Edgar Filing: M&T BANK CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

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

Commission File Number 1-9861

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

New York

16-0968385

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One M & T Plaza

Buffalo, New York

14203

(Address of principal executive offices)

(Zip Code)

(716) 842-5445

(Registrant’s telephone number, including area code)

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

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

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

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

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

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2013


Table of Contents of Information Required in Report		Page

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements.

	CONSOLIDATED BALANCE SHEET - September 30, 2013 and December 31, 2012		3

	CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2013 and 2012		4

	CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three and nine months ended September 30, 2013 and 2012		5

	CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2013 and 2012		6

	CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Nine months ended September 30, 2013 and 2012		7

	NOTES TO FINANCIAL STATEMENTS		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		57

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		104

Item 4.	Controls and Procedures.		104

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings.		104

Item 1A.	Risk Factors.		105

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		106

Item 3.	Defaults Upon Senior Securities.		106

Item 4.	Mine Safety Disclosures.		106

Item 5.	Other Information.		106

Item 6.	Exhibits.		107

SIGNATURES			107

EXHIBIT INDEX			108

- 2 -

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)


Dollars in thousands, except per share		September 30, 2013			December 31, 2012
Assets
	Cash and due from banks	$	1,941,944			1,983,615
	Interest-bearing deposits at banks		1,925,811			129,945
	Federal funds sold		117,809			3,000
	Trading account		371,370			488,966
	Investment securities (includes pledged securities that can be sold or repledged of $1,707,437 at September 30, 2013; $1,801,842 at December 31, 2012)
	Available for sale (cost: $4,555,109 at September 30, 2013; $4,643,070 at December 31, 2012)		4,692,180			4,739,437
	Held to maturity (fair value: $3,277,386 at September 30, 2013; $976,883 at December 31, 2012)		3,319,114			1,032,276
	Other (fair value: $298,479 at September 30, 2013; $302,648 at December 31, 2012)		298,479			302,648

	Total investment securities		8,309,773			6,074,361

	Loans and leases		63,914,772			66,790,186
	Unearned discount		(255,730	)		(219,229	)

	Loans and leases, net of unearned discount		63,659,042			66,570,957
	Allowance for credit losses		(916,370	)		(925,860	)

	Loans and leases, net		62,742,672			65,645,097

	Premises and equipment		614,795			594,652
	Goodwill		3,524,625			3,524,625
	Core deposit and other intangible assets		79,290			115,763
	Accrued interest and other assets		4,799,396			4,448,779

	Total assets	$	84,427,485			83,008,803

Liabilities
	Noninterest-bearing deposits	$	24,150,771			24,240,802
	NOW accounts		1,716,511			1,979,619
	Savings deposits		36,536,906			33,783,947
	Time deposits		3,831,443			4,562,366
	Deposits at Cayman Islands office		316,510			1,044,519

	Total deposits		66,552,141			65,611,253

	Federal funds purchased and agreements to repurchase securities		246,019			1,074,482
	Accrued interest and other liabilities		1,491,797			1,512,717
	Long-term borrowings		5,121,326			4,607,758

	Total liabilities		73,411,283			72,806,210

Shareholders’ equity	Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 381,500 shares at September 30, 2013 and December 31, 2012; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2013 and December 31, 2012		879,010			872,500
	Common stock, $.50 par, 250,000,000 shares authorized, 130,194,232 shares issued at September 30, 2013; 128,176,912 shares issued at December 31, 2012		65,097			64,088
	Common stock issuable, 47,048 shares at September 30, 2013; 57,409 shares at December 31, 2012		2,889			3,473
	Additional paid-in capital		3,192,981			3,025,520
	Retained earnings		7,074,287			6,477,276
	Accumulated other comprehensive income (loss), net		(198,062	)		(240,264	)

	Total shareholders’ equity		11,016,202			10,202,593

	Total liabilities and shareholders’ equity	$	84,427,485			83,008,803

- 3 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


		Three months ended September 30						Nine months ended September 30
In thousands, except per share		2013			2012			2013			2012
Interest income	Loans and leases, including fees	$	683,482			687,466		$	2,071,332			2,010,529
	Deposits at banks		1,650			139			3,372			1,119
	Federal funds sold		22			6			84			17
	Agreements to resell securities		—			—			10			—
	Trading account		169			214			1,048			849
	Investment securities
	Fully taxable		55,746			54,959			141,799			177,647
	Exempt from federal taxes		1,617			2,067			5,223			6,171

	Total interest income		742,686			744,851			2,222,868			2,196,332

Interest expense	NOW accounts		333			327			976			1,034
	Savings deposits		13,733			16,510			41,560			51,633
	Time deposits		6,129			10,843			21,809			36,706
	Deposits at Cayman Islands office		213			336			801			781
	Short-term borrowings		58			365			385			1,016
	Long-term borrowings		49,112			53,748			150,592			174,068

	Total interest expense		69,578			82,129			216,123			265,238

	Net interest income		673,108			662,722			2,006,745			1,931,094
	Provision for credit losses		48,000			46,000			143,000			155,000

	Net interest income after provision for credit losses		625,108			616,722			1,863,745			1,776,094

Other income	Mortgage banking revenues		64,731			106,812			249,096			232,518
	Service charges on deposit accounts		113,839			114,463			336,505			334,334
	Trust income		123,801			115,709			370,132			354,937
	Brokerage services income		16,871			14,114			49,840			44,187
	Trading account and foreign exchange gains		8,987			8,469			27,138			25,278
	Gain on bank investment securities		—			372			56,457			9
	Total other-than-temporary impairment (“OTTI”) losses		—			(2,134	)		(1,884	)		(26,246	)
	Portion of OTTI losses recognized in other comprehensive income (before taxes)		—			(3,538	)		(7,916	)		(7,085	)

	Net OTTI losses recognized in earnings		—			(5,672	)		(9,800	)		(33,331	)

	Equity in earnings of Bayview Lending Group LLC		(3,881	)		(5,183	)		(9,990	)		(16,570	)
	Other revenues from operations		153,040			96,649			349,581			272,744

	Total other income		477,388			445,733			1,418,959			1,214,106

Other expense	Salaries and employee benefits		339,332			321,746			1,019,019			991,530
	Equipment and net occupancy		66,220			64,248			195,657			194,667
	Printing, postage and supplies		9,752			8,272			30,749			31,512
	Amortization of core deposit and other intangible assets		10,628			14,085			36,473			46,766
	FDIC assessments		14,877			23,801			52,010			77,712
	Other costs of operations		217,817			183,875			558,905			540,927

	Total other expense		658,626			616,027			1,892,813			1,883,114

	Income before taxes		443,870			446,428			1,389,891			1,107,086
	Income taxes		149,391			152,966			472,833			373,781

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


	Net income available to common shareholders
	Basic	$	275,336			273,885		$	858,944			676,821
	Diluted		275,356			273,896			859,000			676,842

	Net income per common share
	Basic	$	2.13			2.18		$	6.69			5.39
	Diluted		2.11			2.17			6.64			5.37

	Cash dividends per common share	$	.70			.70		$	2.10			2.10

	Average common shares outstanding
	Basic		129,171			125,818			128,369			125,510
	Diluted		130,265			126,292			129,312			125,936

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended September 30				Nine months ended September 30
In thousands	2013		2012		2013		2012
Net income	$	294,479		293,462	$	917,058		733,305
Other comprehensive income, net of tax and reclassification adjustments:
Net unrealized gains on investment securities		23,367		42,560		26,724		111,931
Reclassification to income for amortization of gains on terminated cash flow hedges		—		—		—		(112	)
Foreign currency translation adjustment		1,251		482		205		351
Defined benefit plans liability adjustment		5,091		4,732		15,273		14,196

Total other comprehensive income		29,709		47,774		42,202		126,366

Total comprehensive income	$	324,188		341,236	$	959,260		859,671

- 5 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


		Nine months ended September 30
In thousands		2013			2012
Cash flows from operating activities	Net income	$	917,058			733,305
	Adjustments to reconcile net income to net cash provided by operating activities
	Provision for credit losses		143,000			155,000
	Depreciation and amortization of premises and equipment		66,547			63,344
	Amortization of capitalized servicing rights		46,966			44,678
	Amortization of core deposit and other intangible assets		36,473			46,766
	Provision for deferred income taxes		93,229			108,699
	Asset write-downs		16,204			46,505
	Net gain on sales of assets		(124,375	)		(5,070	)
	Net change in accrued interest receivable, payable		(2,819	)		(10,712	)
	Net change in other accrued income and expense		115,400			(204,876	)
	Net change in loans originated for sale		(808,778	)		(528,606	)
	Net change in trading account assets and liabilities		4,772			24,743

	Net cash provided by operating activities		503,677			473,776

Cash flows from investing activities	Proceeds from sales of investment securities
	Available for sale		1,081,747			49,430
	Other		12,994			61,648
	Proceeds from maturities of investment securities
	Available for sale		887,092			1,155,603
	Held to maturity		216,627			237,933
	Purchases of investment securities
	Available for sale		(41,358	)		(26,115	)
	Held to maturity		(1,586,425	)		(282,704	)
	Other		(8,825	)		(13,563	)
	Net (increase) decrease in loans and leases		905,491			(3,572,339	)
	Net increase in interest-bearing deposits at banks		(1,795,866	)		(257,034	)
	Other investments, net		(16,947	)		(7,447	)
	Capital expenditures, net		(85,964	)		(65,947	)
	Proceeds from sales of real estate acquired in settlement of loans		48,929			80,762
	Other, net		(179,629	)		(86,649	)

	Net cash used by investing activities		(562,134	)		(2,726,422	)

Cash flows from financing activities	Net increase in deposits		604,311			4,624,134
	Net decrease in short-term borrowings		(828,463	)		(189,906	)
	Proceeds from long-term borrowings		799,760			—
	Payments on long-term borrowings		(258,937	)		(1,727,313	)
	Dividends paid - common		(273,518	)		(267,481	)
	Dividends paid - preferred		(31,494	)		(31,494	)
	Other, net		119,936			15,237

	Net cash provided by financing activities		131,595			2,423,177

	Net increase in cash and cash equivalents		73,138			170,531
	Cash and cash equivalents at beginning of period		1,986,615			1,452,397

	Cash and cash equivalents at end of period	$	2,059,753			1,622,928

Supplemental disclosure of cash flow information	Interest received during the period	$	2,184,128			2,187,027
	Interest paid during the period		226,335			280,983
	Income taxes paid during the period		331,117			272,502

Supplemental schedule of noncash investing and financing activities	Securitization of residential mortgage loans allocated to
	Available for sale investment securities	$	1,807,180			—
	Held to maturity investment securities		917,045			—
	Capitalized servicing rights		29,264			—
	Real estate acquired in settlement of loans		35,865			36,881

- 6 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


In thousands, except per share	Preferred stock		Common stock		Common stock issuable			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss), net			Total
2012
Balance - January 1, 2012	$	864,585		62,842		4,072			2,828,986			5,867,165			(356,441	)		9,271,209
Total comprehensive income		—		—		—			—			733,305			126,366			859,671
Preferred stock cash dividends		—		—		—			—			(40,088	)		—			(40,088	)
Amortization of preferred stock discount		5,831		—		—			—			(5,831	)		—			—
Stock-based compensation plans:
Compensation expense, net		—		228		—			37,655			—			—			37,883
Exercises of stock options, net		—		545		—			71,939			—			—			72,484
Stock purchase plan		—		75		—			10,026			—			—			10,101
Directors’ stock plan		—		7		—			1,114			—			—			1,121
Deferred compensation plans, net, including dividend equivalents		—		5		(621	)		576			(120	)		—			(160	)
Other		—		—		—			952			—			—			952
Common stock cash dividends - $2.10 per share		—		—		—			—			(267,646	)		—			(267,646	)

Balance - September 30, 2012	$	870,416		63,702		3,451			2,951,248			6,286,785			(230,075	)		9,945,527

2013
Balance - January 1, 2013	$	872,500		64,088		3,473			3,025,520			6,477,276			(240,264	)		10,202,593
Total comprehensive income		—		—		—			—			917,058			42,202			959,260
Preferred stock cash dividends		—		—		—			—			(40,088	)		—			(40,088	)
Amortization of preferred stock discount		6,510		—		—			—			(6,510	)		—			—
Exercise of 407,542 Series C stock warrants into 186,589 shares of common stock		—		93		—			(93	)		—			—			—
Exercise of 57,327 Series A stock warrants into 21,130 shares of common stock		—		11		—			(11	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		147		—			29,826			—			—			29,973
Exercises of stock options, net		—		747		—			133,981			—			—			134,728
Directors’ stock plan		—		6		—			1,223			—			—			1,229
Deferred compensation plans, net, including dividend equivalents		—		5		(584	)		568			(98	)		—			(109	)
Other		—		—		—			1,967			—			—			1,967
Common stock cash dividends - $2.10 per share		—		—		—			—			(273,351	)		—			(273,351	)

Balance - September 30, 2013	$	879,010		65,097		2,889			3,192,981			7,074,287			(198,062	)		11,016,202

- 7 -

NOTES TO FINANCIAL STATEMENTS

1.	Significant accounting policies

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

2.	Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of September 30, 2013, total consideration to be paid was valued at approximately $4.8 billion. At September 30, 2013, Hudson City had $39.2 billion of assets, including $24.7 billion of loans and $10.0 billion of investment securities, and $34.5 billion of liabilities, including $22.1 billion of deposits. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals.

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

- 8 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

2.	Acquisitions, continued

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

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


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

Salaries and employee benefits	$	836		4,997
Equipment and net occupancy		690		15
Printing, postage and supplies		1,825		—
Other costs of operations		9,013		4,867

	$	12,364		9,879

- 9 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities

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


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
September 30, 2013
Investment securities available for sale:
U.S. Treasury and federal agencies	$	37,432		480		25	$	37,887
Obligations of states and political subdivisions		17,614		355		6		17,963
Mortgage-backed securities:
Government issued or guaranteed		4,214,895		116,758		1,254		4,330,399
Privately issued		2,789		1,032		5		3,816
Collateralized debt obligations		42,686		17,724		1,107		59,303
Other debt securities		137,661		1,758		20,015		119,404
Equity securities		102,032		22,221		845		123,408

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

Investment securities held to maturity:
Obligations of states and political subdivisions		170,370		4,279		88		174,561
Mortgage-backed securities:
Government issued or guaranteed		2,914,687		39,987		29,015		2,925,659
Privately issued		224,767		—		56,891		167,876
Other debt securities		9,290		—		—		9,290

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

Other securities		298,479		—		—		298,479

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


December 31, 2012
Investment securities available for sale:
U.S. Treasury and federal agencies	$	38,422		922		—	$	39,344
Obligations of states and political subdivisions		20,375		534		8		20,901
Mortgage-backed securities:
Government issued or guaranteed		3,163,210		208,060		229		3,371,041
Privately issued		1,142,287		7,272		125,673		1,023,886
Collateralized debt obligations		43,228		19,663		1,022		61,869
Other debt securities		136,603		2,247		26,900		111,950
Equity securities		98,945		14,921		3,420		110,446

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

Investment securities held to maturity:
Obligations of states and political subdivisions		182,103		7,647		27		189,723
Mortgage-backed securities:
Government issued or guaranteed		597,340		31,727		—		629,067
Privately issued		242,378		160		94,900		147,638
Other debt securities		10,455		—		—		10,455

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

Other securities		302,648		—		—		302,648

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

- 10 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

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

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

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


	Three months ended September 30
	2013			2012
	(in thousands)
Beginning balance	$	794			264,197
Additions for credit losses not previously recognized		—			5,672
Reductions for realized losses		(626	)		(67,926	)

Ending balance	$	168			201,943


	Nine months ended September 30
	2013			2012
	(in thousands)
Beginning balance	$	197,809			285,399
Additions for credit losses not previously recognized		9,800			33,331
Reductions for realized losses		(207,441	)		(116,787	)

Ending balance	$	168			201,943

- 11 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

At September 30, 2013, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:


	Amortized cost		Estimated fair value
	(in thousands)

Debt securities available for sale:
Due in one year or less	$	24,886		24,971
Due after one year through five years		21,212		22,016
Due after five years through ten years		8,282		8,553
Due after ten years		181,013		179,017

		235,393		234,557
Mortgage-backed securities available for sale		4,217,684		4,334,215

	$	4,453,077		4,568,772


Debt securities held to maturity:
Due in one year or less	$	18,617		18,751
Due after one year through five years		65,392		67,400
Due after five years through ten years		86,361		88,410
Due after ten years		9,290		9,290

		179,660		183,851
Mortgage-backed securities held to maturity		3,139,454		3,093,535

	$	3,319,114		3,277,386

A summary of investment securities that as of September 30, 2013 and December 31, 2012 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:


	Less than 12 months					12 months or more
	Fair value		Unrealized losses			Fair value		Unrealized losses
	(in thousands)
September 30, 2013
Investment securities available for sale:
U.S. Treasury and federal agencies	$	6,346		(25	)		—		—
Obligations of states and political subdivisions		577		(2	)		559		(4	)
Mortgage-backed securities:
Government issued or guaranteed		174,503		(1,126	)		5,731		(128	)
Privately issued		—		—			107		(5	)
Collateralized debt obligations		—		—			5,995		(1,107	)
Other debt securities		1,576		(7	)		102,898		(20,008	)
Equity securities		2,777		(845	)		—		—

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


Investment securities held to maturity:
Obligations of states and political subdivisions		14,751		(70	)		1,558		(18	)
Mortgage-backed securities:
Government issued or guaranteed		1,259,353		(29,015	)		—		—
Privately issued		—		—			167,876		(56,891	)

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


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

- 12 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued


	Less than 12 months					12 months or more
	Fair value		Unrealized losses			Fair value		Unrealized losses
	(in thousands)
December 31, 2012
Investment securities available for sale:
Obligations of states and political subdivisions	$	166		(1	)		683		(7	)
Mortgage-backed securities:
Government issued or guaranteed		12,107		(65	)		8,804		(164	)
Privately issued		121,487		(692	)		774,328		(124,981	)
Collateralized debt obligations		—		—			6,043		(1,022	)
Other debt securities		—		—			95,685		(26,900	)
Equity securities		5,535		(1,295	)		2,956		(2,125	)

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


Investment securities held to maturity:
Obligations of states and political subdivisions		1,026		(5	)		3,558		(22	)
Privately issued mortgage-backed securities		—		—			147,273		(94,900	)

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

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

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

4.	Loans and leases and the allowance for credit losses

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


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

Outstanding principal balance	$	5,274,466		6,705,120
Carrying amount:
Commercial, financial, leasing, etc.		730,743		928,107
Commercial real estate		1,875,842		2,567,050
Residential real estate		598,820		707,309
Consumer		1,357,847		1,637,887


	$	4,563,252		5,840,353

- 13 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

Purchased impaired loans included in the table above totaled $357 million at September 30, 2013 and $447 million at December 31, 2012, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for acquired loans for the three months and nine months ended September 30, 2013 and 2012 follows:


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

Balance at beginning of period	$	55,149			622,093		$	55,599			733,161
Interest income		(10,428	)		(60,786	)		(12,436	)		(74,936	)
Reclassifications from nonaccretable balance, net		172			—			542			—
Other (a)		—			6,254			—			1,382

Balance at end of period	$	44,893			567,561		$	43,705			659,607


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

Balance at beginning of period	$	42,252			638,272		$	30,805			807,960
Interest income		(28,879	)		(190,072	)		(29,721	)		(228,908	)
Reclassifications from nonaccretable balance, net		31,520			122,519			42,621			98,165
Other (a)		—			(3,158	)		—			(17,610	)

Balance at end of period	$	44,893			567,561		$	43,705			659,607

(a)

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

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


					90 Days or more past due and accruing
	Current		30-89 Days past due		Non- acquired		Acquired (a)		Purchased impaired (b)		Nonaccrual		Total
					(in thousands)
September 30, 2013
Commercial, financial, leasing, etc.	$	17,678,290		91,757		2,582		11,147		16,257		111,116		17,911,149
Real estate:
Commercial		21,447,385		179,972		12,859		50,853		101,049		198,397		21,990,515
Residential builder and developer		921,728		10,622		52		12,353		138,651		113,096		1,196,502
Other commercial construction		3,029,504		16,903		1,888		5,090		68,539		36,326		3,158,250
Residential		7,884,094		301,564		317,660		44,489		30,201		252,987		8,830,995
Residential Alt-A		297,840		18,263		—		—		—		80,905		397,008
Consumer:
Home equity lines and loans		6,027,315		32,428		—		29,472		2,640		77,537		6,169,392
Automobile		1,144,216		39,221		—		181		—		22,087		1,205,705
Other		2,736,469		34,886		4,751		—		—		23,420		2,799,526

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

- 14 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


					90 Days or more past due and accruing
	Current		30-89 Days past due		Non- acquired		Acquired (a)		Purchased impaired (b)		Nonaccrual		Total
	(in thousands)
December 31, 2012
Commercial, financial, leasing, etc.	$	17,511,052		62,479		23,490		10,587		17,437		151,908	$	17,776,953
Real estate:
Commercial		21,759,997		118,249		13,111		54,995		132,962		193,859		22,273,173
Residential builder and developer		757,311		35,419		3,258		23,909		187,764		181,865		1,189,526
Other commercial construction		2,379,953		35,274		509		9,572		68,971		36,812		2,531,091
Residential		9,811,956		337,969		313,184		45,124		36,769		249,314		10,794,316
Residential Alt-A		331,021		19,692		—		—		—		95,808		446,521
Consumer:
Home equity lines and loans		6,199,591		40,759		—		20,318		3,211		58,071		6,321,950
Automobile		2,442,502		40,461		—		251		—		25,107		2,508,321
Other		2,661,432		40,599		4,845		1,798		—		20,432		2,729,106

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

(a)

Acquired loans that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately.

(b)

Accruing loans that were impaired at acquisition date and were recorded at fair value.

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

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


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

Beginning balance	$	268,867			324,264			85,311			174,291			74,332	$	927,065
Provision for credit losses		20,209			12,139			315			14,935			402		48,000
Allowance related to loans securitized and sold		—			—			—			(11,000	)		—		(11,000	)
Net charge-offs
Charge-offs		(30,931	)		(7,701	)		(5,320	)		(20,242	)		—		(64,194	)
Recoveries		5,150			4,751			2,399			4,199			—		16,499

Net charge-offs		(25,781	)		(2,950	)		(2,921	)		(16,043	)		—		(47,695	)

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

- 15 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


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

Beginning balance	$	244,728			341,521			93,269			164,352			73,158	$	917,028
Provision for credit losses		439			9,891			8,247			26,962			461		46,000
Net charge-offs
Charge-offs		(8,874	)		(7,982	)		(8,687	)		(24,553	)		—		(50,096	)
Recoveries		1,174			1,421			1,139			4,557			—		8,291

Net charge-offs		(7,700	)		(6,561	)		(7,548	)		(19,996	)		—		(41,805	)

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

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


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

Beginning balance	$	246,759			337,101			88,807			179,418			73,775	$	925,860
Provision for credit losses		93,736			914			3,913			43,478			959		143,000
Allowance related to loans securitized and sold		—			—			—			(11,000	)		—		(11,000	)
Net charge-offs
Charge-offs		(86,787	)		(21,493	)		(18,583	)		(62,905	)		—		(189,768	)
Recoveries		9,587			16,931			8,568			13,192			—		48,278

Net charge-offs		(77,200	)		(4,562	)		(10,015	)		(49,713	)		—		(141,490	)

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

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


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

Beginning balance	$	234,022			367,637			91,915			143,121			71,595	$	908,290
Provision for credit losses		29,663			4,322			30,064			88,927			2,024		155,000
Net charge-offs
Charge-offs		(32,989	)		(31,578	)		(32,812	)		(77,155	)		—		(174,534	)
Recoveries		6,771			4,470			4,801			16,425			—		32,467

Net charge-offs		(26,218	)		(27,108	)		(28,011	)		(60,730	)		—		(142,067	)

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

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

- 16 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

- 17 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


	September 30, 2013						December 31, 2012
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(in thousands)
With an allowance recorded:
Commercial, financial, leasing, etc.	$	93,568		114,572		25,530		127,282		149,534		33,829
Real estate:
Commercial		127,921		152,885		24,104		121,542		143,846		23,641
Residential builder and developer		61,947		102,395		7,374		115,306		216,218		25,661
Other commercial construction		74,116		77,180		3,104		73,544		76,869		6,836
Residential		100,287		118,572		6,537		103,451		121,819		3,521
Residential Alt-A		115,695		128,446		15,000		128,891		141,940		17,000
Consumer:
Home equity lines and loans		13,258		14,372		3,408		12,360		13,567		2,254
Automobile		42,106		42,106		12,060		49,210		49,210		14,273
Other		16,057		16,057		4,169		14,408		14,408		5,667

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

With no related allowance recorded:
Commercial, financial, leasing, etc.		24,945		30,551		—		32,631		42,199		—
Real estate:
Commercial		77,284		99,461		—		78,380		100,337		—
Residential builder and developer		56,015		84,852		—		74,307		105,438		—
Other commercial construction		19,960		24,051		—		23,018		23,532		—
Residential		83,041		93,898		—		86,342		96,448		—
Residential Alt-A		28,397		52,565		—		31,354		58,768		—

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


Total:
Commercial, financial, leasing, etc.		118,513		145,123		25,530		159,913		191,733		33,829
Real estate:
Commercial		205,205		252,346		24,104		199,922		244,183		23,641
Residential builder and developer		117,962		187,247		7,374		189,613		321,656		25,661
Other commercial construction		94,076		101,231		3,104		96,562		100,401		6,836
Residential		183,328		212,470		6,537		189,793		218,267		3,521
Residential Alt-A		144,092		181,011		15,000		160,245		200,708		17,000
Consumer:
Home equity lines and loans		13,258		14,372		3,408		12,360		13,567		2,254
Automobile		42,106		42,106		12,060		49,210		49,210		14,273
Other		16,057		16,057		4,169		14,408		14,408		5,667

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

- 18 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended September 30, 2013						Three months ended September 30, 2012
			Interest income recognized						Interest income recognized
	Average recorded investment		Total		Cash basis		Average recorded investment		Total		Cash basis
	(in thousands)
Commercial, financial, leasing, etc.	$	149,357		516		516		141,166		1,507		1,507
Real estate:
Commercial		205,971		716		716		180,009		531		531
Residential builder and developer		130,855		213		188		237,847		476		370
Other commercial construction		95,486		208		208		84,604		9		9
Residential		180,995		1,391		865		131,114		1,269		765
Residential Alt-A		147,056		1,763		692		167,780		1,836		593
Consumer:
Home equity lines and loans		12,810		167		49		11,949		172		48
Automobile		42,957		710		127		51,138		863		185
Other		15,791		161		50		11,996		121		52

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


	Nine months ended September 30, 2013						Nine months ended September 30, 2012
			Interest income recognized						Interest income recognized
	Average recorded investment		Total		Cash basis		Average recorded investment		Total		Cash basis
	(in thousands)
Commercial, financial, leasing, etc.	$	164,877		6,358		6,358		155,627		2,659		2,659
Real estate:
Commercial		200,354		1,428		1,428		179,524		2,087		2,087
Residential builder and developer		159,308		871		637		260,858		1,202		801
Other commercial construction		97,268		3,322		3,322		100,242		5,019		5,019
Residential		184,719		4,795		3,188		128,646		3,926		2,453
Residential Alt-A		151,992		5,173		1,799		174,390		5,432		1,666
Consumer:
Home equity lines and loans		12,633		499		127		11,024		502		136
Automobile		45,075		2,226		404		52,249		2,632		553
Other		15,438		468		153		10,097		320		138

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

- 19 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


			Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential Builder and Developer		Other Commercial Construction
	(in thousands)
September 30, 2013
Pass	$	17,022,772		20,978,696		1,005,932		3,066,941
Criticized accrual		777,261		813,422		77,474		54,983
Criticized nonaccrual		111,116		198,397		113,096		36,326

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


December 31, 2012
Pass	$	16,889,753		21,275,182		922,141		2,307,436
Criticized accrual		735,292		804,132		85,520		186,843
Criticized nonaccrual		151,908		193,859		181,865		36,812

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

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

- 20 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

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


	Commercial, Financial,		Real Estate
	Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
September 30, 2013
Individually evaluated for impairment	$	25,530		34,139		21,517		19,637	$	100,823
Collectively evaluated for impairment		234,912		298,579		59,645		141,202		734,338
Purchased impaired		2,853		735		1,543		1,344		6,475

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

Unallocated										74,734


Total									$	916,370


December 31, 2012
Individually evaluated for impairment	$	33,669		55,291		20,502		22,194	$	131,656
Collectively evaluated for impairment		212,930		280,789		66,684		156,661		717,064
Purchased impaired		160		1,021		1,621		563		3,365

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

Unallocated										73,775


Total									$	925,860

- 21 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


	Commercial, Financial,		Real Estate
	Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
September 30, 2013
Individually evaluated for impairment	$	118,513		413,443		326,860		71,421	$	930,237
Collectively evaluated for impairment		17,776,379		25,623,585		8,870,942		10,100,562		62,371,468
Purchased impaired		16,257		308,239		30,201		2,640		357,337


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


December 31, 2012
Individually evaluated for impairment	$	159,761		480,335		349,477		75,978	$	1,065,551
Collectively evaluated for impairment		17,599,755		25,123,758		10,854,591		11,480,188		65,058,292
Purchased impaired		17,437		389,697		36,769		3,211		447,114


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

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

- 22 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended September 30, 2013 and 2012:


			Recorded investment				Financial effects of modification
Three months ended September 30, 2013	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		14	$	2,407	$	2,266	$	(141	)	$	—
Other		2		1,773		2,067		294			—
Combination of concession types		3		374		374		—			(25	)
Real estate:
Commercial
Principal deferral		10		4,160		4,134		(26	)		—
Other		2		449		475		26			—
Combination of concession types		6		1,868		2,264		396			(156	)
Residential builder and developer
Principal deferral		1		249		241		(8	)		—
Other commercial construction
Principal deferral		1		226		158		(68	)		—
Residential
Principal deferral		6		860		912		52			—
Combination of concession types		14		1,258		1,308		50			(197	)
Residential Alt-A
Principal deferral		5		764		773		9			—
Combination of concession types		4		332		496		164			(252	)
Consumer:
Home equity lines and loans
Principal deferral		2		179		179		—			—
Combination of concession types		9		682		682		—			(79	)
Automobile
Principal deferral		121		1,718		1,718		—			—
Interest rate reduction		2		19		19		—			(2	)
Other		20		42		42		—			—
Combination of concession types		61		551		551		—			(33	)
Other
Principal deferral		9		60		60		—			—
Combination of concession types		18		470		470		—			(86	)

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

(a)

Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.

(b)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

- 23 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			Recorded investment				Financial effects of modification
Three months ended September 30, 2012	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		21	$	7,823	$	7,653	$	(170	)	$	—
Combination of concession types		2		327		322		(5	)		(39	)
Real estate:
Commercial
Principal deferral		8		5,951		6,238		287			—
Combination of concession types		1		214		214		—			(49	)
Residential builder and developer
Principal deferral		11		17,383		16,275		(1,108	)		—
Combination of concession types		1		2,486		2,486		—			—
Other commercial construction
Principal deferral		2		5,429		4,702		(727	)		—
Residential
Principal deferral		5		738		772		34			—
Combination of concession types		18		5,490		5,553		63			(150	)
Residential Alt-A
Principal deferral		1		218		220		2			—
Combination of concession types		13		2,771		2,795		24			—
Consumer:
Home equity lines and loans
Principal deferral		5		434		434		—			—
Combination of concession types		11		976		976		—			(125	)
Automobile
Principal deferral		135		1,721		1,721		—			—
Interest rate reduction		9		157		157		—			(11	)
Other		20		68		68		—			—
Combination of concession types		109		2,329		2,329		—			(319	)
Other
Principal deferral		14		336		336		—			—
Other		1		1		1		—			—
Combination of concession types		22		339		339		—			(97	)

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

(a)

Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.

(b)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

- 24 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the nine months ended September 30, 2013 and 2012:


			Recorded investment				Financial effects of modification
Nine months ended September 30, 2013	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		53	$	9,283	$	9,070	$	(213	)	$	—
Other		4		50,433		50,924		491			—
Combination of concession types		6		2,206		1,696		(510	)		(25	)
Real estate:
Commercial
Principal deferral		23		38,187		38,027		(160	)		—
Other		2		449		475		26			—
Combination of concession types		8		2,450		2,845		395			(212	)
Residential builder and developer
Principal deferral		16		19,102		18,303		(799	)		—
Other		1		4,039		3,888		(151	)		—
Combination of concession types		3		15,580		15,514		(66	)		(535	)
Other commercial construction
Principal deferral		3		590		521		(69	)		—
Residential
Principal deferral		21		2,642		2,877		235			—
Other		1		195		195		—			—
Combination of concession types		52		72,917		69,734		(3,183	)		(754	)
Residential Alt-A
Principal deferral		6		863		875		12			—
Combination of concession types		17		2,426		2,715		289			(640	)
Consumer:
Home equity lines and loans
Principal deferral		6		359		361		2			—
Interest rate reduction		1		99		99		—			(8	)
Other		1		106		106		—			—
Combination of concession types		19		1,299		1,299		—			(176	)
Automobile
Principal deferral		359		4,933		4,933		—			—
Interest rate reduction		11		159		159		—			(17	)
Other		65		274		274		—			—
Combination of concession types		184		2,148		2,148		—			(162	)
Other
Principal deferral		29		290		290		—			—
Interest rate reduction		1		12		12		—			(2	)
Other		1		12		12		—			—
Combination of concession types		90		2,394		2,394		—			(587	)

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

(a)

Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.

(b)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

- 25 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			Recorded investment				Financial effects of modification
Nine months ended September 30, 2012	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		39	$	21,027	$	19,668	$	(1,359	)	$	—
Other		3		2,967		3,052		85			—
Combination of concession types		3		372		366		(6	)		(72	)
Real estate:
Commercial
Principal deferral		11		10,387		10,642		255			—
Interest rate reduction		1		383		430		47			(89	)
Combination of concession types		5		1,424		1,445		21			(305	)
Residential builder and developer
Principal deferral		19		26,708		24,812		(1,896	)		—
Combination of concession types		3		4,836		5,212		376			—
Other commercial construction
Principal deferral		5		66,317		65,600		(717	)		—
Residential
Principal deferral		27		3,302		3,447		145			—
Combination of concession types		47		10,475		10,658		183			(415	)
Residential Alt-A
Principal deferral		5		768		785		17			—
Combination of concession types		28		5,640		5,732		92			(49	)
Consumer:
Home equity lines and loans
Principal deferral		15		1,285		1,285		—			—
Interest rate reduction		1		144		144		—			(6	)
Combination of concession types		17		1,691		1,691		—			(272	)
Automobile
Principal deferral		484		6,306		6,306		—			—
Interest rate reduction		16		234		234		—			(16	)
Other		51		239		239		—			—
Combination of concession types		298		5,108		5,108		—			(601	)
Other
Principal deferral		73		1,117		1,117		—			—
Interest rate reduction		3		23		23		—			(3	)
Other		10		50		50		—			—
Combination of concession types		74		700		700		—			(155	)

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

(a)

Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages.

(b)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

- 26 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended September 30, 2013 and 2012 for which there was a subsequent payment default during the nine-month periods ended September 30, 2013 and 2012, were $20 million (largely commercial real estate loans) and $13 million (largely residential builder and developer loans), respectively.

5.	Borrowings

M&T had $1.2 billion of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at September 30, 2013 which are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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

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

- 27 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

5.	Borrowings, continued

The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2068) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval.

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

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

6.	Shareholders’ equity

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

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


	Shares issued and outstanding		Carrying value September 30, 2013		Carrying value December 31, 2012
			(dollars in thousands)
Series A (a)
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference per share		230,000	$	229,236	$	226,965

Series C (a) (b)
Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000 liquidation preference per share		151,500		149,774		145,535

Series D (c)
Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, $10,000 liquidation preference per share		50,000		500,000		500,000

- 28 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6.	Shareholders’ equity, continued

(a)

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

(b)

Shares were assumed in an acquisition and a new Series C Preferred Stock was designated.

(c)

Dividends, if declared, will be paid semi-annually at a rate of 6.875% per year. The shares are redeemable in whole or in part on or after June 15, 2016. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.

A warrant expiring on May 16, 2021 providing for the purchase of 95,383 shares of M&T common stock at $518.96 per share was outstanding at September 30, 2013 and December 31, 2012. The obligation under that warrant was assumed by M&T in an acquisition.

7.	Pension plans and other postretirement benefits

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


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

Service cost	$	6,090			7,387			186			167
Interest cost on projected benefit obligation		15,032			15,509			673			934
Expected return on plan assets		(21,838	)		(17,627	)		—			—
Amortization of prior service cost		(1,639	)		(1,640	)		(340	)		5
Amortization of net actuarial loss		10,269			9,291			90			133


Net periodic benefit cost	$	7,914			12,920			609			1,239

- 29 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

7.	Pension plans and other postretirement benefits, continued


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

Service cost	$	18,270			22,162			557			501
Interest cost on projected benefit obligation		45,097			46,527			2,018			2,803
Expected return on plan assets		(65,515	)		(52,883	)		—			—
Amortization of prior service cost		(4,917	)		(4,919	)		(1,019	)		15
Amortization of net actuarial loss		30,807			27,874			270			398


Net periodic benefit cost	$	23,742			38,761			1,826			3,717

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

8.	Earnings per common share

The computations of basic earnings per common share follow:


	Three months ended September 30						Nine months ended September 30
	2013			2012			2013			2012
	(in thousands, except per share)
Income available to common shareholders:

Net income	$	294,479			293,462		$	917,058			733,305
Less: Preferred stock dividends (a)		(13,363	)		(13,363	)		(40,088	)		(40,088	)
Amortization of preferred stock discount (a)		(2,235	)		(2,033	)		(6,575	)		(5,921	)

Net income available to common equity		278,881			278,066			870,395			687,296
Less: Income attributable to unvested stock-based compensation awards		(3,545	)		(4,181	)		(11,451	)		(10,475	)


Net income available to common shareholders	$	275,336			273,885		$	858,944			676,821

Weighted-average shares outstanding:

Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards		130,836			127,741			130,088			127,449
Less: Unvested stock-based compensation awards		(1,665	)		(1,923	)		(1,719	)		(1,939	)


Weighted-average shares outstanding		129,171			125,818			128,369			125,510

Basic earnings per common share	$	2.13			2.18		$	6.69			5.39

(a)

Including impact of not as yet declared cumulative dividends.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

8.	Earnings per common share, continued

The computations of diluted earnings per common share follow:


	Three months ended September 30						Nine months ended September 30
	2013			2012			2013			2012
	(in thousands, except per share)

Net income available to common equity	$	278,881			278,066		$	870,395			687,296

Less: Income attributable to unvested stock-based compensation awards		(3,525	)		(4,170	)		(11,395	)		(10,454	)


Net income available to common shareholders	$	275,356			273,896		$	859,000			676,842

Adjusted weighted-average shares outstanding:

Common and unvested stock-based compensation awards		130,836			127,741			130,088			127,449
Less: Unvested stock-based compensation awards		(1,665	)		(1,923	)		(1,719	)		(1,939	)
Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock		1,094			474			943			426


Adjusted weighted-average shares outstanding		130,265			126,292			129,312			125,936

Diluted earnings per common share	$	2.11			2.17		$	6.64			5.37

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

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 3.1 million and 9.7 million common shares during the three-month periods ended September 30, 2013 and 2012, respectively, and 4.1 million and 9.9 million common shares during the nine-month periods ended September 30, 2013 and 2012, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

9.	Comprehensive income

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


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

Balance – January 1, 2013	$	(91,835	)		152,199			(455,590	)		(431	)	$	(395,657	)		155,393		$	(240,264	)

Other comprehensive income before reclassifications:
Unrealized holding gains (losses), net		59,523			(61,706	)		—			—			(2,183	)		814			(1,369	)
Foreign currency translation adjustment		—			—			—			296			296			(91	)		205

Total other comprehensive income before reclassifications		59,523			(61,706	)		—			296			(1,887	)		723			(1,164	)


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

Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities		230			3,127			—			—			3,357	(a)		(1,318	)		2,039
OTTI charges recognized in net income		9,800			—			—			—			9,800	(b)		(3,847	)		5,953
Losses (gains) realized in net income		41,217			(8,129	)		—			—			33,088	(c)		(12,987	)		20,101
Amortization of prior service credit		—			—			(5,936	)		—			(5,936	) (e)		2,330			(3,606	)
Amortization of actuarial losses		—			—			31,077			—			31,077	(e)		(12,198	)		18,879

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


Total gain (loss) during the period		110,770			(66,708	)		25,141			296			69,499			(27,297	)		42,202


Balance – September 30, 2013	$	18,935			85,491			(430,449	)		(135	)	$	(326,158	)		128,096		$	(198,062	)

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

9.	Comprehensive income, continued


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

Balance – January 1, 2012	$	(138,319	)		9,757			(457,145	)		(1,062	)	$	(586,769	)		230,328		$	(356,441	)

Other comprehensive income before reclassifications:
Unrealized holding gains (losses), net		(8,099	)		153,908			—			—			145,809			(57,183	)		88,626
Foreign currency translation adjustment		—			—			—			552			552			(201	)		351

Total other comprehensive income before reclassifications		(8,099	)		153,908			—			552			146,361			(57,384	)		88,977


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

Accretion of unrealized holding losses on HTM securities		1,544			3,495			—			—			5,039	(a)		(1,978	)		3,061
OTTI charges recognized in net income		33,331			—			—			—			33,331	(b)		(13,082	)		20,249
Gains realized in net income		—			(9	)		—			—			(9	) (c)		4			(5	)
Amortization of gains on terminated cash flow hedges		—			—			—			(178	)		(178	) (d)		66			(112	)
Amortization of prior service credit		—			—			(4,904	)		—			(4,904	) (e)		1,925			(2,979	)
Amortization of actuarial losses		—			—			28,272			—			28,272	(e)		(11,097	)		17,175

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


Total gain (loss) during the period		26,776			157,394			23,368			374			207,912			(81,546	)		126,366


Balance – September 30,2012	$	(111,543	)		167,151			(433,777	)		(688	)	$	(378,857	)		148,782		$	(230,075	)

(a)

Included in interest income

(b)

Included in OTTI losses recognized in earnings

(c)

Included in gain (loss) on bank investment securities

(d)

Included in interest expense

(e)

Included in salaries and employee benefits expense

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


	Investment securities						Defined benefit plans			Other			Total
	With OTTI			All other			Defined benefit plans			Other			Total

Balance – December 31, 2012	$	(55,790	)		92,581			(276,771	)		(284	)	$	(240,264	)

Net gain (loss) during period		67,293			(40,569	)		15,273			205			42,202


Balance – September 30, 2013	$	11,503			52,012			(261,498	)		(79	)	$	(198,062	)

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments

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

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

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


	Notional amount		Average maturity		Weighted- average rate
	Notional amount		Average maturity		Fixed			Variable
	(in thousands)		(in years)
September 30, 2013
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		3.9		4.42	%		1.22	%


December 31, 2012
Fair value hedges:
Fixed rate long-term borrowings (a)	$	900,000		4.4		6.07	%		1.85	%

(a)

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

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

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

- 34 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued

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


	Asset derivatives				Liability derivatives
	Fair value				Fair value
	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	114,083		143,179	$	—		—
Commitments to sell real estate loans (a)		2,477		1,114		11,665		3,825

		116,560		144,293		11,665		3,825
Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		18,185		48,056		5,110		197
Commitments to sell real estate loans (a)		6,880		1,982		7,435		6,570
Trading:
Interest rate contracts (b)		285,442		399,963		248,311		365,616
Foreign exchange and other option and futures contracts (b)		13,451		8,725		13,138		8,658

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


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

(a)

Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities.

(b)

Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued


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

Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(86	)		(20	)	$	3,273		(3,252	)


Derivatives not designated as hedging instruments

Trading:
Interest rate contracts (b)	$	2,778					$	777
Foreign exchange and other option and futures contracts (b)		(862	)					74


Total	$	1,916					$	851


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

Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(29,097	)		27,733	$	5,918		(5,876	)


Derivatives not designated as hedging instruments

Trading:
Interest rate contracts (b)	$	5,974				$	3,996