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 March 31, 2014

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

Commission File Number 1-9861

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)


New York		16-0968385
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One M & T Plaza Buffalo, New York		14203
(Address of principal executive offices)		(Zip Code)

(716) 842-5445

(Registrant’s telephone number, including area code)

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

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

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 30, 2014: 131,488,635 shares.

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2014


Table of Contents of Information Required in Report		Page

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements.

	CONSOLIDATED BALANCE SHEET - March 31, 2014 and December 31, 2013		3

	CONSOLIDATED STATEMENT OF INCOME - Three months ended March 31, 2014 and 2013		4

	CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME – Three months ended March 31, 2014 and 2013		5

	CONSOLIDATED STATEMENT OF CASH FLOWS - Three months ended March 31, 2014 and 2013		6

	CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Three months ended March 31, 2014 and 2013		7

	NOTES TO FINANCIAL STATEMENTS		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		51

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		90

Item 4.	Controls and Procedures.		90

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings.		90

Item 1A.	Risk Factors.		91

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		92

Item 3.	Defaults Upon Senior Securities.		92

Item 4.	Mine Safety Disclosures.		92

Item 5.	Other Information.		92

Item 6.	Exhibits.		93

SIGNATURES			94

EXHIBIT INDEX			94

- 2 -

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)


		March 31,			December 31,
Dollars in thousands, except per share		2014			2013
Assets	Cash and due from banks	$	1,671,052			1,573,361
	Interest-bearing deposits at banks		3,299,185			1,651,138
	Federal funds sold		92,066			99,573
	Trading account		314,807			376,131
	Investment securities (includes pledged securities that can be sold or repledged of $1,657,883 at March 31, 2014; $1,696,438 at December 31, 2013)
	Available for sale (cost: $6,042,063 at March 31, 2014; $4,444,365 at December 31, 2013)		6,191,571			4,531,786
	Held to maturity (fair value: $3,814,766 at March 31, 2014; $3,860,127 at December 31, 2013)		3,873,985			3,966,130
	Other (fair value: $298,693 at March 31, 2014; $298,581 at December 31, 2013)		298,693			298,581

	Total investment securities		10,364,249			8,796,497

	Loans and leases		64,378,511			64,325,783
	Unearned discount		(243,433	)		(252,624	)

	Loans and leases, net of unearned discount		64,135,078			64,073,159
	Allowance for credit losses		(916,768	)		(916,676	)

	Loans and leases, net		63,218,310			63,156,483

	Premises and equipment		627,966			633,520
	Goodwill		3,524,625			3,524,625
	Core deposit and other intangible assets		58,789			68,851
	Accrued interest and other assets		5,359,311			5,282,212

	Total assets	$	88,530,360			85,162,391

Liabilities	Noninterest-bearing deposits	$	25,244,200			24,661,007
	NOW accounts		1,917,763			1,989,441
	Savings deposits		37,887,008			36,621,580
	Time deposits		3,402,515			3,523,838
	Deposits at Cayman Islands office		247,880			322,746

	Total deposits		68,699,366			67,118,612

	Federal funds purchased and agreements to repurchase securities		230,209			260,455
	Accrued interest and other liabilities		1,462,725			1,368,922
	Long-term borrowings		6,251,197			5,108,870

	Total liabilities		76,643,497			73,856,859

Shareholders’ equity	Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at March 31, 2014; 381,500 shares at December 31, 2013; Liquidation preference of $10,000 per share: 50,000 shares at March 31, 2014 and December 31, 2013		1,231,500			881,500
	Common stock, $.50 par, 250,000,000 shares authorized, 131,388,585 shares issued at March 31, 2014; 130,516,364 shares issued at December 31, 2013		65,694			65,258
	Common stock issuable, 42,100 shares at March 31, 2014; 47,231 shares at December 31, 2013		2,616			2,915
	Additional paid-in capital		3,302,402			3,232,014
	Retained earnings		7,309,912			7,188,004
	Accumulated other comprehensive income (loss), net		(25,261	)		(64,159	)

	Total shareholders’ equity		11,886,863			11,305,532

	Total liabilities and shareholders’ equity	$	88,530,360			85,162,391

- 3 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


		Three months ended March 31
In thousands, except per share		2014			2013
Interest income	Loans and leases, including fees	$	645,222			682,455
	Deposits at banks		1,884			267
	Federal funds sold		16			17
	Agreements to resell securities		—			9
	Trading account		427			638
	Investment securities
	Fully taxable		73,899			44,760
	Exempt from federal taxes		1,504			1,829

	Total interest income		722,952			729,975

Interest expense	NOW accounts		297			322
	Savings deposits		11,601			14,037
	Time deposits		3,940			8,196
	Deposits at Cayman Islands office		208			388
	Short-term borrowings		32			231
	Long-term borrowings		50,441			50,751

	Total interest expense		66,519			73,925

	Net interest income		656,433			656,050
	Provision for credit losses		32,000			38,000

	Net interest income after provision for credit losses		624,433			618,050

Other income	Mortgage banking revenues		80,049			93,103
	Service charges on deposit accounts		104,198			110,949
	Trust income		121,252			121,603
	Brokerage services income		16,500			15,711
	Trading account and foreign exchange gains		6,447			8,927
	Total other-than-temporary impairment (“OTTI”) losses		—			(1,884	)
	Portion of OTTI losses recognized in other comprehensive income (before taxes)		—			(7,916	)

	Net OTTI losses recognized in earnings		—			(9,800	)

	Equity in earnings of Bayview Lending Group LLC		(4,454	)		(3,656	)
	Other revenues from operations		96,115			96,045

	Total other income		420,107			432,882

Other expense	Salaries and employee benefits		371,326			356,551
	Equipment and net occupancy		71,167			65,159
	Printing, postage and supplies		10,956			10,699
	Amortization of core deposit and other intangible assets		10,062			13,343
	FDIC assessments		15,488			19,438
	Other costs of operations		223,272			170,406

	Total other expense		702,271			635,596

	Income before taxes		342,269			415,336
	Income taxes		113,252			141,223

	Net income	$	229,017			274,113

	Net income available to common shareholders
	Basic	$	211,720			255,079
	Diluted		211,731			255,096
	Net income per common share
	Basic	$	1.63			2.00
	Diluted		1.61			1.98
	Cash dividends per common share	$	.70			.70
	Average common shares outstanding
	Basic		130,212			127,669
	Diluted		131,126			128,636

- 4 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended March 31
In thousands	2014			2013
Net income	$	229,017			274,113
Other comprehensive income, net of tax and reclassification adjustments:
Net unrealized gains on investment securities		38,214			10,079
Foreign currency translation adjustment		(136	)		(932	)
Defined benefit plans liability adjustment		820			5,164

Total other comprehensive income		38,898			14,311

Total comprehensive income	$	267,915			288,424

- 5 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


		Three months ended March 31
In thousands		2014			2013
Cash flows from operating activities	Net income	$	229,017			274,113
	Adjustments to reconcile net income to net cash provided by operating activities
	Provision for credit losses		32,000			38,000
	Depreciation and amortization of premises and equipment		24,708			22,027
	Amortization of capitalized servicing rights		17,792			15,208
	Amortization of core deposit and other intangible assets		10,062			13,343
	Provision for deferred income taxes		42,256			19,253
	Asset write-downs		1,117			13,558
	Net gain on sales of assets		(852	)		(2,676	)
	Net change in accrued interest receivable, payable		(3,185	)		(2,872	)
	Net change in other accrued income and expense		57,884			80,645
	Net change in loans originated for sale		122,406			205,643
	Net change in trading account assets and liabilities		27,893			22,156

	Net cash provided by operating activities		561,098			698,398

Cash flows from investing activities	Proceeds from sales of investment securities
	Other		146			2,032
	Proceeds from maturities of investment securities
	Available for sale		166,324			353,305
	Held to maturity		92,305			79,164
	Purchases of investment securities
	Available for sale		(1,709,847	)		(14,597	)
	Held to maturity		(3,238	)		(6,010	)
	Other		(258	)		(274	)
	Net (increase) decrease in loans and leases		(220,551	)		404,142
	Net increase in interest-bearing deposits at banks		(1,648,047	)		(1,174,825	)
	Capital expenditures, net		(16,725	)		(16,671	)
	Net increase in loan servicing advances		(122,910	)		(9,054	)
	Other, net		21,763			11,015

	Net cash used by investing activities		(3,441,038	)		(371,773	)

Cash flows from financing activities	Net increase (decrease) in deposits		1,581,705			(519,555	)
	Net decrease in short-term borrowings		(30,246	)		(699,889	)
	Proceeds from long-term borrowings		1,498,688			799,760
	Payments on long-term borrowings		(352,245	)		(3,460	)
	Proceeds from issuance of preferred stock		346,500			—
	Dividends paid - common		(92,406	)		(90,788	)
	Dividends paid - preferred		(6,080	)		(4,769	)
	Other, net		24,208			31,528

	Net cash provided (used) by financing activities		2,970,124			(487,173	)

	Net increase (decrease) in cash and cash equivalents		90,184			(160,548	)
	Cash and cash equivalents at beginning of period		1,672,934			1,986,615

	Cash and cash equivalents at end of period	$	1,763,118			1,826,067

Supplemental disclosure of cash flow information	Interest received during the period Interest paid during the period Income taxes paid during the period	$	695,653 61,841 4,789			718,296 72,106 9,545

Supplemental schedule of noncash investing and financing activities	Securitization of residential mortgage loans allocated to Available-for-sale investment securities Capitalized servicing rights	$	29,785 372			— —
	Real estate acquired in settlement of loans		8,886			8,244

- 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
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		—		—		—			—			274,113			14,311			288,424
Preferred stock cash dividends		—		—		—			—			(13,363	)		—			(13,363	)
Amortization of preferred stock discount		2,127		—		—			—			(2,127	)		—			—
Exercise of 407,542 Series C stock warrants into 186,589 shares of common stock		—		93		—			(93	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		160		—			12,911			—			—			13,071
Exercises of stock options, net		—		126		—			21,444			—			—			21,570
Directors’ stock plan		—		4		—			772			—			—			776
Deferred compensation plans, net, including dividend equivalents		—		5		(644	)		563			(32	)		—			(108	)
Other		—		—		—			666			—			—			666
Common stock cash dividends - $.70 per share		—		—		—			—			(90,672	)		—			(90,672	)

Balance - March 31, 2013	$	874,627		64,476		2,829			3,061,783			6,645,195			(225,953	)		10,422,957

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		—		—		—			—			229,017			38,898			267,915
Preferred stock cash dividends		—		—		—			—			(14,674	)		—			(14,674	)
Issuance of Series E preferred stock		350,000		—		—			(3,500	)		—			—			346,500
Stock-based compensation plans:
Compensation expense, net		—		123		—			13,999			—			—			14,122
Exercises of stock options, net		—		266		—			49,228			—			—			49,494
Stock purchase plan		—		43		—			9,545			—			—			9,588
Directors’ stock plan		—		2		—			439			—			—			441
Deferred compensation plans, net, including dividend equivalents		—		2		(299	)		265			(29	)		—			(61	)
Other		—		—		—			412			—			—			412
Common stock cash dividends - $.70 per share		—		—		—			—			(92,406	)		—			(92,406	)

Balance - March 31, 2014	$	1,231,500		65,694		2,616			3,302,402			7,309,912			(25,261	)		11,886,863

- 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 2013 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 will 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 March 31, 2014 total consideration to be paid was valued at approximately $5.2 billion.

At March 31, 2014, Hudson City had $38.2 billion of assets, including $23.8 billion of loans and $8.5 billion of investment securities, and $33.4 billion of liabilities, including $21.1 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 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 of New York (“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 the Bank Secrecy Act and anti-money-laundering laws and regulations and to take certain other steps to enhance their compliance practices. The Company 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 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 to December 31, 2014. Nevertheless, there can be no assurances that the merger will be completed by that date.

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.

- 8 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

2. Acquisitions, continued

A summary of merger-related expenses in the first quarter of 2013 associated with the pending Hudson City acquisition included in the consolidated statement of income is presented below. There were no merger-related expenses during the three-month period ended March 31, 2014.


	Three months ended March 31, 2013
	(in thousands)
Salaries and employee benefits	$	536
Equipment and net occupancy		201
Printing, postage and supplies		827
Other cost of operations		3,168

	$	4,732

3. Investment securities

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


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
March 31, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	42,415		291		59	$	42,647
Obligations of states and political subdivisions		10,148		306		71		10,383
Mortgage-backed securities:
Government issued or guaranteed		5,722,948		85,193		7,050		5,801,091
Privately issued		235		466		5		696
Collateralized debt obligations		38,451		23,623		306		61,768
Other debt securities		138,197		1,859		17,807		122,249
Equity securities		89,669		63,431		363		152,737

		6,042,063		175,169		25,661		6,191,571

Investment securities held to maturity:
Obligations of states and political subdivisions		162,894		3,280		194		165,980
Mortgage-backed securities:
Government issued or guaranteed		3,486,786		26,847		37,718		3,475,915
Privately issued		215,649		—		51,434		164,215
Other debt securities		8,656		—		—		8,656

		3,873,985		30,127		89,346		3,814,766

Other securities		298,693		—		—		298,693

Total	$	10,214,741		205,296		115,007	$	10,305,030

- 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, 2013
Investment securities available for sale:
U.S. Treasury and federal agencies	$	37,396		382		2	$	37,776
Obligations of states and political subdivisions		10,484		333		6		10,811
Mortgage-backed securities:
Government issued or guaranteed		4,123,435		61,001		19,350		4,165,086
Privately issued		1,468		387		5		1,850
Collateralized debt obligations		42,274		21,666		857		63,083
Other debt securities		137,828		1,722		19,465		120,085
Equity securities		91,480		41,842		227		133,095

		4,444,365		127,333		39,912		4,531,786

Investment securities held to maturity:
Obligations of states and political subdivisions		169,684		3,744		135		173,293
Mortgage-backed securities:
Government issued or guaranteed		3,567,905		16,160		65,149		3,518,916
Privately issued		219,628		—		60,623		159,005
Other debt securities		8,913		—		—		8,913

		3,966,130		19,904		125,907		3,860,127

Other securities		298,581		—		—		298,581

Total	$	8,709,076		147,237		165,819	$	8,690,494

There were no gross realized gains or losses from sales of investment securities for the quarters ended March 31, 2014 and 2013. The Company recognized $10 million of pre-tax other-than-temporary impairment (“OTTI”) losses during the quarter ended March 31, 2013 related to privately issued mortgage-backed securities. The impairment charges were recognized in light of deterioration of real estate values and a rise in delinquencies and charge-offs of underlying mortgage loans collateralizing those securities. The 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 of future collateral performance. There were no OTTI losses during the first quarter of 2014.

Changes in credit losses associated with debt securities for which OTTI losses have been recognized in earnings for the three months ended March 31, 2013 follows:


	Three months ended March 31, 2013
	(in thousands)
Beginning balance	$	197,809
Additions for credit losses not previously recognized		9,800
Reductions for realized losses		(20,495	)

Ending balance	$	187,114

There were no significant credit losses associated with debt securities held by the Company as of March 31, 2014 or December 31, 2013.

- 10 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

At March 31, 2014, 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	$	9,830		9,957
Due after one year through five years		43,459		44,086
Due after five years through ten years		5,328		5,442
Due after ten years		170,594		177,562

		229,211		237,047
Mortgage-backed securities available for sale		5,723,183		5,801,787

	$	5,952,394		6,038,834

Debt securities held to maturity:
Due in one year or less	$	17,944		18,049
Due after one year through five years		74,928		76,540
Due after five years through ten years		70,022		71,391
Due after ten years		8,656		8,656

		171,550		174,636
Mortgage-backed securities held to maturity		3,702,435		3,640,130

	$	3,873,985		3,814,766

- 11 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

A summary of investment securities that as of March 31, 2014 and December 31, 2013 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:


	Less than 12 months					12 months or more
	Fair value		Unrealized losses			Fair value		Unrealized losses
	(in thousands)
March 31, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	29,346		(59	)		—		—
Obligations of states and political subdivisions		1,930		(68	)		439		(3	)
Mortgage-backed securities:
Government issued or guaranteed		1,725,859		(6,919	)		5,215		(131	)
Privately issued		—		—			91		(5	)
Collateralized debt obligations		—		—			6,097		(306	)
Other debt securities		927		(10	)		105,418		(17,797	)
Equity securities		2,307		(363	)		—		—

		1,760,369		(7,419	)		117,260		(18,242	)

Investment securities held to maturity:
Obligations of states and political subdivisions		17,490		(155	)		2,658		(39	)

Mortgage-backed securities:
Government issued or guaranteed		1,715,149		(37,718	)		—		—
Privately issued		—		—			164,215		(51,434	)

		1,732,639		(37,873	)		166,873		(51,473	)

Total	$	3,493,008		(45,292	)		284,133		(69,715	)

December 31, 2013
Investment securities available for sale:
U.S. Treasury and federal agencies	$	745		(2	)		—		—
Obligations of states and political subdivisions		—		—			558		(6	)
Mortgage-backed securities:
Government issued or guaranteed		1,697,094		(19,225	)		5,815		(125	)
Privately issued		—		—			98		(5	)
Collateralized debt obligations		—		—			6,257		(857	)
Other debt securities		1,428		(4	)		103,602		(19,461	)
Equity securities		159		(227	)		—		—

		1,699,426		(19,458	)		116,330		(20,454	)

Investment securities held to maturity:
Obligations of states and political subdivisions		13,517		(120	)		1,558		(15	)
Mortgage-backed securities:
Government issued or guaranteed		2,629,950		(65,149	)		—		—
Privately issued		—		—			159,005		(60,623	)

		2,643,467		(65,269	)		160,563		(60,638	)

Total	$	4,342,893		(84,727	)		276,893		(81,092	)

- 12 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

The Company owned 392 individual investment securities with aggregate gross unrealized losses of $115 million at March 31, 2014. Based on a review of each of the securities in the investment securities portfolio at March 31, 2014, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 2014, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At March 31, 2014, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $299 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 were as follows:


	March 31, 2014		December 31, 2013
	(in thousands)
Outstanding principal balance	$	4,302,336		4,656,811
Carrying amount:
Commercial, financial, leasing, etc.		474,612		580,685
Commercial real estate		1,412,397		1,541,368
Residential real estate		551,698		576,473
Consumer		1,258,875		1,308,926

	$	3,697,582		4,007,452

Purchased impaired loans included in the table above totaled $303 million at March 31, 2014 and $331 million at December 31, 2013, 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 ended March 31, 2014 and 2013 follows:


	Three months ended March 31, 2014
	Purchased impaired			Other acquired			Total
	(in thousands)
Balance at beginning of period	$	37,230			538,633			575,863
Interest income		(6,328	)		(52,633	)		(58,961	)
Reclassifications from nonaccretable balance, net		37			—			37
Other (a)		—			(838	)		(838	)

Balance at end of period	$	30,939			485,162			516,101

- 13 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended March 31, 2013
	Purchased impaired			Other acquired			Total
	(in thousands)
Balance at beginning of period	$	42,252			638,272			680,524
Interest income		(8,704	)		(61,747	)		(70,451	)
Reclassifications from nonaccretable balance, net		180			10,817			10,997
Other (a)		—			(9,733	)		(9,733	)

Balance at end of period	$	33,728			577,609			611,337

(a)

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

A summary of current, past due and nonaccrual loans as of March 31, 2014 and December 31, 2013 were as follows:


	Current		30-89 Days past due		90 Days or more past due and accruing				Purchased impaired (b)		Nonaccrual		Total
	Current		30-89 Days past due		Non- acquired		Acquired (a)		Purchased impaired (b)		Nonaccrual		Total
	(in thousands)
March 31, 2014
Commercial, financial, leasing, etc.	$	18,686,680		43,019		8,245		4,295		15,560		138,271		18,896,070
Real estate:
Commercial		21,309,518		158,281		7,870		33,560		91,312		175,984		21,776,525
Residential builder and developer		1,073,532		3,613		—		8,812		122,757		89,563		1,298,277
Other commercial construction		2,915,804		41,861		—		2,381		44,175		25,063		3,029,284
Residential		7,530,046		254,376		285,478		45,733		26,986		259,678		8,402,297
Residential Alt-A		272,463		20,815		—		—		—		78,520		371,798
Consumer:
Home equity lines and loans		5,914,788		36,440		—		26,039		2,598		82,555		6,062,420
Automobile		1,454,199		20,441		—		176		—		16,351		1,491,167
Other		2,744,821		32,087		5,424		—		—		24,908		2,807,240

Total	$	61,901,851		610,933		307,017		120,996		303,388		890,893		64,135,078

- 14 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Current		30-89 Days past due		90 Days or more past due and accruing				Purchased impaired (b)		Nonaccrual		Total
	Current		30-89 Days past due		Non- acquired		Acquired (a)		Purchased impaired (b)		Nonaccrual		Total
	(in thousands)
December 31, 2013
Commercial, financial, leasing, etc.	$	18,489,474		77,538		4,981		6,778		15,706		110,739		18,705,216
Real estate:
Commercial		21,236,071		145,749		63,353		35,603		88,034		173,048		21,741,858
Residential builder and developer		1,025,984		8,486		141		7,930		137,544		96,427		1,276,512
Other commercial construction		2,986,598		42,234		—		8,031		57,707		35,268		3,129,838
Residential		7,630,368		295,131		294,649		43,700		29,184		252,805		8,545,837
Residential Alt-A		283,253		18,009		—		—		—		81,122		382,384
Consumer:
Home equity lines and loans		5,972,365		40,537		—		27,754		2,617		78,516		6,121,789
Automobile		1,314,246		29,144		—		366		—		21,144		1,364,900
Other		2,726,522		47,830		5,386		—		—		25,087		2,804,825

Total	$	61,664,881		704,658		368,510		130,162		330,792		874,156		64,073,159

(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 $292 million and $401 million at March 31, 2014 and December 31, 2013, respectively. Commercial mortgage loans held for sale were $38 million at March 31, 2014 and $68 million at December 31, 2013.

Changes in the allowance for credit losses for the three months ended March 31, 2014 were as follows:


	Commercial, Financial, Leasing, etc.			Real Estate
	Commercial, Financial, Leasing, etc.			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		12,598			116			4,228			14,141			917		32,000
Net charge-offs
Charge-offs		(14,809	)		(3,486	)		(7,453	)		(21,691	)		—		(47,439	)
Recoveries		5,663			3,197			1,631			5,040			—		15,531

Net charge-offs		(9,146	)		(289	)		(5,822	)		(16,651	)		—		(31,908	)

Ending balance	$	276,835			324,805			77,062			162,134			75,932		916,768

- 15 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

Changes in the allowance for credit losses for the three months ended March 31, 2013 were as follows:


	Commercial, Financial, Leasing, etc.			Real Estate
	Commercial, Financial, 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		17,880			(312	)		5,036			14,836			560		38,000
Net charge-offs
Charge-offs		(9,544	)		(9,588	)		(8,171	)		(21,645	)		—		(48,948	)
Recoveries		2,756			815			4,450			4,184			—		12,205

Net charge-offs		(6,788	)		(8,773	)		(3,721	)		(17,461	)		—		(36,743	)

Ending balance	$	257,851			328,016			90,122			176,793			74,335		927,117

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

- 16 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

The following tables provide information with respect to loans and leases that were considered impaired as of March 31, 2014 and December 31, 2013 and for the three month periods ended March 31, 2014 and 2013.


	March 31, 2014						December 31, 2013
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(in thousands)
With an allowance recorded:
Commercial, financial, leasing, etc.	$	104,878		130,132		21,578		90,293		112,092		24,614
Real estate:
Commercial		102,898		120,165		15,811		113,570		132,325		19,520
Residential builder and developer		31,314		45,625		4,746		33,311		55,122		4,379
Other commercial construction		77,054		81,296		5,933		86,260		90,515		4,022
Residential		93,029		112,025		5,262		96,508		114,521		7,146
Residential Alt-A		109,986		124,319		13,000		111,911		124,528		14,000
Consumer:
Home equity lines and loans		17,522		18,592		5,225		13,672		14,796		3,312
Automobile		38,068		38,068		10,120		40,441		40,441		11,074
Other		17,832		17,832		4,780		17,660		17,660		4,541

		592,581		688,054		86,455		603,626		702,000		92,608

With no related allowance recorded:
Commercial, financial, leasing, etc.		40,542		42,948		—		28,093		33,095		—
Real estate:
Commercial		83,194		104,359		—		65,271		84,333		—
Residential builder and developer		68,487		101,354		—		72,366		104,768		—
Other commercial construction		5,801		9,400		—		7,369		11,493		—
Residential		84,328		94,408		—		84,144		95,358		—
Residential Alt-A		28,047		51,001		—		28,357		52,211		—

		310,399		403,470		—		285,600		381,258		—

Total:
Commercial, financial, leasing, etc.		145,420		173,080		21,578		118,386		145,187		24,614
Real estate:
Commercial		186,092		224,524		15,811		178,841		216,658		19,520
Residential builder and developer		99,801		146,979		4,746		105,677		159,890		4,379
Other commercial construction		82,855		90,696		5,933		93,629		102,008		4,022
Residential		177,357		206,433		5,262		180,652		209,879		7,146
Residential Alt-A		138,033		175,320		13,000		140,268		176,739		14,000
Consumer:
Home equity lines and loans		17,522		18,592		5,225		13,672		14,796		3,312
Automobile		38,068		38,068		10,120		40,441		40,441		11,074
Other		17,832		17,832		4,780		17,660		17,660		4,541

Total	$	902,980		1,091,524		86,455		889,226		1,083,258		92,608

- 17 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended March 31, 2014						Three months ended March 31, 2013
			Interest income recognized						Interest income recognized
	Average recorded investment		Total		Cash basis		Average recorded investment		Total		Cash basis
	(in thousands)
Commercial, financial, leasing, etc.	$	134,306		548		548		167,793		2,434		2,434
Real estate:
Commercial		185,425		926		926		194,446		303		303
Residential builder and developer		101,253		74		74		183,853		140		65
Other commercial construction		87,292		1,087		1,087		98,318		635		635
Residential		174,168		1,400		902		188,075		1,470		922
Residential Alt-A		139,651		1,626		559		156,971		1,740		591
Consumer:
Home equity lines and loans		15,676		121		29		12,454		167		39
Automobile		39,383		625		87		47,606		776		146
Other		17,700		174		52		14,930		151		54

Total	$	894,854		6,581		4,264		1,064,446		7,816		5,189

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.

- 18 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential Builder and Developer		Other Commercial Construction
	(in thousands)
March 31, 2014
Pass	$	18,022,241		21,053,068		1,151,202		2,946,152
Criticized accrual		735,558		547,473		57,512		58,069
Criticized nonaccrual		138,271		175,984		89,563		25,063

Total	$	18,896,070		21,776,525		1,298,277		3,029,284

December 31, 2013
Pass	$	17,894,592		20,972,257		1,107,144		3,040,106
Criticized accrual		699,885		596,553		72,941		54,464
Criticized nonaccrual		110,739		173,048		96,427		35,268

Total	$	18,705,216		21,741,858		1,276,512		3,129,838

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 the original balance of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values.

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

- 19 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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)
March 31, 2014
Individually evaluated for impairment	$	21,578		26,157		18,243		20,125	$	86,103
Collectively evaluated for impairment		249,499		298,048		56,797		140,409		744,753
Purchased impaired		5,758		600		2,022		1,600		9,980

Allocated	$	276,835		324,805		77,062		162,134		840,836

Unallocated										75,932

Total									$	916,768

December 31, 2013
Individually evaluated for impairment	$	24,614		27,563		21,127		18,927	$	92,231
Collectively evaluated for impairment		246,096		296,781		55,864		144,210		742,951
Purchased impaired		2,673		634		1,665		1,507		6,479

Allocated	$	273,383		324,978		78,656		164,644		841,661

Unallocated										75,015

Total									$	916,676

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)
March 31, 2014
Individually evaluated for impairment	$	145,420		367,183		314,829		73,422	$	900,854
Collectively evaluated for impairment		18,735,090		25,478,659		8,432,280		10,284,807		62,930,836
Purchased impaired		15,560		258,244		26,986		2,598		303,388

Total	$	18,896,070		26,104,086		8,774,095		10,360,827	$	64,135,078

December 31, 2013
Individually evaluated for impairment	$	118,386		376,339		320,360		71,773	$	886,858
Collectively evaluated for impairment		18,571,124		25,488,584		8,578,677		10,217,124		62,855,509
Purchased impaired		15,706		283,285		29,184		2,617		330,792

Total	$	18,705,216		26,148,208		8,928,221		10,291,514	$	64,073,159

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

- 20 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2014 and 2013:


			Recorded investment				Financial effects of modification
Three months ended March 31, 2014	Number		Pre- modifica- tion		Post- modifica- tion		Recorded investment (a)			Interest (b)
			(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		30	$	14,954	$	14,848	$	(106	)	$	—
Combination of concession types		2		41		39		(2	)		(4	)
Real estate:
Commercial
Principal deferral		13		7,044		7,002		(42	)		—
Combination of concession types		1		346		401		55			(104	)
Other commercial construction
Principal deferral		1		151		151		—			—
Residential
Principal deferral		13		1,602		1,663		61			—
Interest rate reduction		1		98		104		6			(32	)
Other		1		188		188		—			—
Combination of concession types		14		2,188		2,160		(28	)		(282	)
Residential Alt-A
Principal deferral		2		166		202		36			—
Combination of concession types		10		1,746		1,736		(10	)		(61	)
Consumer:
Home equity lines and loans
Principal deferral		3		280		280		—			—
Combination of concession types		15		1,856		1,856		—			(172	)
Automobile
Principal deferral		80		993		993		—			—
Other		11		61		61		—			—
Combination of concession types		23		250		250		—			(26	)
Other
Principal deferral		8		55		55		—			—
Other		1		45		45		—			—
Combination of concession types		14		466		466		—			(188	)

Total		243	$	32,530	$	32,500	$	(30	)	$	(869	)

(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 March 31, 2013	Number		Pre- modifica- tion		Post- modifica- tion		Recorded investment (a)			Interest (b)
			(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		24	$	2,006	$	1,982	$	(24	)	$	—
Other		1		47,200		47,200		—			—
Combination of concession types		1		342		342		—			—
Real estate:
Commercial
Principal deferral		8		18,478		18,363		(115	)		—
Combination of concession types		2		582		581		(1	)		(56	)
Residential builder and developer
Principal deferral		8		1,357		1,340		(17	)		—
Combination of concession types		1		1,701		1,691		(10	)		—
Residential
Principal deferral		7		566		607		41			—
Other		1		195		195		—			—
Combination of concession types		20		2,449		2,536		87			(371	)
Residential Alt-A
Combination of concession types		5		907		925		18			(110	)
Consumer:
Home equity lines and loans
Principal deferral		2		79		79		—			—
Combination of concession types		2		211		211		—			(33	)
Automobile
Principal deferral		121		1,586		1,586		—			—
Interest rate reduction		2		36		36		—			(5	)
Other		17		159		159		—			—
Combination of concession types		61		553		553		—			(42	)
Other
Principal deferral		6		45		45		—			—
Other		1		12		12		—			—
Combination of concession types		42		1,217		1,217		—			(267	)

Total		332	$	79,681	$	79,660	$	(21	)	$	(884	)

(a)

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

(b)

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2014 and 2013 and for which there was a subsequent payment default during the three-month periods ended March 31, 2014 and 2013, respectively, were not material.

- 22 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

5. Borrowings

M&T had $834 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2014 that are held by various trusts and were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in M&T’s Tier 1 capital. However, 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 general, the agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T.

The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2033) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval.

On February 27, 2014, M&T redeemed all of the issued and outstanding 8.5% $350 million trust preferred 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 March 31, 2014 and December 31, 2013. The agreements are subject to 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 March 31, 2014 and December 31, 2013.

- 23 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6. Shareholders’ equity

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

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


	Shares issued and outstanding		Carrying value March 31, 2014		Carrying value December 31, 2013
			(dollars in thousands)
Series A (a)
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference per share		230,000	$	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		151,500
Series D (b)
Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, $10,000 liquidation preference per share		50,000		500,000		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, were paid quarterly at a rate of 5% per year through November 14, 2013 and are paid at 6.375% thereafter. M&T has agreed to not redeem the preferred shares until on or after November 15, 2018. Warrants to purchase M&T common stock were issued in connection with the Series A and C preferred stock (Series A – 1,218,522 common shares at $73.86 per share; Series C – 407,542 common shares at $55.76 per share). In March 2013, the Series C warrants were exercised in a “cashless” exercise, resulting in the issuance of 186,589 common shares. During 2013, 69,127 of the Series A warrants were exercised in “cashless” exercises, resulting in the issuance of 25,427 common shares. Remaining outstanding Series A warrants that expire in 2018 were 1,149,395 at March 31, 2014.

(b)

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.

- 24 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6. Shareholders’ equity, continued

(c)

Dividends, if declared, will be 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 plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence.

In addition to the Series A and Series C warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at March 31, 2014 and December 31, 2013. 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 benefit cost for defined benefit plans consisted of the following:


	Pension benefits						Other postretirement benefits
	Three months ended March 31
	2014			2013			2014			2013
	(in thousands)
Service cost	$	5,100			6,050			150			200
Interest cost on projected benefit obligation		17,250			15,126			675			675
Expected return on plan assets		(22,925	)		(21,875	)		—			—
Amortization of prior service credit		(1,650	)		(1,650	)		(350	)		(350	)
Amortization of net actuarial loss		3,350			10,400			—			100

Net periodic benefit cost	$	1,125			8,051			475			625

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $15,732,000 and $15,755,000 for the three months ended March 31, 2014 and 2013, respectively.

- 25 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8. Earnings per common share

The computations of basic earnings per common share follow:


	Three months ended March 31
	2014			2013
	(in thousands, except per share)
Income available to common shareholders:
Net income	$	229,017			274,113
Less: Preferred stock dividends (a)		(14,674	)		(13,363	)
Amortization of preferred stock discount (a)		—			(2,147	)

Net income available to common equity		214,343			258,603
Less: Income attributable to unvested stock-based compensation awards		(2,623	)		(3,524	)

Net income available to common shareholders	$	211,720			255,079
Weighted-average shares outstanding:
Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards		131,800			129,449
Less: Unvested stock-based compensation awards		(1,588	)		(1,780	)

Weighted-average shares outstanding		130,212			127,669
Basic earnings per common share	$	1.63			2.00

(a)

Including impact of not as yet declared cumulative dividends.

- 26 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8. Earnings per common share, continued

The computations of diluted earnings per common share follow:


	Three months ended March 31
	2014			2013
	(in thousands, except per share)
Net income available to common equity	$	214,343			258,603
Less: Income attributable to unvested stock-based compensation awards		(2,612	)		(3,507	)

Net income available to common shareholders	$	211,731			255,096
Adjusted weighted-average shares outstanding:
Common and unvested stock-based compensation awards		131,800			129,449
Less: Unvested stock-based compensation awards		(1,588	)		(1,780	)
Plus: Incremental shares from assumed conversion of stock-based compensation awards		914			967

Adjusted weighted-average shares outstanding		131,126			128,636
Diluted earnings per common share	$	1.61			1.98

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 3.0 million and 4.7 million common shares during the three-month periods ended March 31, 2014 and 2013, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

- 27 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9. Comprehensive income

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


	Investment Securities
	With OTTI		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		19,968		42,119		—			—			62,087			(24,374	)		37,713
Foreign currency translation adjustment		—		—		—			(234	)		(234	)		98			(136	)

Total other comprehensive income before reclassifications		19,968		42,119		—			(234	)		61,853			(24,276	)		37,577

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:
Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities		2		823		—			—			825	(a)		(324	)		501
Amortization of prior service credit		—		—		(2,000	)		—			(2,000	)(c)		785			(1,215	)
Amortization of actuarial losses		—		—		3,350			—			3,350			(1,315	)		2,035

Total reclassifications		2		823		1,350			—			2,175			(854	)		1,321

Total gain (loss) during the period		19,970		42,942		1,350			(234	)		64,028			(25,130	)		38,898

Balance – March 31, 2014	$	57,225		61,392		(160,267	)		(119	)	$	(41,769	)		16,508		$	(25,261	)

- 28 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9. Comprehensive income, continued


	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		24,540			(18,959	)		—			—			5,581			(2,181	)		3,400
Foreign currency translation adjustment		—			—			—			(1,452	)		(1,452	)		520			(932	)

Total other comprehensive income before reclassifications		24,540			(18,959	)		—			(1,452	)		4,129			(1,661	)		2,468

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:
Accretion of unrealized holding losses on HTM securities		49			1,146			—			—			1,195	(a)		(469	)		726
OTTI charges recognized in net income		9,800			—			—			—			9,800	(b)		(3,847	)		5,953
Amortization of prior service credit		—			—			(2,000	)		—			(2,000	)(c)		785			(1,215	)
Amortization of actuarial losses		—			—			10,500			—			10,500	(c)		(4,121	)		6,379

Total reclassifications		9,849			1,146			8,500			—			19,495			(7,652	)		11,843

Total gain (loss) during the period		34,389			(17,813	)		8,500			(1,452	)		23,624			(9,313	)		14,311

Balance – March 31, 2013	$	(57,446	)		134,386			(447,090	)		(1,883	)	$	(372,033	)		146,080		$	(225,953	)

(a)

Included in interest income

(b)

Included in OTTI losses recognized in earnings

(c)

Included in salaries and employee benefits expense

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


					Defined
	Investment securities				benefit
	With OTTI		All other		plans			Other			Total
Balance – December 31, 2013	$	22,632		11,294		(98,182	)		97			(64,159	)
Net gain (loss) during period		12,132		26,082		820			(136	)		38,898

Balance – March 31, 2014	$	34,764		37,376		(97,362	)		(39	)		(25,261	)

- 29 -

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 March 31, 2014.

The net effect of interest rate swap agreements was to increase net interest income by $11 million and $10 million for the three months ended March 31, 2014 and 2013, respectively.

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


					Weighted-
	Notional amount		Average maturity		average rate
	Notional amount		Average maturity		Fixed			Variable
	(in thousands)		(in years)
March 31, 2014
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		3.4		4.42	%		1.19	%

December 31, 2013
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		3.7		4.42	%		1.20	%

(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 $17.1 billion and $17.4 billion at March 31, 2014 and December 31, 2013, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $1.0 billion and $1.4 billion at March 31, 2014 and December 31, 2013, respectively.

- 30 -

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
	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013

	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	94,716		102,875	$	—		—
Commitments to sell real estate loans (a)		1,303		6,957		1,160		487

		96,019		109,832		1,160		487
Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		13,878		7,616		1,289		3,675
Commitments to sell real estate loans (a)		2,807		6,120		1,895		230
Trading:
Interest rate contracts (b)		246,284		274,864		207,179		234,455
Foreign exchange and other option and futures contracts (b)		8,963		15,831		9,187		15,342

		271,932		304,431		219,550		253,702

Total derivatives	$	367,951		414,263	$	220,710		254,189

(a)

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

(b)

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

- 31 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued


	Amount of unrealized gain (loss) recognized
	Three months ended March 31, 2014					Three months ended March 31, 2013
	Derivative			Hedged item		Derivative			Hedged item
	(in thousands)
Derivatives in fair value hedging relationships
Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(8,160	)		7,920	$	(8,873	)		8,900

Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	(302	)			$	968
Foreign exchange and other option and futures contracts (b)		(5,030	)				(381	)

Total	$	(5,332	)			$	587

(a)

Reported as other revenues from operations.

(b)

Reported as trading account and foreign exchange gains.

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 at each of March 31, 2014 and December 31, 2013. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

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

The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $175 million and $194 million at March 31, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $101 million and $107 million at March 31, 2014 and December 31, 2013, respectively. The Company was required to post collateral relating to those positions of $93 million and $95 million, at March 31, 2014 and December 31, 2013, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings,

- 32 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued

the counterparties of the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit-risk-related contingent features in a net liability position on March 31, 2014 was $32 million for which the Company had posted collateral of $22 million in the normal course of business. If the credit-risk-related contingent features had been triggered on March 31, 2014, the maximum amount of additional collateral the Company would have been required to post with counterparties was $10 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to an enforceable master netting arrangement, was $167 million and $183 million at March 31, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $94 million and $95 million at March 31, 2014 and December 31, 2013, respectively. Counterparties posted collateral relating to those positions of $92 million and $93 million at March 31, 2014 and December 31, 2013, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions.

11. Variable interest entities and asset securitizations

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 March 31, 2014 and December 31, 2013, the carrying values of the loans in the securitization trust were $117 million and $121 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 March 31, 2014 and December 31, 2013 was $18 million. Because the transaction was non-recourse, the Company’s maximum exposure to loss as a result of its association with the trust at March 31, 2014 is limited to realizing the carrying value of the loans less the amount of the mortgage-backed securities held by 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 Company’s consolidated financial statements. At March 31, 2014 and December 31, 2013, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet. The Company has recognized $34 million 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&T’s 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 $1.3 billion at March 31, 2014 and December 31, 2013. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments

- 33 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

11. Variable interest entities and asset securitizations, continued

in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Company’s maximum exposure to loss of its investments in such partnerships was $250 million, including $57 million of unfunded commitments, at March 31, 2014 and $236 million, including $45 million of unfunded commitments, at December 31, 2013. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements.

12. Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at March 31, 2014.

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 Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

Trading account assets and liabilities

Trading account assets and liabilities consist primarily of interest rate swap agreements and foreign exchange contracts with customers who require such services with offsetting positions with third parties to minimize the Company’s risk with respect to such transactions. The Company generally determines the fair value of its derivative trading account assets and liabilities using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. Mutual funds held in connection with deferred compensation 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 Company’s available-for-sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Certain investments in mutual funds and equity securities are actively traded and, therefore, have been classified as Level 1 valuations.

The Company sold substantially all of its privately issued mortgage-backed securities classified as available for sale during the second quarter of 2013. In prior periods, the Company generally used model-based techniques to value such securities because the Company was significantly restricted in the level of market observable assumptions that could be relied upon. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Because of the inactivity in the markets and the lack of observable valuation inputs, the Company classified the valuation of privately issued mortgage-backed securities as Level 3.

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at March 31, 2014 and December 31, 2013. 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 11% with a weighted-average of 7% was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At March 31, 2014, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $38 million and $62 million, respectively, and at December 31, 2013 were $42 million and $63 million, respectively. Privately issued mortgage-backed securities and securities backed by trust preferred securities issued by financial institutions and other entities constituted all of the available-for-sale investment securities classified as Level 3 valuations.

The Company ensures an appropriate control framework is in place over the valuation processes and techniques used for 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.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

Real estate loans held for sale

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

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

The Company enters into various commitments to originate real estate loans for sale and commitments to sell real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value on the consolidated balance sheet. The estimated fair values of such commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans to certain government-sponsored entities and other parties. The fair valuations of commitments to sell real estate loans generally result in a Level 2 classification. The estimated fair value of commitments to originate real estate loans for sale are adjusted to reflect the Company’s anticipated commitment expirations. The estimated commitment expirations are considered significant unobservable inputs contributing to the Level 3 classification of commitments to originate real estate loans for sale. Significant unobservable inputs used in the determination of estimated fair value of commitments to originate real estate loans for sale are included in the accompanying table of significant unobservable inputs to Level 3 measurements.

Interest rate swap agreements used for interest rate risk management

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

The following tables present assets and liabilities at March 31, 2014 and December 31, 2013 measured at estimated fair value on a recurring basis:


	Fair value measurements at March 31, 2014		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)
Trading account assets	$	314,807		49,473		265,334		—
Investment securities available for sale:
U.S. Treasury and federal agencies		42,647		—		42,647		—
Obligations of states and political subdivisions		10,383		—		10,383		—
Mortgage-backed securities:
Government issued or guaranteed		5,801,091		—		5,801,091		—
Privately issued		696		—		—		696
Collateralized debt obligations		61,768		—		—		61,768
Other debt securities		122,249		—		122,249		—
Equity securities		152,737		80,580		72,157		—

		6,191,571		80,580		6,048,527		62,464

Real estate loans held for sale		330,004		—		330,004		—
Other assets (b)		112,704		—		98,826		13,878

Total assets	$	6,949,086		130,053		6,742,691		76,342

Trading account liabilities	$	216,366		—		216,366		—
Other liabilities (b)		4,344		—		3,055		1,289

Total liabilities	$	220,710		—		219,421		1,289

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued


	Fair value measurements at December 31, 2013		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)
Trading account assets	$	376,131		51,386		324,745		—
Investment securities available for sale:
U.S. Treasury and federal agencies		37,776		—		37,776		—
Obligations of states and political subdivisions		10,811		—		10,811		—
Mortgage-backed securities:
Government issued or guaranteed		4,165,086		—		4,165,086		—
Privately issued		1,850		—		—		1,850
Collateralized debt obligations		63,083		—		—		63,083
Other debt securities		120,085		—		120,085		—
Equity securities		133,095		82,450		50,645		—

		4,531,786		82,450		4,384,403		64,933

Real estate loans held for sale		468,650		—		468,650		—
Other assets (b)		123,568		—		115,952		7,616

Total assets	$	5,500,135		133,836		5,293,750		72,549

Trading account liabilities	$	249,797		—		249,797		—
Other liabilities (b)		4,392		—		717		3,675

Total liabilities	$	254,189		—		250,514		3,675

(a)

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2014 and the year ended December 31, 2013.

(b)

Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3).

- 38 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 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		—			—			22,383	(b)
Included in other comprehensive income		67	(e)		4,646	(e)		—
Settlements		(1,221	)		(5,961	)		—
Transfers in and/or out of Level 3 (c)		—			—			(13,735	)(d)

Balance – March 31, 2014	$	696		$	61,768		$	12,589

Changes in unrealized gains included in earnings related to assets still held at March 31, 2014	$	—		$	—		$	15,050	(b)

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2013 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, 2013	$	1,023,886		$	61,869		$	47,859
Total gains (losses) realized/unrealized:
Included in earnings		(9,800	)(a)		—			43,312	(b)
Included in other comprehensive income		26,381	(e)		740	(e)		—
Settlements		(47,220	)		(891	)		—
Transfers in and/or out of Level 3 (c)		—			—			(55,052	)(d)

Balance – March 31, 2013	$	993,247		$	61,718		$	36,119

Changes in unrealized gains (losses) included in earnings related to assets still held at March 31, 2013	$	(9,800	)(a)	$	—		$	31,398	(b)

(a)

Reported as an other-than-temporary impairment loss in the consolidated statement of income.

(b)

Reported as mortgage banking revenues in the consolidated statement of income and includes the fair value of commitment issuances and expirations.

(c)

The Company’s policy for transfers between fair value levels is to recognize the transfer as of the actual date of the event or change in circumstances that caused the transfer.

(d)

Transfers out of Level 3 consist of interest rate locks transferred to closed loans.

(e)

Reported as net unrealized gains on investment securities in the consolidated statement of comprehensive income.

- 40 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

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

Loans

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 20% to 75% at March 31, 2014. 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 $161 million at March 31, 2014 ($100 million and $61 million of which were classified as Level 2 and Level 3, respectively), $222 million at December 31, 2013 ($173 million and $49 million of which were classified as Level 2 and Level 3, respectively) and $227 million at March 31, 2013 ($158 million and $69 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on March 31, 2014 and 2013 were decreases of $15 million for each of the three month periods ended March 31, 2014 and 2013.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $11 million and $19 million at March 31, 2014 and March 31, 2013 respectively. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three months ended March 31, 2014 or 2013.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

Significant unobservable inputs to Level 3 measurements

The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at March 31, 2014 and December 31, 2013:


	Fair value at March 31, 2014		Valuation technique	Unobservable input/assumptions	Range (weighted- average)
Recurring fair value measurements
Privately issued mortgage–backed securities	$	696	Two independent pricing quotes	—		—
Collateralized debt obligations		61,768	Discounted cash flow	Probability of default		16%-54% (37	%)
				Loss severity		100%
Net other assets (liabilities) (a)		12,589	Discounted cash flow	Commitment expirations		0%-90% (17	%)


	Fair value at December 31, 2013		Valuation technique	Unobservable input/assumptions	Range (weighted- average)
Recurring fair value measurements
Privately issued mortgage–backed securities	$	1,850	Two independent pricing quotes	—		—
Collateralized debt obligations		63,083	Discounted cash flow	Probability of default		17%-55% (39	%)
				Loss severity		100%
Net other assets (liabilities) (a)		3,941	Discounted cash flow	Commitment expirations		0%-90% (20	%)

(a)

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

Sensitivity of fair value measurements to changes in unobservable inputs

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

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

- 42 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

Disclosures of fair value of financial instruments

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

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


	March 31, 2014
	Carrying amount			Estimated fair value			Level 1		Level 2			Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	1,763,118		$	1,763,118		$	1,689,900	$	73,218		$	—
Interest-bearing deposits at banks		3,299,185			3,299,185			—		3,299,185			—
Trading account assets		314,807			314,807			49,473		265,334			—
Investment securities		10,364,249			10,305,030			80,580		9,997,771			226,679
Loans and leases:
Commercial loans and leases		18,896,070			18,584,218			—		—			18,584,218
Commercial real estate loans		26,104,086			25,970,001			—		38,305			25,931,696
Residential real estate loans		8,774,095			8,733,704			—		5,285,649			3,448,055
Consumer loans		10,360,827			10,271,804			—		—			10,271,804
Allowance for credit losses		(916,768	)		—			—		—			—

Loans and leases, net		63,218,310			63,559,727			—		5,323,954			58,235,773
Accrued interest receivable		242,009			242,009			—		242,009			—
Financial liabilities:
Noninterest-bearing deposits	$	(25,244,200	)	$	(25,244,200	)	$	—	$	(25,244,200	)	$	—
Savings deposits and NOW accounts		(39,804,771	)		(39,804,771	)		—		(39,804,771	)		—
Time deposits		(3,402,515	)		(3,420,917	)		—		(3,420,917	)		—
Deposits at Cayman Islands office		(247,880	)		(247,880	)		—		(247,880	)		—
Short-term borrowings		(230,209	)		(230,209	)		—		(230,209	)		—
Long-term borrowings		(6,251,197	)		(6,388,067	)		—		(6,388,067	)		—
Accrued interest payable		(59,685	)		(59,685	)		—		(59,685	)		—
Trading account liabilities		(216,366	)		(216,366	)		—		(216,366	)		—
Other financial instruments:
Commitments to originate real estate loans for sale	$	12,589		$	12,589		$	—	$	—		$	12,589
Commitments to sell real estate loans		1,055			1,055			—		1,055			—
Other credit-related commitments		(114,641	)		(114,641	)		—		—			(114,641	)
Interest rate swap agreements used for interest rate risk management		94,716			94,716			—		94,716			—

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued


	December 31, 2013
	Carrying amount			Estimated fair value			Level 1		Level 2			Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	1,672,934		$	1,672,934		$	1,596,877	$	76,057		$	—
Interest-bearing deposits at banks		1,651,138			1,651,138			—		1,651,138			—
Trading account assets		376,131			376,131			51,386		324,745			—
Investment securities		8,796,497			8,690,494			82,450		8,384,106			223,938
Loans and leases:
Commercial loans and leases		18,705,216			18,457,288			—		—			18,457,288
Commercial real estate loans		26,148,208			26,018,195			—		67,505			25,950,690
Residential real estate loans		8,928,221			8,867,872			—		5,432,207			3,435,665
Consumer loans		10,291,514			10,201,087			—		—			10,201,087
Allowance for credit losses		(916,676	)		—			—		—			—

Loans and leases, net		63,156,483			63,544,442			—		5,499,712			58,044,730
Accrued interest receivable		222,558			222,558			—		222,558			—
Financial liabilities:
Noninterest-bearing deposits	$	(24,661,007	)	$	(24,661,007	)	$	—	$	(24,661,007	)	$	—
Savings deposits and NOW accounts		(38,611,021	)		(38,611,021	)		—		(38,611,021	)		—
Time deposits		(3,523,838	)		(3,542,789	)		—		(3,542,789	)		—
Deposits at Cayman Islands office		(322,746	)		(322,746	)		—		(322,746	)		—
Short-term borrowings		(260,455	)		(260,455	)		—		(260,455	)		—
Long-term borrowings		(5,108,870	)		(5,244,902	)		—		(5,244,902	)		—
Accrued interest payable		(43,419	)		(43,419	)		—		(43,419	)		—
Trading account liabilities		(249,797	)		(249,797	)		—		(249,797	)		—
Other financial instruments:
Commitments to originate real estate loans for sale	$	3,941		$	3,941		$	—	$	—		$	3,941
Commitments to sell real estate loans		12,360			12,360			—		12,360			—
Other credit-related commitments		(118,886	)		(118,886	)		—		—			(118,886	)
Interest rate swap agreements used for interest rate risk management		102,875			102,875			—		102,875			—

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.

Investment securities

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

Loans and leases

In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans and leases would seek.

Deposits

Pursuant to GAAP, the estimated fair value ascribed to noninterest-bearing deposits, savings deposits and 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 Company’s pricing at the respective date for deposits with comparable remaining terms to maturity.

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

Long-term borrowings

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

Other commitments and contingencies

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

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

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.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

13. Commitments and contingencies

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


	March 31, 2014		December 31, 2013
	(in thousands)
Commitments to extend credit
Home equity lines of credit	$	6,260,931		6,218,823
Commercial real estate loans to be sold		151,989		62,386
Other commercial real estate and construction		4,055,951		3,919,545
Residential real estate loans to be sold		521,869		469,869
Other residential real estate		368,055		384,617
Commercial and other		10,781,231		10,419,545
Standby letters of credit		3,531,586		3,600,528
Commercial letters of credit		39,197		53,284
Financial guarantees and indemnification contracts		2,842,506		2,457,633
Commitments to sell real estate loans		845,549		854,656

Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, whereas commercial letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and a third party. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.

Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in financial guarantees and indemnification contracts are loan principal amounts sold with recourse in conjunction with the Company’s involvement in the Fannie Mae Delegated Underwriting and Servicing program. The Company’s maximum credit risk for recourse associated with loans sold under this program totaled approximately $2.3 billion at each of March 31, 2014 and December 31, 2013.

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.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

13. Commitments and contingencies, continued

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 has an agreement with the Baltimore Ravens of the National Football League whereby the Company obtained the naming rights to a football stadium in Baltimore, Maryland. Under the agreement, the Company is obligated to pay $6 million per year from 2014 through 2017.

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

The Company reinsures credit life and accident and health insurance purchased by consumer loan customers. The Company also enters into reinsurance contracts with third party insurance companies who insure against the risk of a mortgage borrower’s payment default in connection with certain mortgage loans originated by the Company. When providing reinsurance coverage, the Company receives a premium in exchange for accepting a portion of the insurer’s risk of loss. The outstanding loan principal balances reinsured by the Company were approximately $14 million at March 31, 2014. Assets of subsidiaries providing reinsurance that are available to satisfy claims totaled approximately $35 million at March 31, 2014. The amounts noted above are not necessarily indicative of losses which may ultimately be incurred. Such losses are expected to be substantially less because most loans are repaid by borrowers in accordance with the original loan terms. Management believes that any reinsurance losses that may be payable by the Company will not be material to the Company’s consolidated financial position.

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. At March 31, 2014, management believes that any further liability arising out of the Company’s obligation to loan purchasers is not material to the Company’s consolidated financial position.

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. On an on-going basis the Company assesses its liabilities and contingencies in connection with such legal 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 $50 million. Although the Company does not believe that the outcome of pending litigations will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14. Segment information

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

The financial information of the Company’s segments was compiled utilizing the accounting policies described in note 22 to the Company’s consolidated financial statements as of and for the year ended December 31, 2013. 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. As also described in note 22 to the Company’s 2013 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 Company’s reportable segments, but are included in the “All Other” category. The Company does, however, assign such intangible assets to business units for purposes of testing for impairment.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14. Segment information, continued

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


	Three months ended March 31
	2014								2013
	Total revenues(a)		Inter- segment revenues			Net income (loss)			Total revenues(a)		Inter- segment revenues			Net income (loss)
	(in thousands)
Business Banking	$	102,299		1,057			28,598		$	105,418		1,194			32,561
Commercial Banking		248,586		1,197			99,765			249,850		1,350			107,387
Commercial Real Estate		158,360		348			74,561			165,293		1,552			76,508
Discretionary Portfolio		24,657		(5,039	)		11,279			12,041		(8,601	)		1,846
Residential Mortgage Banking		94,588		9,748			19,411			119,899		18,698			34,361
Retail Banking		261,888		3,505			29,711			291,185		3,257			52,350
All Other		186,162		(10,816	)		(34,308	)		145,246		(17,450	)		(30,900	)

Total	$	1,076,540		—			229,017		$	1,088,932		—			274,113


	Average total assets
	Three months ended March 31				Year ended December 31
	2014		2013		2013
	(in millions)
Business Banking	$	5,242		4,980		5,080
Commercial Banking		22,523		21,272		21,655
Commercial Real Estate		16,937		17,054		17,150
Discretionary Portfolio		18,581		16,585		16,480
Residential Mortgage Banking		3,157		2,847		2,858
Retail Banking		10,155		11,391		10,997
All Other		10,070		7,784		9,442

Total	$	86,665		81,913		83,662

(a)

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14. Segment information, continued

(e.g. deposits). The taxable-equivalent adjustment aggregated $5,945,000 and $6,450,000 for the three-month periods ended March 31, 2014 and 2013, 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.

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 $60 million at March 31, 2014.

Bayview Financial Holdings, L.P. (together with its affiliates, “Bayview Financial”), a privately-held specialty mortgage finance company, is BLG’s majority investor. In addition to their common investment in BLG, the Company and Bayview Financial conduct other business activities with each other. The Company has obtained loan servicing rights for mortgage loans from BLG and Bayview Financial having outstanding principal balances of $5.4 billion and $5.5 billion at March 31, 2014 and December 31, 2013, respectively. Revenues from those servicing rights were $7 million and $8 million during the three-month periods ended March 31, 2014 and 2013, respectively. The Company sub-services residential mortgage loans for Bayview Financial having outstanding principal balances totaling $46.5 billion and $45.6 billion at March 31, 2014 and December 31, 2013, respectively. Revenues earned for sub-servicing loans for Bayview Financial were $26 million and $2 million for the three-month periods ended March 31, 2014 and 2013, respectively. In addition, the Company held $216 million and $220 million of mortgage-backed securities in its held-to-maturity portfolio at March 31, 2014 and December 31, 2013, respectively, that were securitized by Bayview Financial.

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Item 2.

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

Overview

M&T Bank Corporation (“M&T”) recorded net income in the first quarter of 2014 of $229 million or $1.61 of diluted earnings per common share, compared with $274 milli