operations of businesses and other occupants of the real property. Similarly, residential real estate valuations can be impacted by housing trends, the availability of financing at reasonable interest rates, and general economic conditions affecting consumers.
In determining the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases. In quantifying incurred losses, the Company considers the factors and uses the techniques described herein and in note 4 of Notes to Financial Statements. For purposes of determining the level of the allowance for credit losses, the Company segments its loan and lease portfolio by loan type. The amount of specific loss components in the Companys loan and lease portfolios is determined through a loan-by-loan analysis of commercial loans and commercial real estate loans in nonaccrual status. Measurement of the specific loss components is typically based on expected future cash flows, collateral values or other factors that may impact the borrowers ability to pay. Losses associated with residential real estate loans and consumer loans are generally determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Companys credit department. These forecasts give consideration to overall borrower repayment performance and current geographic region changes in collateral values using third party published historical price indices or automated valuation methodologies. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a junior lien position. Approximately 45% of the Companys home equity portfolio consists of junior lien loans and lines of credit. Except for consumer loans and residential real estate loans that are considered smaller balance homogeneous loans and are evaluated collectively and loans obtained in acquisition transactions, the Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more and has been placed in nonaccrual status. Those impaired loans are evaluated for specific loss components. Modified loans,
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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 loans expected cash flows. Loans less than 90 days delinquent are deemed to have a minimal delay in payment and are generally not considered to be impaired. Loans acquired in connection with acquisition transactions subsequent to 2008 were recorded at fair value with no carry-over of any previously recorded allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans and discounting those cash flows at then-current interest rates. The impact of estimated future credit losses represents the predominant difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition. Subsequent decreases to those expected cash flows require the Company to evaluate the need for an additional allowance for credit losses and could lead to charge-offs of acquired loan balances. Additional information regarding the Companys process for determining the allowance for credit losses is included in note 4 of Notes to Financial Statements.
Management believes that the allowance for credit losses at September 30, 2015 appropriately reflected credit losses inherent in the portfolio as of that date. The allowance for credit losses was $934 million, or 1.36% of total loans and leases at September 30, 2015, compared with $919 million or 1.40% at September 30, 2014, $920 million or 1.38% at December 31, 2014 and $930 million or 1.36% at June 30, 2015. The ratio of the allowance to total loans and leases at each respective date reflects the impact of loans obtained in acquisition transactions subsequent to 2008 that have been recorded at estimated fair value based on estimated future cash flows expected to be received on those loans. Those cash flows reflect the impact of expected defaults on customer repayment performance. As noted earlier, GAAP prohibits any carry-over of an allowance for credit losses for acquired loans recorded at fair value. The level of the allowance reflects managements evaluation of the loan and lease portfolio using the methodology and considering the factors as described herein. Should the various credit factors considered by management in establishing the allowance for credit losses change and should managements assessment of losses inherent in the loan portfolio also change, the level of the allowance as a percentage of loans could increase or decrease in future periods. The ratio of the allowance for credit losses to nonaccrual loans was 119% at September 30, 2015, compared with 108% at September 30, 2014, 115% at December 31, 2014 and 117% at June 30, 2015. Given the Companys general position as a secured lender and its practice of charging off loan balances when collection is deemed doubtful, that ratio and changes in that ratio are generally not an indicative measure of the adequacy of the Companys allowance for credit losses, nor does management rely upon that ratio in determining the allowance. The level of the allowance reflects managements evaluation of the loan and lease portfolio as of each respective date.
Other Income
Other income totaled $440 million in the third quarter of 2015, compared with $451 million in the year-earlier quarter and $497 million in the second quarter of 2015. Reflected in other income in the second quarter of 2015 was a $45 million gain from the divestiture of the trade processing business within the retirement services business of the Company. Excluding that gain, other income totaled $452 million in the second quarter of 2015. The decline in the recent quarter as compared with the year-earlier quarter resulted predominantly from lower mortgage banking revenues and trust income, partially offset by higher gains on the sale of previously leased equipment. The lower trust income reflects the impact of the divested trade processing business. As compared with the second quarter of 2015, lower mortgage banking revenues and loan syndication fees were partially offset by higher gains on the sale of previously leased equipment.
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Mortgage banking revenues were $84 million in the recently completed quarter, compared with $94 million in the third quarter of 2014 and $103 million in the second quarter of 2015. Mortgage banking revenues are comprised of both residential and commercial mortgage banking activities. The Companys involvement in commercial mortgage banking activities includes the origination, sales and servicing of loans under the multifamily loan programs of Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development.
Residential mortgage banking revenues, consisting of realized gains from sales of residential real estate loans and loan servicing rights, unrealized gains and losses on residential real estate loans held for sale and related commitments, residential real estate loan servicing fees, and other residential real estate loan-related fees and income, were $67 million in the third quarter of 2015, compared with $73 million in the third quarter of 2014 and $75 million in the second quarter of 2015. The lower level of residential mortgage banking revenues in the recent quarter as compared with the year-earlier quarter and 2015s second quarter reflects a decline in revenues associated with servicing residential real estate loans for others and lower realized and unrealized gains.
New commitments to originate residential real estate loans to be sold were approximately $870 million in the recent quarter, compared with $878 million and $995 million in the third quarter of 2014 and the second quarter of 2015, respectively. Realized gains from sales of residential real estate loans and loan servicing rights and recognized net unrealized gains and losses attributable to residential real estate loans held for sale, commitments to originate loans for sale and commitments to sell loans totaled to gains of $18 million in the recently completed quarter, compared with gains of $19 million and $21 million in the third quarter of 2014 and the second quarter of 2015, respectively.
The Company is contractually obligated to repurchase previously sold loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan documentation. When required to do so, the Company may reimburse purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues for losses related to its obligations to loan purchasers. The amount of those charges varies based on the volume of loans sold, the level of reimbursement requests received from loan purchasers and estimates of losses that may be associated with previously sold loans. Residential mortgage banking revenues were reduced for such obligations by $1 million during each of the recent quarter, the third quarter of 2014 and the second quarter of 2015.
Loans held for sale that were secured by residential real estate totaled $422 million at September 30, 2015, $466 million at September 30, 2014 and $435 million at December 31, 2014. Commitments to sell residential real estate loans and commitments to originate residential real estate loans for sale at pre-determined rates were $817 million and $587 million, respectively, at September 30, 2015, $827 million and $557 million, respectively, at September 30, 2014 and $717 million and $432 million, respectively, at December 31, 2014. Net recognized unrealized gains on residential real estate loans held for sale, commitments to sell loans, and commitments to originate loans for sale were $18 million at September 30, 2015, $20 million at September 30, 2014 and $19 million at December 31, 2014. Changes in such net unrealized gains are recorded in mortgage banking revenues and resulted in net decreases in revenues of less than $1 million in the recent quarter and $2 million in the second quarter of 2015, compared with a net increase in revenues of less than $1 million in the third quarter of 2014.
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Revenues from servicing residential real estate loans for others were $49 million in the recent quarter, compared with $54 million in the third quarter of 2014 and $53 million in the second quarter of 2015. The decline in the recent quarter as compared with the earlier quarters is largely reflective of lower sub-servicing activities. Revenues earned for sub-servicing loans were $26 million for the three-month period ended September 30, 2015, compared with $30 million for each of the three-month periods ended September 30, 2014 and June 30, 2015. Residential real estate loans serviced for others totaled $64.3 billion at September 30, 2015, $69.7 billion at September 30, 2014, $67.2 billion at December 31, 2014 and $66.5 billion at June 30, 2015. Reflected in residential real estate loans serviced for others were loans sub-serviced for others of $40.2 billion at September 30, 2015, $44.4 billion at September 30, 2014, $42.1 billion at December 31, 2014 and $42.3 billion at June 30, 2015. The contractual servicing rights associated with loans sub-serviced by the Company were predominantly held by affiliates of Bayview Lending Group LLC (BLG).
Capitalized servicing rights consist largely of servicing associated with loans sold by the Company. Capitalized residential mortgage loan servicing assets totaled $117 million at September 30, 2015, compared with $114 million at September 30, 2014 and $111 million at December 31, 2014.
Commercial mortgage banking revenues were $18 million in the third quarter of 2015, compared with $20 million in the year-earlier period and $28 million in the second quarter of 2015. Included in such amounts were revenues from loan origination and sales activities of $8 million in the recent quarter, compared with $11 million in the third quarter of 2014 and $17 million in the second quarter of 2015. The decline in such revenues was due to lower origination volume as commitments to purchase multi-family commercial real estate loans by Fannie Mae and Freddie Mac slowed from the first half of the year. Commercial real estate loans originated for sale to other investors totaled $190 million in the recent quarter, compared with $513 million and $890 million in the third quarter of 2014 and the second quarter of 2015, respectively. Loan servicing revenues were $10 million in the recent quarter, compared with $9 million in the year-earlier quarter and $11 million in the second quarter of 2015. Capitalized commercial mortgage servicing assets totaled $81 million at September 30, 2015 and $73 million at each of September 30 and December 31, 2014. Commercial real estate loans serviced for other investors totaled $11.6 billion at September 30, 2015 and $11.3 billion at each of September 30, 2014 and December 31, 2014, and included $2.5 billion, $2.3 billion and $2.4 billion, respectively, of loan balances for which investors had recourse to the Company if such balances are ultimately uncollectible. Commitments to sell commercial real estate loans and commitments to originate commercial real estate loans for sale were $161 million and $89 million, respectively, at September 30, 2015, $300 million and $141 million, respectively, at September 30, 2014 and $520 million and $212 million, respectively, at December 31, 2014. Commercial real estate loans held for sale at September 30, 2015, September 30, 2014 and December 31, 2014 were $71 million, $159 million and $308 million, respectively.
Service charges on deposit accounts totaled $107 million in the third quarter of 2015, compared with $110 million in the year-earlier quarter and $105 million in the second quarter of 2015. The lower levels of fees in the two most recent quarters as compared with the third quarter of 2014 were largely due to lower consumer deposit service fees, particularly overdraft fees.
Trust income includes fees related to two significant businesses. The Institutional Client Services (ICS) business provides a variety of trustee, agency, investment management and administrative services for corporations and institutions, investment bankers, corporate tax, finance and legal executives, and other institutional clients who: (i) use capital markets
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financing structures; (ii) use independent trustees to hold retirement plan and other assets; and (iii) need investment and cash management services. The Wealth Advisory Services (WAS) business helps high net worth clients grow their wealth, protect it, and transfer it to their heirs. A comprehensive array of wealth management services are offered, including asset management, fiduciary services and family office services. Revenues associated with the ICS business were approximately $53 million, $63 million and $52 million during the quarters ended September 30, 2015, September 30, 2014 and June 30, 2015, respectively. The ICS revenue decline in the two most recent quarters as compared with the third quarter of 2014 reflects the April 2015 divestiture of the trade processing business within the retirement services division. Revenues associated with the trade processing business totaled $8 million during the quarter ended September 30, 2014 and $9 million during the first quarter of 2015. After consideration of operating expenses, the net income of the sold business was not material to the Companys consolidated results of operations in any period noted herein. Revenues attributable to WAS were approximately $53 million, $56 million and $58 million for the three-month periods ended September 30, 2015, September 30, 2014 and June 30, 2015, respectively. The second quarter of 2015 included $3 million of seasonal tax preparation fees. The decline in revenue in the recent quarter when compared to last years third quarter and the remainder of the decline from the second quarter of 2015 was attributable to lower values of managed assets, due in part to the recent stock market decline. In total, trust income aggregated $114 million in the third quarter of 2015, compared with $129 million and $119 million in the year-earlier quarter and the second quarter of 2015, respectively. Total trust assets, which include assets under management and assets under administration, aggregated $200.0 billion at September 30, 2015, compared with $276.6 billion at September 30, 2014, $287.9 billion at December 31, 2014 and $205.0 billion at June 30, 2015. The decline in trust assets at the two most recent quarter-ends was predominantly due to the customer account balances included in the April 2015 sale of the trade processing business. Trust assets under management were $65.7 billion, $67.7 billion and $68.2 billion at September 30, 2015, September 30, 2014 and December 31, 2014, respectively. The Companys proprietary mutual funds had assets of $11.7 billion, $12.4 billion and $13.3 billion at September 30, 2015, September 30, 2014 and December 31, 2014, respectively.
Brokerage services income, which includes revenues from the sale of mutual funds and annuities and securities brokerage fees, totaled $17 million in each of the third quarters of 2015 and 2014 and the second quarter of 2015. Gains from trading account and foreign exchange activity were $8 million during the most recent quarter, $7 million during the year-earlier quarter and $6 million in the second quarter of 2015. Information about the notional amount of interest rate, foreign exchange and other contracts entered into by the Company for trading account purposes is included in note 10 of Notes to Financial Statements and herein under the heading Taxable-equivalent Net Interest Income.
M&Ts share of the operating losses of BLG was $4 million in each of the recent quarter and in 2014s third quarter and $3 million in the second quarter of 2015. The operating losses of BLG in the respective quarters reflect provisions for losses associated with securitized loans and other loans held by BLG and loan servicing and other administrative costs. Under GAAP, such losses are required to be recognized by BLG despite the fact that many of the securitized loan losses will ultimately be borne by the underlying third party bondholders. As these loan losses are realized through later foreclosure and still later sale of real estate collateral, the underlying bonds will be charged-down leading to BLGs future recognition of debt extinguishment gains. The timing of such debt extinguishment is difficult to predict and given ongoing loan loss provisioning, it is not possible to project when BLG will return to profitability. As a result of
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credit and liquidity disruptions, BLG ceased its originations of small-balance commercial real estate loans in 2008. However, as a result of past securitization activities, BLG is entitled to cash flows from mortgage assets that it owns or that are owned by its affiliates and is also entitled to receive distributions from affiliates that provide asset management and other services. Accordingly, the Company believes that BLG is capable of realizing positive cash flows that could be available for distribution to its owners, including M&T, despite a lack of positive GAAP-earnings from its core mortgage activities. Information about the Companys relationship with BLG and its affiliates is included in note 15 of Notes to Financial Statements.
Other revenues from operations totaled $113 million in the recent quarter, compared with $99 million in the third quarter of 2014 and $151 million in the second quarter of 2015. The increase in other revenues from operations in the recent quarter when compared with the year-earlier quarter was primarily due to $14 million of gains on the sale of previously leased equipment in the third quarter of 2015. Similar gains in the year-earlier period were less than $1 million. The recent quarter decline in other revenues from operations as compared with the second quarter of 2015 was predominantly due to the $45 million gain associated with the sale of the trade processing business in the retirement services division. Included in other revenues from operations were the following significant components. Letter of credit and other credit-related fees (including loan syndication fees) totaled $29 million in each of the third quarters of 2015 and 2014, compared with $37 million in the second quarter of 2015. Tax-exempt income from bank owned life insurance, which includes increases in the cash surrender value of life insurance policies and benefits received, aggregated $12 million in the third quarter of 2015, $13 million in the third quarter of 2014 and $15 million in the second quarter of 2015. Revenues from merchant discount and credit card fees were $27 million in the recent quarter, compared with $25 million in the year-earlier quarter and $26 million in the second quarter of 2015. Insurance-related sales commissions and other revenues totaled $9 million in the third quarter of 2015, $10 million in last years third quarter and $8 million in the second quarter of 2015.
Other income totaled $1.38 billion in the first nine months of 2015, compared with $1.33 billion in the corresponding 2014 period. Excluding the gain on the divestiture of the trade processing business, other income aggregated $1.33 billion in the first nine months of 2015. On that basis, higher mortgage banking revenues and gains on the sale of previously leased equipment were predominantly offset by lower trust income, reflecting the sale of the trade processing business, and lower service charges on deposit accounts.
Mortgage banking revenues were $288 million for the nine-month period ended September 30, 2015, up 7% from $269 million in the year-earlier period. Residential mortgage banking revenues rose 2% to $220 million during the first nine months of 2015 from $216 million in the similar 2014 period. New commitments to originate residential real estate loans to be sold were $2.8 billion and $2.5 billion during the first nine months of 2015 and 2014, respectively. Realized gains from sales of residential real estate loans and loan servicing rights (net of the impact of costs associated with obligations to repurchase real estate loans originated for sale) and recognized unrealized gains and losses on residential real estate loans held for sale, commitments to originate loans for sale and commitments to sell loans totaled to gains of $60 million and $61 million during the nine-month periods ended September 30, 2015 and 2014, respectively. Residential mortgage banking revenues during the nine-month periods ended September 30, 2015 and 2014 were reduced by $4 million and $3 million, respectively, related to actual or anticipated settlements of repurchase obligations. Revenues from servicing residential mortgage loans for others were $160 million and $155 million for the first nine months of 2015 and 2014, respectively. That increase reflects
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higher sub-servicing revenues that totaled $91 million and $83 million in the 2015 and 2014 periods, respectively. Commercial mortgage banking revenues totaled $68 million and $53 million during the nine-month periods ended September 30, 2015 and 2014, respectively. That increase reflects higher revenues from loan origination and sales activities of $11 million and from loan servicing of $4 million. Commercial real estate loans originated for sale to others were $1.5 billion in the first nine months of 2015, compared with $1.1 billion in the comparable 2014 period.
Service charges on deposit accounts totaled $315 million and $322 million during the first nine months of 2015 and 2014, respectively. That decline resulted predominantly from lower consumer service charges, largely overdraft fees. Trust income aggregated $356 million during the nine-month period ended September 30, 2015, compared with $380 million a year earlier. That decline was largely attributable to $26 million of revenues in the first nine months of 2014 associated with the trade processing business that was sold in April 2015, compared with $9 million of similar revenues in the first quarter of 2015. Brokerage services income totaled $49 million during the first nine months of 2015, compared with $51 million in the year-earlier period. Trading account and foreign exchange activity resulted in gains of $21 million for each of the nine-month periods ended September 30, 2015 and 2014. M&Ts investment in BLG resulted in the recognition of losses of $11 million for the nine months ended September 30, 2015, compared with losses of $13 million in the year-earlier period.
Other revenues from operations were $359 million in the nine-month period ended September 30, 2015, compared with $297 million in the similar year-earlier period. That increase reflects the $45 million gain from the sale of the trade processing business and $15 million of gains from the sale of previously leased equipment. Similar gains were not significant during the first nine months of 2014. Also included in other revenues from operations during the nine-month periods ended September 30, 2015 and 2014 were the following significant components. Letter of credit and other credit-related fees totaled $92 million in 2015 and $96 million in 2014. Income from bank owned life insurance was $38 million and $37 million in 2015 and 2014, respectively. Merchant discount and credit card fees aggregated $77 million in 2015 and $70 million in 2014. Insurance-related sales commissions and other revenues were $29 million and $33 million in the first nine months of 2015 and 2014, respectively.
Other Expense
Effective January 1, 2015, M&T adopted amended guidance from the FASB for accounting for investments in qualified affordable housing projects under which the initial cost of such investments is amortized to income tax expense in proportion to the tax benefit received. The adoption of this accounting guidance did not have a significant effect on the Companys consolidated financial position or results of operations, but did result in the restatement of the consolidated financial statements for 2014 and earlier years to remove net costs associated with qualified affordable housing projects from other expense and include the amortization of the investments in income tax expense. As a result, the amortization included in income tax expense was $10 million and $31 million in the three- and nine-month periods ended September 30, 2015, respectively, and $14 million and $39 million in the three- and nine-month periods ended September 30, 2014, respectively. Similarly, losses removed from other costs of operations and amortization amounts now included in income tax expense were $14 million in the fourth quarter of 2014.
Reflecting the application of the new accounting guidance, other expense aggregated $654 million in the third quarter of 2015, down from $665 million in the year-earlier period and $697 million in 2015s second quarter.
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Included in those amounts are expenses considered by management to be nonoperating in nature consisting of amortization of core deposit and other intangible assets of $4 million and $7 million in the third quarters of 2015 and 2014, respectively, and $6 million in the second quarter of 2015. There were no merger-related expenses during those respective quarters. Exclusive of these nonoperating expenses, noninterest operating expenses were $650 million in the most recent quarter, compared with $658 million in the year-earlier quarter and $691 million in the second quarter of 2015. Reflected in operating expenses were contributions to The M&T Charitable Foundation of $40 million in the second quarter of 2015. There were no similar contributions in the recent quarter. Also reflected in the decline in noninterest operating expense in the recent quarter as compared with the year-earlier quarter were lower costs for professional services, partially offset by higher salaries and employee benefits expense.
Other expense for the first nine months of 2015 aggregated $2.04 billion, up $14 million or 1% from $2.02 billion in the year-earlier period. Included in those amounts are expenses considered to be nonoperating in nature consisting of amortization of core deposit and other intangible assets of $17 million in 2015 and $27 million in 2014. There were no merger-related expenses during those respective periods. Exclusive of these nonoperating expenses, noninterest operating expenses through the first nine months of 2015 increased $23 million or 1% from the corresponding 2014 period. The most significant factors contributing to that increase were higher costs for salaries and employee benefits and charitable contributions, partially offset by lower professional services costs and FDIC assessments. Table 2 provides a reconciliation of other expense to noninterest operating expense.
Salaries and employee benefits expense totaled $364 million in the recent quarter, compared with $349 million in the third quarter of 2014 and $362 million in the second quarter of 2015. For the first three quarters of 2015, salaries and employee benefits expense totaled $1.12 billion, up 5% from $1.06 billion in the year-earlier period. As compared with the 2014 periods, the three months and nine months ended September 30, 2015 reflect the impact of annual merit increases for employees and higher pension expense. Higher incentive compensation costs also contributed to the increased salaries and benefits expense in the nine-month period ended September 30, 2015 as compared with the similar 2014 period. The increased pension expense in the 2015 periods was predominantly attributable to an increase in the amortization of unrecognized actuarial losses. Cumulative unrecognized actuarial losses increased from $191 million at December 31, 2013 to $512 million at December 31, 2014 due predominantly to a 75 basis point reduction in the discount rate and revised mortality tables released in 2014 by the Society of Actuaries used to determine the pension benefit obligation. In accordance with GAAP, net unrecognized gains or losses that exceed ten percent of the greater of the projected benefit obligation or the market-related value of plan assets are required to be amortized over the expected service period of active employees, and are included as a component of net pension cost. Stock-based compensation totaled $11 million during each of the quarters ended September 30, 2015 and September 30, 2014, $17 million during the quarter ended June 30, 2015 and $55 million and $54 million for the nine-month periods ended September 30, 2015 and 2014, respectively. The number of full-time equivalent employees was 15,456 at September 30, 2015, 15,260 at September 30, 2014, 15,312 at December 31, 2014 and 15,380 at June 30, 2015.
Excluding the nonoperating expense items described earlier from each period, nonpersonnel operating expenses were $286 million in the third quarter of 2015, compared with $309 million and $329 million in the year-earlier quarter and the second quarter of 2015, respectively. On the same basis, those expenses were $905 million and $937 million during the first nine months of 2015 and 2014, respectively. The decrease in such operating
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expenses in the recent quarter when compared with last years third quarter reflects lower professional services costs. The decrease in nonpersonnel operating expenses in the recent quarter as compared with the second quarter of 2015 was predominantly due to the $40 million of charitable contributions made in the second quarter of 2015. The decline in nonpersonnel operating expenses in the first nine months of 2015 as compared with the corresponding 2014 period was predominantly attributable to lower expenses for professional services, litigation-related costs and FDIC assessments, offset in part, by higher charitable contributions. Professional services costs related to BSA/AML compliance, capital planning and stress testing, risk management and other operational initiatives were elevated throughout 2014. The higher litigation-related charges in 2014 were associated with pre-acquisition activities of M&Ts Wilmington Trust entities.
The efficiency ratio, or noninterest operating expenses (as defined above) divided by the sum of taxable-equivalent net interest income and noninterest income (exclusive of gains and losses from bank investment securities), measures the relationship of noninterest operating expenses to revenues. The Companys efficiency ratio was 57.1% during the recent quarter, improved from 58.4% and 58.2% in the year-earlier quarter and the second quarter of 2015, respectively. The efficiency ratios for the nine-month periods ended September 30, 2015 and 2014 were 58.9% and 59.8%, respectively.
Income Taxes
The provision for income taxes for the third quarter of 2015 was $154 million, compared with $150 million and $167 million in the year-earlier quarter and second quarter of 2015, respectively. The effective tax rates were 35.5%, 35.3% and 36.8% for the quarters ended September 30, 2015, September 30, 2014 and June 30, 2015, respectively. For the nine-month periods ended September 30, 2015 and 2014, the provision for income taxes was $455 million and $419 million, respectively, and the effective tax rates were 36.0% and 34.7%, respectively. As noted earlier, effective January 1, 2015 the Company adopted amended guidance from the FASB for accounting for investments in qualified affordable housing projects, which resulted in the restatement of the consolidated financial statements for 2014 and earlier years. The adoption of the guidance resulted in higher effective tax rates than existed prior to such adoption. The Company attributed $11 million of non-deductible goodwill to the basis of the trade processing business sold in April 2015, which reduced the recorded gain. Excluding the impact of the attribution of the non-deductible goodwill, the effective tax rate for the three-month period ended June 30, 2015 and the nine-month period ended September 30, 2015 would have been 35.9% and 35.7%, respectively. During the second quarter of 2014, the Company resolved with tax authorities previously uncertain tax positions associated with pre-acquisition activities of M&Ts Wilmington Trust entities, resulting in a reduction of the provision for income taxes of $8 million. Excluding that reduction of income tax expense, the effective tax rate would have been 35.4% for the nine-month period ended September 30, 2014. The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income, the level of income allocated to the various state and local jurisdictions where the Company operates, because tax rates differ among such jurisdictions, and the impact of any large but infrequently occurring items.
The Companys effective tax rate in future periods will be affected by the results of operations allocated to the various tax jurisdictions within which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Companys interpretations by any of various tax authorities that may examine tax returns filed by M&T or any of its subsidiaries.
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Capital
Shareholders equity was $12.9 billion at September 30, 2015, representing 13.21% of total assets, compared with $12.3 billion or 12.68% of total assets a year earlier and $12.3 billion or 12.76% at December 31, 2014.
Included in shareholders equity was preferred stock with financial statement carrying values of $1.2 billion at each of September 30, 2015, September 30, 2014 and December 31, 2014. Further information concerning M&Ts preferred stock can be found in note 6 of Notes to Financial Statements.
Common shareholders equity was $11.7 billion, or $87.67 per share, at September 30, 2015, compared with $11.1 billion, or $83.99 per share, at September 30, 2014 and $11.1 billion, or $83.88 per share, at December 31, 2014. Tangible equity per common share, which excludes goodwill and core deposit and other intangible assets and applicable deferred tax balances, was $61.22 at the end of the recent quarter, compared with $57.10 a year earlier and $57.06 at December 31, 2014. The Companys ratio of tangible common equity to tangible assets was 8.66% at September 30, 2015, compared with 8.05% a year earlier and 8.11% at December 31, 2014. Reconciliations of total common shareholders equity and tangible common equity and total assets and tangible assets as of each of those respective dates are presented in table 2.
Shareholders equity reflects accumulated other comprehensive income or loss, which includes the net after-tax impact of unrealized gains or losses on investment securities classified as available for sale, unrealized losses on held-to-maturity securities for which an other-than-temporary impairment charge has been recognized, gains or losses associated with interest rate swap agreements designated as cash flow hedges, foreign currency translation adjustments and adjustments to reflect the funded status of defined benefit pension and other postretirement plans. Net unrealized gains on investment securities reflected in shareholders equity, net of applicable tax effect, were $128 million, or $.96 per common share, at September 30, 2015, compared with net unrealized gains of $109 million, or $.83 per common share, at September 30, 2014 and $127 million, or $.96 per common share, at December 31, 2014. Information about unrealized gains and losses as of September 30, 2015 and December 31, 2014 is included in note 3 of Notes to Financial Statements.
Reflected in net unrealized gains at September 30, 2015 were pre-tax effect unrealized losses of $38 million on available-for-sale investment securities with an amortized cost of $2.1 billion and pre-tax effect unrealized gains of $274 million on securities with an amortized cost of $8.8 billion. The pre-tax effect unrealized losses reflect $18 million of losses on trust preferred securities issued by financial institutions having an amortized cost of $124 million and an estimated fair value of $106 million (generally considered Level 2 valuations). Further information concerning the Companys valuations of available-for-sale investment securities is provided in note 12 of Notes to Financial Statements.
The Company assesses impairment losses on privately issued mortgage-backed securities in the held-to-maturity portfolio by performing internal modeling to estimate bond-specific cash flows considering recent performance of the mortgage loan collateral and utilizing assumptions about future defaults and loss severity. These bond-specific cash flows also reflect the placement of the bond in the overall securitization structure and the remaining subordination levels. In total, at September 30, 2015 and December 31, 2014, the Company had in its held-to-maturity portfolio privately issued mortgage-backed securities with an amortized cost basis of $187 million and $202 million, respectively, and a fair value of $148 million and $158 million, respectively. At September 30, 2015, 86% of the mortgage-backed securities were in the most senior tranche of the securitization structure with 27% being independently rated as investment grade. The mortgage-backed securities are
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generally collateralized by residential and small-balance commercial real estate loans originated between 2004 and 2008 and had a weighted-average credit enhancement of 16% at September 30, 2015, calculated by dividing the remaining unpaid principal balance of bonds subordinate to the bonds owned by the Company plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure. All mortgage-backed securities in the held-to-maturity portfolio had a current payment status as of September 30, 2015. The weighted-average default percentage and loss severity assumptions utilized in the Companys internal modeling were 34% and 85%, respectively. The Company has concluded that as of September 30, 2015, its privately issued mortgage-backed securities were not other-than-temporarily impaired. Nevertheless, it is possible that adverse changes in the future performance of mortgage loan collateral underlying such securities could impact the Companys conclusions.
As of September 30, 2015, based on a review of each of the remaining securities in the investment securities portfolio, the Company concluded that the declines in the values of any securities containing an unrealized loss were temporary and that any additional other-than-temporary impairment charges were not appropriate. It is likely that the Company will be required to sell certain of its collateralized debt obligations backed by trust preferred securities held in the available-for-sale portfolio to comply with the provisions of the Volcker Rule. However, the amortized cost and fair value of those collateralized debt obligations were $24 million and $30 million, respectively, at September 30, 2015 and the Company did not expect that it would realize any material losses if it ultimately was required to sell such securities. As of that date, the Company did not intend to sell nor is it anticipated that it would be required to sell any of its other impaired securities, that is, where fair value is less than the cost basis of the security. The Company intends to continue to closely monitor the performance of its securities because changes in their underlying credit performance or other events could cause the cost basis of those securities to become other-than-temporarily impaired. However, because the unrealized losses on available-for-sale investment securities have generally already been reflected in the financial statement values for investment securities and shareholders equity, any recognition of an other-than-temporary decline in value of those investment securities would not have a material effect on the Companys consolidated financial condition. Any other-than-temporary impairment charge related to held-to-maturity securities would result in reductions in the financial statement values for investment securities and shareholders equity. Additional information concerning fair value measurements and the Companys approach to the classification of such measurements is included in note 12 of the Notes to Financial Statements.
Adjustments to reflect the funded status of defined benefit pension and other postretirement plans, net of applicable tax effect, reduced accumulated other comprehensive income by $289 million, or $2.17 per common share, at September 30, 2015, $95 million, or $.72 per common share, at September 30, 2014 and $306 million, or $2.31 per common share, at December 31, 2014.
Cash dividends declared on M&Ts common stock totaled $94 million in each of the two most recent quarters, compared with $93 million in the third quarter of 2014, and represented a quarterly dividend of $.70 per common share in each of those quarters. Common stock dividends during the nine-month periods ended September 30, 2015 and 2014 were $281 million and $278 million, respectively.
Cash dividends declared on preferred stock are detailed in the accompanying table. There were no cash dividends declared in the first quarter of 2014 on the Series E Preferred Stock issued in February 2014.
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PREFERRED STOCK DIVIDENDS
In thousands
1st Qtr. | 2nd Qtr. | 3rd Qtr. | Year- to-date |
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Series A 2015 |
$ | 3,666 | 3,666 | 3,666 | 10,998 | |||||||||||
Series A 2014 |
3,666 | 3,666 | 3,666 | 10,998 | ||||||||||||
Series C 2015 |
2,414 | 2,414 | 2,414 | 7,242 | ||||||||||||
Series C 2014 |
2,414 | 2,414 | 2,414 | 7,242 | ||||||||||||
Series D 2015 |
8,594 | 8,593 | 8,594 | 25,781 | ||||||||||||
Series D 2014 |
8,594 | 8,593 | 8,594 | 25,781 | ||||||||||||
Series E 2015 |
5,644 | 5,644 | 5,644 | 16,932 | ||||||||||||
Series E 2014 |
| 5,770 | 5,769 | 11,539 | ||||||||||||
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Totals 2015 |
$ | 20,318 | 20,317 | 20,318 | 60,953 | |||||||||||
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Totals 2014 |
$ | 14,674 | 20,443 | 20,443 | 55,560 | |||||||||||
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The Company did not repurchase any shares of its common stock during 2014 or the first nine months of 2015.
M&T and its subsidiary banks are required to comply with applicable capital adequacy standards established by the federal banking agencies. In July 2013, the Federal Reserve Board, the OCC and the FDIC approved New Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. These rules went into effect as to M&T and its subsidiary banks on January 1, 2015, subject to phase-in periods for certain components and other provisions.
The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including M&T and its subsidiaries, M&T Bank and Wilmington Trust, N.A., as compared to the U.S. general risk-based capital rules that were applicable to the Company through December 31, 2014. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions regulatory capital ratios. In addition, the New Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies rules.
Among other matters, the New Capital Rules: (i) introduce a new capital measure called Common Equity Tier 1 (CET1) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to the previous regulations. Under the New Capital Rules, for most banking organizations, including M&T, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the New Capital Rules specific requirements.
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Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 are as follows:
| 4.5% CET1 to risk-weighted assets; |
| 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; |
| 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and |
| 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage ratio). |
Pursuant to the New Capital Rules, non-advanced approaches banking organizations, including M&T, may make a one-time permanent election to exclude the effects of certain accumulated other comprehensive income or loss items reflected in shareholders equity under U.S. GAAP. M&T made that election during the first quarter of 2015. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies Tier 1 capital, subject to phase-out in the case of bank holding companies, such as M&T, that had $15 billion or more in total consolidated assets as of December 31, 2009. As a result, beginning in 2015 25% of M&Ts trust preferred securities became includable in Tier 1 capital, and in 2016, none of M&Ts trust preferred securities will be includable in Tier 1 capital. Trust preferred securities no longer included in M&Ts Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out and irrespective of whether such securities otherwise meet the revised definition of Tier 2 capital set forth in the New Capital Rules. A detailed discussion of the new regulatory capital rules is included in Part I, Item 1 of Form 10-K for the year ended December 31, 2014.
The regulatory capital ratios of the Company, M&T Bank and Wilmington Trust, N.A., as of September 30, 2015 are presented in the accompanying table.
REGULATORY CAPITAL RATIOS
September 30, 2015
M&T | M&T | Wilmington | ||||||||||
(Consolidated) | Bank | Trust, N.A. | ||||||||||
Common equity Tier 1 |
10.08 | % | 10.54 | % | 88.19 | % | ||||||
Tier 1 capital |
11.94 | % | 10.54 | % | 88.19 | % | ||||||
Total capital |
14.70 | % | 13.06 | % | 88.94 | % | ||||||
Tier 1 leverage |
10.31 | % | 9.11 | % | 17.36 | % |
On March 12, 2015, M&T announced that the Federal Reserve did not object to M&Ts proposed 2015 Capital Plan. Accordingly, M&T may maintain a quarterly common stock dividend of $.70 per share; continue to pay dividends and interest on other equity and debt instruments included in regulatory capital, including preferred stock, trust preferred securities and subordinated debt that were outstanding at December 31, 2014, consistent with the contractual terms of those instruments; repurchase up to $200 million of common shares during the first half of 2016; and redeem or repurchase up to $310 million of trust preferred securities. As previously noted, those latter securities were redeemed in April 2015. Common and preferred dividends are subject to approval by M&Ts Board of Directors in the ordinary course of business.
Segment Information
As required by GAAP, the Companys reportable segments have been determined based upon its internal profitability reporting system, which is organized by
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strategic business unit. Financial information about the Companys segments is presented in note 14 of Notes to Financial Statements. During 2015, certain methodology and organizational changes were made and, accordingly, the financial information for the Companys reportable segments for 2014 has been restated to conform with the methods and assumptions used in 2015. As described in note 14 of Notes to Financial Statements, the methodology changes were largely the result of updated funds transfer pricing and various cost allocations. Additionally, the segment financial data also reflect the Companys adoption of amended guidance for accounting for investments in qualified affordable housing projects.
The Business Banking segment earned $24 million in the third quarter of 2015, compared with $25 million in each of the three-month periods ended September 30, 2014 and June 30, 2015. As compared with the year-earlier quarter, a decrease in net interest income of $2 million was offset, in part, by higher merchant discount and credit card fees of $1 million. The lower net interest income reflected a narrowing of the net interest margin. The modest decline in net income as compared with the second quarter of 2015 reflected a $2 million increase in the provision for credit losses, due to higher net charge-offs, partially offset by an increase in merchant discount and credit card fees of $1 million. Net income recorded by the Business Banking segment totaled $74 million in each of the nine-month periods ended September 30, 2015 and 2014. As compared with the 2014 period, a $4 million decrease in the provision for credit losses, due to lower net charge-offs, a $3 million increase in merchant discount and credit card fees and lower costs for FDIC assessments of $1 million were offset by a decline in net interest income of $8 million. The decline in net interest income resulted from a narrowing of the net interest margin offset, in part, by an increase in average outstanding deposit balances of $543 million.
The Commercial Banking segment contributed net income of $108 million in each of the two most recent quarters, compared with $101 million in the third quarter of 2014. The recent quarters 8% improvement as compared with the year-earlier quarter reflected increased gains on sales of previously leased equipment of $13 million and a $7 million increase in net interest income, partially offset by a $9 million rise in the provision for credit losses, due to higher net charge-offs. The higher net interest income was due predominantly to higher average outstanding loan balances of $1.2 billion. As compared with the second quarter of 2015, increased gains on sales of previously leased equipment of $12 million and a $6 million increase in net interest income were partially offset by an $11 million increase in the provision for credit losses, due to higher net charge-offs, and lower credit-related fees of $7 million. The higher net interest income reflected a widening of the net interest margin on loans and a $665 million increase in average outstanding deposit balances. Year-to-date net income for this segment totaled $313 million in 2015 and $304 million in 2014. The improved performance in 2015 resulted largely from increased gains on sales of previously leased equipment of $15 million and an $8 million rise in net interest income, partially offset by a $6 million increase in the provision for credit losses. The higher net interest income reflected growth in average outstanding loan and deposit balances of $1.3 billion and $680 million, respectively.
The Commercial Real Estate segment recorded net income of $85 million during the quarter ended September 30, 2015, compared with $79 million earned in the year-earlier quarter and $83 million in the second quarter of 2015. The recent quarters 8% rise in net income as compared with 2014s third quarter was largely due to a $9 million increase in net interest income, predominantly resulting from higher average outstanding loan balances of $1.7 billion. The increase in net income as compared with the second quarter of
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2015 reflected an increase in net interest income and a decrease in the provision for credit losses, partially offset by a decline in mortgage banking revenues, the result of lower origination and sales activities. The higher net interest income resulted from increases in average outstanding loan balances of $177 million. Net income for the Commercial Real Estate segment was $251 million and $230 million for the first nine months of 2015 and 2014, respectively. That improvement reflects an $18 million rise in net interest income, a $13 million increase in mortgage banking revenues and a $3 million decrease in the provision for credit losses. The higher net interest income resulted largely from increases in average outstanding loan and deposit balances of $1.6 billion and $345 million, respectively, partially offset by a narrowing of the net interest margin.
The Discretionary Portfolio segment contributed net income of $5 million in the third quarter of 2015, compared with $12 million in the year-earlier quarter and $11 million in the second quarter of 2015. The decline in net income as compared with the year-earlier period was largely due to a $10 million decline in net interest income, partially offset by a $2 million decrease in the provision for credit losses. The lower net interest income reflected a 23 basis point narrowing of the net interest margin on investment securities resulting from the Companys allocation of funding charges associated with those assets. The recent quarters unfavorable performance as compared with the immediately preceding quarter reflected a $3 million decrease in bank owned life insurance revenues and a $4 million decrease in net interest income, resulting from a narrowing of the net interest margin on investment securities and loans. Net income recorded by the Discretionary Portfolio segment totaled $22 million for the first nine months of 2015, compared with $39 million earned in the corresponding 2014 period. The decline was predominantly due to lower net interest income of $30 million that resulted from a 31 basis point narrowing of the net interest margin on investment securities.
Net contribution from the Residential Mortgage Banking segment totaled $21 million in the recent quarter, compared with $23 million in the third quarter of 2014 and $25 million in the second quarter of 2015. The recent quarters decline in net income as compared with the year-earlier quarter reflected a $6 million decrease in revenues from servicing residential real estate loans, largely related to sub-servicing activities, partially offset by lower amortization of capitalized servicing rights of $4 million (reflecting lower prepayment trends). The decline in net income in 2015s third quarter as compared with the immediately preceding quarter reflected decreases in revenues from servicing residential real estate loans of $5 million and in revenues from mortgage origination and sales activities (including intersegment revenues) of $3 million. Year-to-date net income recorded by the Residential Mortgage Banking segment totaled $75 million in 2015 and $65 million in 2014. The improved performance in 2015 was attributable to: an $8 million increase in revenues from mortgage origination and sales activities (including intersegment revenues) due to higher origination volumes; a $4 million rise in revenues from servicing residential real estate loans, predominantly the result of increased sub-servicing activities; and lower amortization of capitalized servicing rights of $15 million. Partially offsetting those favorable factors were higher professional services and personnel-related costs of $2 million each and increased servicing costs.
Net income earned by the Retail Banking segment totaled $65 million in the quarter ended September 30, 2015, compared with $72 million in the year-earlier period and $69 million in the second quarter of 2015. The decline in net income as compared with the year-earlier quarter reflects a $3 million decrease in net interest income, a $2 million reduction in fees earned for providing deposit account services and an increase in centrally-allocated technology-related operating expenses. The lower net interest income resulted
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from a narrowing of the net interest margin, partially offset by an increase in average outstanding loans of $543 million. As compared with the immediately preceding quarter, a $4 million increase in the provision for credit losses, resulting from higher net charge-offs, and higher equipment and occupancy costs of $3 million were partially offset by a $2 million increase in net interest income. The increase in net interest income resulted from higher average outstanding loan balances of $209 million, partially offset by lower average outstanding deposit balances of $331 million. Year-to-date net income for this segment totaled $202 million in 2015 and $214 million in 2014. The year-over-year decline was due to a $9 million decrease in net interest income, a $5 million reduction in fees earned for providing deposit account services, a $4 million reduction in servicing revenues related to securitized automobile loans, and higher allocated expenses, largely compliance and technology-related. Those factors were offset, in part, by lower personnel-related and equipment and occupancy costs. The decline in net interest income resulted from a narrowing of the net interest margin, partially offset by a $594 million increase in average outstanding loan balances.
The All Other category encompasses other activities of the Company that are not directly attributable to the reported segments. Reflected in this category are the amortization of core deposit and other intangible assets resulting from the acquisitions of financial institutions, M&Ts share of the operating losses of BLG, merger-related gains and expenses related to acquisitions, and the net impact of the Companys allocation methodologies for internal transfers for funding charges and credits associated with the earning assets and interest-bearing liabilities of the Companys reportable segments and the provision for credit losses. The All Other category also includes the trust income of the Company that reflects the ICS and WAS business activities. The various components of the All Other category resulted in net losses of $28 million in the quarter ended September 30, 2015, $36 million in the third quarter of 2014 and $34 million in the second quarter of 2015. The most significant factors contributing to the reduced net loss in the recent quarter as compared to the year-earlier period include a decrease in professional services expenses of $18 million and the favorable impact from the Companys allocation methodologies for internal transfers for funding charges and credits associated with earning assets and interest-bearing liabilities of the Companys reportable segments. Those favorable factors were largely offset by increases in personnel-related expenses of $13 million and a decline in trust income of $15 million, largely due to the impact of the sale of the trade processing business within the retirement services division of ICS in the second quarter of 2015. Results for the second quarter of 2015 reflected a $45 million pre-tax gain related to that sale, partially offset by $40 million of tax-deductible cash contributions to The M&T Charitable Foundation. The after-tax impact of those two items lowered net income by approximately $1 million. Furthermore, as compared with the second quarter of 2015, decreases during the recent quarter in personnel-related expenses of $3 million and the favorable impact from the Companys allocation methodologies for internal transfers for funding charges and credits associated with earning assets and interest-bearing liabilities of the Companys reportable segments were partially offset by decreases in trust income of $5 million, largely attributable to seasonal tax preparation fees in 2015s second quarter. The All Other category had a net loss of $129 million in the first nine months of 2015, compared with $137 million in 2014. The favorable impact from lower professional services costs and the Companys allocation methodologies was offset, in part, by increased personnel-related expenses and a decline in trust income, largely due to the impact of the sold trade processing business.
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Recent Accounting Developments
As previously noted, the Company adopted amended accounting guidance for investments in qualified affordable housing projects under which the initial cost of investments in qualified affordable housing projects is amortized in proportion to the tax credits and other tax benefits received from such projects and recognized in the income statement as a component of income tax expense. As required, the guidance was applied retrospectively to all periods presented. The adoption of this guidance did not have a significant effect on the Companys consolidated financial position or results of operations, but did result in the restatement of the consolidated statement of income for the three-month and nine-month periods ended September 30, 2014 to remove $14 million and $39 million, respectively, of losses associated with qualified affordable housing projects from other costs of operations and include the amortization of the initial cost of the investment in income tax expense. The Company amortized $10 million and $31 million of its investments in qualified affordable housing projects to income tax expense during the three-month and nine-month periods ended September 30, 2015, respectively.
In the first quarter of 2015, the Company adopted amended accounting guidance from the FASB related to the classification of certain government-guaranteed mortgage loans upon foreclosure. This guidance requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based upon the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The adoption of this guidance did not have a significant effect on the Companys consolidated financial position or results of operations.
Effective January 1, 2015, the Company adopted amended accounting guidance for repurchase-to-maturity transactions and repurchase financings. The adoption had no impact on the Companys consolidated financial position or results of operations. The Company has made the required disclosures in note 5 of Notes to Financial Statements.
In January 2015, the Company also adopted amended accounting and disclosure guidance for reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amended guidance clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amended guidance also requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The Companys adoption of this guidance on January 1, 2015 did not have a significant effect on the Companys consolidated financial position or results of operations. The Company has made the required disclosures in note 4 of Notes to Financial Statements.
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In September 2015, the FASB issued amended guidance for measurement-period adjustments related to business combinations. The amended guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer will be required to record, in the same periods financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. This guidance is effective for adjustments to provisional amounts that occur in annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company is still evaluating the impact the guidance could have on its consolidated financial statements.
In May 2015, the FASB issued amended disclosure guidance for investments in certain entities that calculate net asset value per share (or its equivalent). The amended guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Instead, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect the amended guidance to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued amended accounting guidance for debt issuance costs. The amended guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect a material change in the presentation of its consolidated financial position upon adoption of this amended guidance.
In February 2015, the FASB issued amended accounting guidance relating to the consolidation of variable interest entities to modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and to eliminate the presumption that a general partner should consolidate a limited partnership. The amended guidance also eliminates certain conditions in the assessment of whether fees paid by a legal entity to a decision maker or a service provider represent a variable interest in the legal entity and reduces the extent to which related party arrangements cause an entity to be considered a primary beneficiary. The new guidance eliminates the indefinite deferral of existing consolidation guidance for certain investment funds, but provides a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. This guidance is effective for annual and interim periods within those annual periods beginning after December 15, 2015. The Company is still evaluating the impact the guidance could have on its consolidated financial statements.
In June 2014, the FASB issued amended accounting guidance for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amended guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes
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probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 31, 2015, with earlier adoption permitted. The Company does not expect the amended guidance to have a material impact on its consolidated financial position or results of operations.
In May 2014, the FASB issued amended accounting and disclosure guidance for revenue from contracts with customers. The core principle of the accounting guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amended disclosure guidance requires sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of this guidance by one year. The amended guidance is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The guidance should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. The Company is still evaluating the impact the guidance could have on its consolidated financial statements.
Forward-Looking Statements
Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain forward-looking statements that are based on current expectations, estimates and projections about the Companys business, managements beliefs and assumptions made by management. Forward-looking statements are typically identified by words such as believe, expect, anticipate, intend, target, estimate, continue, positions, prospects or potential, by future conditional verbs such as will, would, should, could, or may, or by variations of such words or by similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (Future Factors) which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Forward-looking statements speak only as of the date they are made and the Company assumes no duty to update forward-looking statements.
Future Factors include changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity; prepayment speeds, loan originations, credit losses and market values of loans, collateral securing loans and other assets; sources of liquidity; common shares outstanding; common stock price volatility; fair value of and
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number of stock-based compensation awards to be issued in future periods; the impact of changes in market values on trust-related revenues; legislation and/or regulation affecting the financial services industry as a whole, and M&T and its subsidiaries individually or collectively, including tax legislation or regulation; regulatory supervision and oversight, including monetary policy and capital requirements; changes in accounting policies or procedures as may be required by the FASB or regulatory agencies; increasing price and product/service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products/services; containing costs and expenses; governmental and public policy changes; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; the outcome of pending and future litigation and governmental proceedings, including tax-related examinations and other matters; continued availability of financing; financial resources in the amounts, at the times and on the terms required to support M&T and its subsidiaries future businesses; and material differences in the actual financial results of merger, acquisition and investment activities compared with M&Ts initial expectations, including the full realization of anticipated cost savings and revenue enhancements.
These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic and political conditions, either nationally or in the states in which M&T and its subsidiaries do business, including interest rate and currency exchange rate fluctuations, changes and trends in the securities markets, and other Future Factors.
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M&T BANK CORPORATION AND SUBSIDIARIES
Table 1
QUARTERLY TRENDS
2015 Quarters | 2014 Quarters | |||||||||||||||||||||||||||
Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||
Earnings and dividends |
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Amounts in thousands, except per share |
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Interest income (taxable-equivalent basis) |
$ | 776,274 | 766,374 | 743,925 | 762,619 | 748,864 | 740,139 | 728,897 | ||||||||||||||||||||
Interest expense |
77,199 | 77,226 | 78,499 | 74,772 | 73,964 | 65,176 | 66,519 | |||||||||||||||||||||
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Net interest income |
699,075 | 689,148 | 665,426 | 687,847 | 674,900 | 674,963 | 662,378 | |||||||||||||||||||||
Less: provision for credit losses |
44,000 | 30,000 | 38,000 | 33,000 | 29,000 | 30,000 | 32,000 | |||||||||||||||||||||
Other income |
439,699 | 497,027 | 440,203 | 451,643 | 451,111 | 456,412 | 420,107 | |||||||||||||||||||||
Less: other expense |
653,816 | 696,628 | 686,375 | 666,221 | 665,359 | 667,660 | 690,234 | |||||||||||||||||||||
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Income before income taxes |
440,958 | 459,547 | 381,254 | 440,269 | 431,652 | 433,715 | 360,251 | |||||||||||||||||||||
Applicable income taxes |
154,309 | 166,839 | 133,803 | 156,713 | 150,467 | 143,530 | 125,289 | |||||||||||||||||||||
Taxable-equivalent adjustment |
6,248 | 6,020 | 5,838 | 6,007 | 5,841 | 5,849 | 5,945 | |||||||||||||||||||||
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Net income |
$ | 280,401 | 286,688 | 241,613 | 277,549 | 275,344 | 284,336 | 229,017 | ||||||||||||||||||||
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Net income available to common shareholders-diluted |
$ | 257,346 | 263,481 | 218,837 | 254,239 | 251,917 | 260,695 | 211,731 | ||||||||||||||||||||
Per common share data |
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Basic earnings |
$ | 1.94 | 1.99 | 1.66 | 1.93 | 1.92 | 1.99 | 1.63 | ||||||||||||||||||||
Diluted earnings |
1.93 | 1.98 | 1.65 | 1.92 | 1.91 | 1.98 | 1.61 | |||||||||||||||||||||
Cash dividends |
$ | .70 | .70 | .70 | .70 | .70 | .70 | .70 | ||||||||||||||||||||
Average common shares outstanding |
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Basic |
132,630 | 132,356 | 132,049 | 131,450 | 131,265 | 130,856 | 130,212 | |||||||||||||||||||||
Diluted |
133,376 | 133,116 | 132,769 | 132,278 | 132,128 | 131,828 | 131,126 | |||||||||||||||||||||
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Performance ratios, annualized |
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Return on |
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Average assets |
1.13 | % | 1.18 | % | 1.02 | % | 1.12 | % | 1.17 | % | 1.27 | % | 1.07 | % | ||||||||||||||
Average common shareholders equity |
8.93 | % | 9.37 | % | 7.99 | % | 9.10 | % | 9.18 | % | 9.79 | % | 8.22 | % | ||||||||||||||
Net interest margin on average earning assets (taxable-equivalent basis) |
3.14 | % | 3.17 | % | 3.17 | % | 3.10 | % | 3.23 | % | 3.40 | % | 3.52 | % | ||||||||||||||
Nonaccrual loans to total loans and leases, net of unearned discount |
1.15 | % | 1.17 | % | 1.18 | % | 1.20 | % | 1.29 | % | 1.36 | % | 1.39 | % | ||||||||||||||
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Net operating (tangible) results (a) |
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Net operating income (in thousands) |
$ | 282,907 | 290,341 | 245,776 | 281,929 | 279,838 | 289,974 | 235,162 | ||||||||||||||||||||
Diluted net operating income per common share |
1.95 | 2.01 | 1.68 | 1.95 | 1.94 | 2.02 | 1.66 | |||||||||||||||||||||
Annualized return on |
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Average tangible assets |
1.18 | % | 1.24 | % | 1.08 | % | 1.18 | % | 1.24 | % | 1.35 | % | 1.15 | % | ||||||||||||||
Average tangible common shareholders equity |
12.98 | % | 13.76 | % | 11.90 | % | 13.55 | % | 13.80 | % | 14.92 | % | 12.76 | % | ||||||||||||||
Efficiency ratio (b) |
57.05 | % | 58.23 | % | 61.46 | % | 57.84 | % | 58.44 | % | 58.20 | % | 62.83 | % | ||||||||||||||
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Balance sheet data |
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In millions, except per share |
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Average balances |
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Total assets (c) |
$ | 98,515 | 97,598 | 95,892 | 98,644 | 93,245 | 89,873 | 86,665 | ||||||||||||||||||||
Total tangible assets (c) |
94,989 | 94,067 | 92,346 | 95,093 | 89,689 | 86,311 | 83,096 | |||||||||||||||||||||
Earning assets |
88,446 | 87,333 | 85,212 | 87,965 | 82,776 | 79,556 | 76,288 | |||||||||||||||||||||
Investment securities |
14,441 | 14,195 | 13,376 | 12,978 | 12,780 | 10,959 | 9,265 | |||||||||||||||||||||
Loans and leases, net of unearned discount |
67,849 | 67,670 | 66,587 | 65,767 | 64,763 | 64,343 | 63,763 | |||||||||||||||||||||
Deposits |
73,821 | 72,958 | 71,698 | 75,515 | 70,772 | 69,659 | 67,327 | |||||||||||||||||||||
Common shareholders equity (c) |
11,555 | 11,404 | 11,227 | 11,211 | 11,015 | 10,808 | 10,576 | |||||||||||||||||||||
Tangible common shareholders equity (c) |
8,029 | 7,873 | 7,681 | 7,660 | 7,459 | 7,246 | 7,007 | |||||||||||||||||||||
At end of quarter |
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Total assets (c) |
$ | 97,797 | 97,080 | 98,378 | 96,686 | 97,228 | 90,835 | 88,530 | ||||||||||||||||||||
Total tangible assets (c) |
94,272 | 93,552 | 94,834 | 93,137 | 93,674 | 87,276 | 84,965 | |||||||||||||||||||||
Earning assets |
87,807 | 86,990 | 87,959 | 86,278 | 86,751 | 80,062 | 77,950 | |||||||||||||||||||||
Investment securities |
14,495 | 14,752 | 14,393 | 12,994 | 13,348 | 12,120 | 10,364 | |||||||||||||||||||||
Loans and leases, net of unearned discount |
68,540 | 68,131 | 67,099 | 66,669 | 65,572 | 64,748 | 64,135 | |||||||||||||||||||||
Deposits |
72,945 | 72,630 | 73,594 | 73,582 | 74,342 | 69,829 | 68,699 | |||||||||||||||||||||
Common shareholders equity, net of undeclared cumulative preferred dividends (c) |
11,687 | 11,433 | 11,294 | 11,102 | 11,099 | 10,934 | 10,652 | |||||||||||||||||||||
Tangible common shareholders equity (c) |
8,162 | 7,905 | 7,750 | 7,553 | 7,545 | 7,375 | 7,087 | |||||||||||||||||||||
Equity per common share |
87.67 | 85.90 | 84.95 | 83.88 | 83.99 | 82.86 | 81.05 | |||||||||||||||||||||
Tangible equity per common share |
61.22 | 59.39 | 58.29 | 57.06 | 57.10 | 55.89 | 53.92 | |||||||||||||||||||||
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Market price per common share |
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High |
$ | 134.00 | 128.70 | 129.58 | 128.96 | 128.69 | 125.90 | 123.04 | ||||||||||||||||||||
Low |
111.86 | 117.86 | 111.78 | 112.42 | 118.51 | 116.10 | 109.16 | |||||||||||||||||||||
Closing |
121.95 | 124.93 | 127.00 | 125.62 | 123.29 | 124.05 | 121.30 | |||||||||||||||||||||
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(a) | Excludes amortization and balances related to goodwill and core deposit and other intangible assets and merger-related gains and expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. A reconciliation of net income and net operating income appears in Table 2. |
(b) | Excludes impact of merger-related gains and expenses and net securities transactions. |
(c) | The difference between total assets and total tangible assets, and common shareholders equity and tangible common shareholders equity, represents goodwill, core deposit and other intangible assets, net of applicable deferred tax balances. A reconciliation of such balances appears in Table 2. |
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M&T BANK CORPORATION AND SUBSIDIARIES
Table 2
RECONCILIATION OF QUARTERLY GAAP TO NON-GAAP MEASURES
2015 Quarters | 2014 Quarters | |||||||||||||||||||||||||||
Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||
Income statement data |
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In thousands, except per share |
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Net income |
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Net income |
$ | 280,401 | 286,688 | 241,613 | 277,549 | 275,344 | 284,336 | 229,017 | ||||||||||||||||||||
Amortization of core deposit and other intangible assets (a) |
2,506 | 3,653 | 4,163 | 4,380 | 4,494 | 5,638 | 6,145 | |||||||||||||||||||||
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Net operating income |
$ | 282,907 | 290,341 | 245,776 | 281,929 | 279,838 | 289,974 | 235,162 | ||||||||||||||||||||
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Earnings per common share |
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Diluted earnings per common share |
$ | 1.93 | 1.98 | 1.65 | 1.92 | 1.91 | 1.98 | 1.61 | ||||||||||||||||||||
Amortization of core deposit and other intangible assets (a) |
.02 | .03 | .03 | .03 | .03 | .04 | .05 | |||||||||||||||||||||
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Diluted net operating earnings per common share |
$ | 1.95 | 2.01 | 1.68 | 1.95 | 1.94 | 2.02 | 1.66 | ||||||||||||||||||||
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Other expense |
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Other expense |
$ | 653,816 | 696,628 | 686,375 | 666,221 | 665,359 | 667,660 | 690,234 | ||||||||||||||||||||
Amortization of core deposit and other intangible assets |
(4,090 | ) | (5,965 | ) | (6,793 | ) | (7,170 | ) | (7,358 | ) | (9,234 | ) | (10,062 | ) | ||||||||||||||
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Noninterest operating expense |
$ | 649,726 | 690,663 | 679,582 | 659,051 | 658,001 | 658,426 | 680,172 | ||||||||||||||||||||
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Efficiency ratio |
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Noninterest operating expense (numerator) |
$ | 649,726 | 690,663 | 679,582 | 659,051 | 658,001 | 658,426 | 680,172 | ||||||||||||||||||||
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Taxable-equivalent net interest income |
699,075 | 689,148 | 665,426 | 687,847 | 674,900 | 674,963 | 662,378 | |||||||||||||||||||||
Other income |
439,699 | 497,027 | 440,203 | 451,643 | 451,111 | 456,412 | 420,107 | |||||||||||||||||||||
Less: Loss on bank investment securities |
| (10 | ) | (98 | ) | | | | | |||||||||||||||||||
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Denominator |
$ | 1,138,774 | 1,186,185 | 1,105,727 | 1,139,490 | 1,126,011 | 1,131,375 | 1,082,485 | ||||||||||||||||||||
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|
|||||||||||||||
Efficiency ratio |
57.05 | % | 58.23 | % | 61.46 | % | 57.84 | % | 58.44 | % | 58.20 | % | 62.83 | % | ||||||||||||||
|
|
|
|
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|
|
|||||||||||||||
Balance sheet data |
||||||||||||||||||||||||||||
In millions |
||||||||||||||||||||||||||||
Average assets |
||||||||||||||||||||||||||||
Average assets |
$ | 98,515 | 97,598 | 95,892 | 98,644 | 93,245 | 89,873 | 86,665 | ||||||||||||||||||||
Goodwill |
(3,513 | ) | (3,514 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | ||||||||||||||
Core deposit and other intangible assets |
(20 | ) | (25 | ) | (31 | ) | (38 | ) | (45 | ) | (53 | ) | (64 | ) | ||||||||||||||
Deferred taxes |
7 | 8 | 10 | 12 | 14 | 16 | 20 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Average tangible assets |
$ | 94,989 | 94,067 | 92,346 | 95,093 | 89,689 | 86,311 | 83,096 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Average common equity |
||||||||||||||||||||||||||||
Average total equity |
$ | 12,787 | 12,636 | 12,459 | 12,442 | 12,247 | 12,039 | 11,648 | ||||||||||||||||||||
Preferred stock |
(1,232 | ) | (1,232 | ) | (1,232 | ) | (1,231 | ) | (1,232 | ) | (1,231 | ) | (1,072 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Average common equity |
11,555 | 11,404 | 11,227 | 11,211 | 11,015 | 10,808 | 10,576 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Goodwill |
(3,513 | ) | (3,514 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | ||||||||||||||
Core deposit and other intangible assets |
(20 | ) | (25 | ) | (31 | ) | (38 | ) | (45 | ) | (53 | ) | (64 | ) | ||||||||||||||
Deferred taxes |
7 | 8 | 10 | 12 | 14 | 16 | 20 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Average tangible common equity |
$ | 8,029 | 7,873 | 7,681 | 7,660 | 7,459 | 7,246 | 7,007 | ||||||||||||||||||||
|
|
|
|
|
|
|
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|
|
|
|
|
|||||||||||||||
At end of quarter |
||||||||||||||||||||||||||||
Total assets |
||||||||||||||||||||||||||||
Total assets |
$ | 97,797 | 97,080 | 98,378 | 96,686 | 97,228 | 90,835 | 88,530 | ||||||||||||||||||||
Goodwill |
(3,513 | ) | (3,513 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | ||||||||||||||
Core deposit and other intangible assets |
(18 | ) | (22 | ) | (28 | ) | (35 | ) | (42 | ) | (49 | ) | (59 | ) | ||||||||||||||
Deferred taxes |
6 | 7 | 9 | 11 | 13 | 15 | 19 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total tangible assets |
$ | 94,272 | 93,552 | 94,834 | 93,137 | 93,674 | 87,276 | 84,965 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total common equity |
||||||||||||||||||||||||||||
Total equity |
$ | 12,922 | 12,668 | 12,528 | 12,336 | 12,333 | 12,169 | 11,887 | ||||||||||||||||||||
Preferred stock |
(1,232 | ) | (1,232 | ) | (1,232 | ) | (1,231 | ) | (1,232 | ) | (1,232 | ) | (1,232 | ) | ||||||||||||||
Undeclared dividendscumulative preferred stock |
(3 | ) | (3 | ) | (2 | ) | (3 | ) | (2 | ) | (3 | ) | (3 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Common equity, net of undeclared cumulative preferred dividends |
11,687 | 11,433 | 11,294 | 11,102 | 11,099 | 10,934 | 10,652 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Goodwill |
(3,513 | ) | (3,513 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | (3,525 | ) | ||||||||||||||
Core deposit and other intangible assets |
(18 | ) | (22 | ) | (28 | ) | (35 | ) | (42 | ) | (49 | ) | (59 | ) | ||||||||||||||
Deferred taxes |
6 | 7 | 9 | 11 | 13 | 15 | 19 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total tangible common equity |
$ | 8,162 | 7,905 | 7,750 | 7,553 | 7,545 | 7,375 | 7,087 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
(a) After any related tax effect. |
-99-
M&T BANK CORPORATION AND SUBSIDIARIES
Table 3
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
2015 Third Quarter | 2015 Second Quarter | 2015 First Quarter | ||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
Average balance in millions; interest in thousands |
Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Earning assets |
||||||||||||||||||||||||||||||||||||
Loans and leases, net of unearned discount* |
||||||||||||||||||||||||||||||||||||
Commercial, financial, etc. |
$ | 19,939 | $ | 161,709 | 3.22 | % | 19,973 | 158,109 | 3.18 | % | 19,457 | 153,866 | 3.21 | % | ||||||||||||||||||||||
Real estatecommercial |
28,309 | 302,626 | 4.18 | 28,208 | 298,565 | 4.19 | 27,596 | 288,121 | 4.18 | |||||||||||||||||||||||||||
Real estateconsumer |
8,348 | 87,047 | 4.17 | 8,447 | 88,473 | 4.19 | 8,572 | 88,850 | 4.15 | |||||||||||||||||||||||||||
Consumer |
11,253 | 126,369 | 4.46 | 11,042 | 122,812 | 4.46 | 10,962 | 121,366 | 4.49 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total loans and leases, net |
67,849 | 677,751 | 3.96 | 67,670 | 667,959 | 3.96 | 66,587 | 652,203 | 3.97 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Interest-bearing deposits at banks |
6,060 | 3,852 | .25 | 5,326 | 3,351 | .25 | 5,073 | 3,118 | .25 | |||||||||||||||||||||||||||
Federal funds sold and agreements to resell securities |
| | | 39 | 9 | .10 | 97 | 24 | .10 | |||||||||||||||||||||||||||
Trading account |
96 | 125 | .52 | 103 | 239 | .92 | 79 | 565 | 2.87 | |||||||||||||||||||||||||||
Investment securities** |
||||||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies |
13,548 | 86,152 | 2.52 | 13,265 | 83,356 | 2.52 | 12,437 | 78,313 | 2.55 | |||||||||||||||||||||||||||
Obligations of states and political subdivisions |
138 | 1,398 | 4.03 | 149 | 1,607 | 4.32 | 159 | 1,967 | 5.04 | |||||||||||||||||||||||||||
Other |
755 | 6,996 | 3.68 | 781 | 9,853 | 5.06 | 780 | 7,735 | 4.02 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total investment securities |
14,441 | 94,546 | 2.60 | 14,195 | 94,816 | 2.68 | 13,376 | 88,015 | 2.67 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total earning assets |
88,446 | 776,274 | 3.48 | 87,333 | 766,374 | 3.52 | 85,212 | 743,925 | 3.54 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Allowance for credit losses |
(937 | ) | (929 | ) | (925 | ) | ||||||||||||||||||||||||||||||
Cash and due from banks |
1,218 | 1,180 | 1,221 | |||||||||||||||||||||||||||||||||
Other assets |
9,788 | 10,014 | 10,384 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total assets |
$ | 98,515 | 97,598 | 95,892 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Liabilities and shareholders equity |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities |
||||||||||||||||||||||||||||||||||||
Interest-bearing deposits |
||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 1,309 | 360 | .11 | 1,333 | 349 | .11 | 1,121 | 311 | .11 | ||||||||||||||||||||||||||
Savings deposits |
41,197 | 10,937 | .11 | 41,712 | 10,361 | .10 | 41,525 | 10,219 | .10 | |||||||||||||||||||||||||||
Time deposits |
2,858 | 3,643 | .51 | 2,948 | 3,690 | .50 | 3,017 | 3,740 | .50 | |||||||||||||||||||||||||||
Deposits at Cayman Islands office |
206 | 151 | .29 | 212 | 150 | .28 | 224 | 147 | .27 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest-bearing deposits |
45,570 | 15,091 | .13 | 46,205 | 14,550 | .13 | 45,887 | 14,417 | .13 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Short-term borrowings |
174 | 32 | .07 | 195 | 36 | .07 | 196 | 34 | .07 | |||||||||||||||||||||||||||
Long-term borrowings |
10,114 | 62,076 | 2.44 | 10,164 | 62,640 | 2.47 | 9,835 | 64,048 | 2.64 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest-bearing liabilities |
55,858 | 77,199 | .55 | 56,564 | 77,226 | .55 | 55,918 | 78,499 | .57 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Noninterest-bearing deposits |
28,251 | 26,753 | 25,811 | |||||||||||||||||||||||||||||||||
Other liabilities |
1,619 | 1,645 | 1,704 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total liabilities |
85,728 | 84,962 | 83,433 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Shareholders equity |
12,787 | 12,636 | 12,459 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 98,515 | 97,598 | 95,892 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Net interest spread |
2.93 | 2.97 | 2.97 | |||||||||||||||||||||||||||||||||
Contribution of interest-free funds |
.21 | .20 | .20 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Net interest income/margin on earning assets |
$ | 699,075 | 3.14 | % | 689,148 | 3.17 | % | 665,426 | 3.17 | % | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
* Includes nonaccrual loans. ** Includes available-for-sale securities at amortized cost. |
(continued) |
-100-
M&T BANK CORPORATION AND SUBSIDIARIES
Table 3 (continued)
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
2014 Fourth Quarter | 2014 Third Quarter | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Average balance in millions; interest in thousands |
Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Earning assets |
||||||||||||||||||||||||
Loans and leases, net of unearned discount* |
||||||||||||||||||||||||
Commercial, financial, etc. |
$ | 19,117 | $ | 156,627 | 3.25 | % | 18,889 | 156,440 | 3.29 | % | ||||||||||||||
Real estatecommercial |
27,064 | 293,283 | 4.24 | 26,487 | 283,476 | 4.19 | ||||||||||||||||||
Real estateconsumer |
8,654 | 90,637 | 4.19 | 8,634 | 90,023 | 4.17 | ||||||||||||||||||
Consumer |
10,932 | 123,681 | 4.49 | 10,753 | 122,408 | 4.52 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans and leases, net |
65,767 | 664,228 | 4.01 | 64,763 | 652,347 | 4.00 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest-bearing deposits at banks |
9,054 | 5,744 | .25 | 5,083 | 3,198 | .25 | ||||||||||||||||||
Federal funds sold and agreements to resell securities |
86 | 18 | .08 | 80 | 14 | .07 | ||||||||||||||||||
Trading account |
80 | 353 | 1.76 | 70 | 287 | 1.65 | ||||||||||||||||||
Investment securities** |
||||||||||||||||||||||||
U.S. Treasury and federal agencies |
12,032 | 82,843 | 2.73 | 11,817 | 82,475 | 2.77 | ||||||||||||||||||
Obligations of states and political subdivisions |
160 | 1,963 | 4.86 | 162 | 1,897 | 4.65 | ||||||||||||||||||
Other |
786 | 7,470 | 3.77 | 801 | 8,646 | 4.28 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities |
12,978 | 92,276 | 2.82 | 12,780 | 93,018 | 2.89 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total earning assets |
87,965 | 762,619 | 3.44 | 82,776 | 748,864 | 3.59 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for credit losses |
(924 | ) | (924 | ) | ||||||||||||||||||||
Cash and due from banks |
1,290 | 1,273 | ||||||||||||||||||||||
Other assets |
10,313 | 10,120 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 98,644 | 93,245 | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and shareholders equity |
||||||||||||||||||||||||
Interest-bearing liabilities |
||||||||||||||||||||||||
Interest-bearing deposits |
||||||||||||||||||||||||
NOW accounts |
$ | 1,083 | 383 | .14 | 1,037 | 394 | .15 | |||||||||||||||||
Savings deposits |
42,949 | 11,151 | .10 | 41,056 | 11,532 | .11 | ||||||||||||||||||
Time deposits |
3,128 | 3,915 | .50 | 3,227 | 3,805 | .47 | ||||||||||||||||||
Deposits at Cayman Islands office |
265 | 149 | .22 | 325 | 161 | .20 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-bearing deposits |
47,425 | 15,598 | .13 | 45,645 | 15,892 | .14 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Short-term borrowings |
195 | 25 | .05 | 181 | 19 | .04 | ||||||||||||||||||
Long-term borrowings |
8,954 | 59,149 | 2.62 | 8,547 | 58,053 | 2.69 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-bearing liabilities |
56,574 | 74,772 | .52 | 54,373 | 73,964 | .54 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Noninterest-bearing deposits |
28,090 | 25,127 | ||||||||||||||||||||||
Other liabilities |
1,538 | 1,498 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities |
86,202 | 80,998 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Shareholders equity |
12,442 | 12,247 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 98,644 | 93,245 | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest spread |
2.92 | 3.05 | ||||||||||||||||||||||
Contribution of interest-free funds |
.18 | .18 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Net interest income/margin on earning assets |
$ | 687,847 | 3.10 | % | 674,900 | 3.23 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
* | Includes nonaccrual loans. |
** | Includes available-for-sale securities at amortized cost. |
-101-
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Incorporated by reference to the discussion contained under the caption Taxable-equivalent Net Interest Income in Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. | Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures. Based upon their evaluation of the effectiveness of M&Ts disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)), Robert G. Wilmers, Chairman of the Board and Chief Executive Officer, and René F. Jones, Executive Vice President and Chief Financial Officer, concluded that M&Ts disclosure controls and procedures were effective as of September 30, 2015.
(b) Changes in internal control over financial reporting. M&T regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. No changes in internal control over financial reporting have been identified in connection with the evaluation of disclosure controls and procedures during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, M&Ts internal control over financial reporting.
Item 1. | Legal Proceedings. |
M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Companys liabilities and contingencies in connection with such proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Companys consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
Wilmington Trust Corporation Investigative and Litigation Matters
M&Ts Wilmington Trust Corporation (Wilmington Trust) subsidiary is the subject of certain governmental investigations arising from actions undertaken by Wilmington Trust prior to M&Ts acquisition of Wilmington Trust and its subsidiaries, as set forth below.
DOJ Investigation: Prior to M&Ts acquisition of Wilmington Trust, the Department of Justice (DOJ) commenced an investigation of Wilmington Trust, relating to Wilmington Trusts financial reporting and securities filings, as well as certain commercial real estate lending relationships involving its subsidiary bank, Wilmington Trust Company, all of which relate to filings and activities occurring prior to the acquisition of Wilmington Trust by M&T. Counsel for Wilmington Trust has met with the DOJ to discuss the DOJ investigation. The DOJ investigation is ongoing.
This investigation could lead to administrative or legal proceedings resulting in potential civil and/or criminal remedies, or settlements, including, among other things, enforcement actions, fines, penalties, restitution or additional costs and expenses.
-102-
In Re Wilmington Trust Securities Litigation (U.S. District Court, District of Delaware, Case No. 10-CV-0990-SLR): Beginning on November 18, 2010, a series of parties, purporting to be class representatives, commenced a putative class action lawsuit against Wilmington Trust, alleging that Wilmington Trusts financial reporting and securities filings were in violation of securities laws. The cases were consolidated and Wilmington Trust moved to dismiss. The Court issued an order denying Wilmington Trusts motion to dismiss on March 20, 2014. The parties are currently engaged in the discovery phase of the lawsuit.
Other Matters
The Company is the subject of an investigation by government agencies relating to the origination of Federal Housing Administration (FHA) insured residential home loans and residential home loans sold to The Federal Home Loan Mortgage Corporation (Freddie Mac) and The Federal National Mortgage Association (Fannie Mae). A number of other U.S. financial institutions have announced similar investigations. Regarding FHA loans, the U.S. Department of Housing and Urban Development (HUD) Office of Inspector General and the DOJ (collectively, the Government) are investigating whether the Company complied with underwriting guidelines concerning certain loans where HUD paid FHA insurance claims. The Company is fully cooperating with the investigation. The Government has advised the Company that based upon its review of a sample of loans for which an FHA insurance claim was paid by HUD, some of the loans do not meet underwriting guidelines. The Company, based on its own review of the sample, does not agree with the sampling methodology and loan analysis employed by the Government. Regarding loans originated by the Company and sold to Freddie Mac and Fannie Mae, the investigation concerns whether the mortgages sold to Freddie Mac and Fannie Mae comply with applicable underwriting guidelines. The Company is also cooperating with that portion of the investigation. The investigation could lead to claims by the Government under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allow treble and other special damages substantially in excess of actual losses. Remedies in these proceedings or settlements may include restitution, fines, penalties, or alterations in the Companys business practices. The Company and the Government continue settlement discussions regarding the investigation.
Due to their complex nature, it is difficult to estimate when litigation and investigatory matters such as these may be resolved. As set forth in the introductory paragraph to this Item 1 Legal Proceedings, losses from current litigation and regulatory matters which the Company is subject to that are not currently considered probable are within a range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, and are included in the range of reasonably possible losses set forth above.
Item 1A. | Risk Factors. |
There have been no material changes in risk factors relating to M&T to those disclosed in response to Item 1A. to Part I of Form 10-K for the year ended December 31, 2014.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
(a)(b) Not applicable.
(c)
Issuer Purchases of Equity Securities |
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(d)Maximum | ||||||||||||||||
(c)Total | Number (or | |||||||||||||||
Number of | Approximate | |||||||||||||||
Shares | Dollar Value) | |||||||||||||||
(or Units) | of Shares | |||||||||||||||
Purchased | (or Units) | |||||||||||||||
(a)Total | as Part of | that may yet | ||||||||||||||
Number | (b)Average | Publicly | be Purchased | |||||||||||||
of Shares | Price Paid | Announced | Under the | |||||||||||||
(or Units) | per Share | Plans or | Plans or | |||||||||||||
Period |
Purchased(1) | (or Unit) | Programs | Programs (2) | ||||||||||||
July 1 July 31, 2015 |
4,316 | $ | 129.75 | | 2,181,500 | |||||||||||
August 1 August 31, 2015 |
1,288 | 128.98 | | 2,181,500 | ||||||||||||
September 1 September 30, 2015 |
738 | 117.92 | | 2,181,500 | ||||||||||||
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Total |
6,342 | $ | 128.22 | | ||||||||||||
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(1) | The total number of shares purchased during the periods indicated reflects shares deemed to have been received from employees who exercised stock options by attesting to previously acquired common shares in satisfaction of the exercise price or shares received from employees upon the vesting of restricted stock awards in satisfaction of applicable tax withholding obligations, as is permitted under M&Ts stock-based compensation plans. |
(2) | On February 22, 2007, M&T announced a program to purchase up to 5,000,000 shares of its common stock. No shares were purchased under such program during the periods indicated. |
Item 3. | Defaults Upon Senior Securities. |
(Not applicable.)
Item 4. | Mine Safety Disclosures. |
(None.)
Item 5. | Other Information. |
(None.)
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Item 6. | Exhibits. |
The following exhibits are filed as a part of this report.
Exhibit No. |
. | |
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
32.1 | Certification of Chief Executive Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
32.2 | Certification of Chief Financial Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
101.INS | XBRL Instance Document. Filed herewith. | |
101.SCH | XBRL Taxonomy Extension Schema. Filed herewith. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. Filed herewith. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. Filed herewith. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. Filed herewith. | |
101.DEF | XBRL Taxonomy Definition Linkbase. Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
M&T BANK CORPORATION | ||||||
Date: October 30, 2015 | By: | /s/ René F. Jones | ||||
René F. Jones | ||||||
Executive Vice President | ||||||
and Chief Financial Officer |
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Exhibit No. |
. | |
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
32.1 | Certification of Chief Executive Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
32.2 | Certification of Chief Financial Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
101.INS | XBRL Instance Document. Filed herewith. | |
101.SCH | XBRL Taxonomy Extension Schema. Filed herewith. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. Filed herewith. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. Filed herewith. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. Filed herewith. | |
101.DEF | XBRL Taxonomy Definition Linkbase. Filed herewith. |
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