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 June 30, 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		(I.R.S. Employer
incorporation or organization)		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 July 31, 2014: 131,965,978 shares.

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2014


Table of Contents of Information Required in Report	Page
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEET—June 30, 2014 and December 31, 2013		3

CONSOLIDATED STATEMENT OF INCOME—Three and six months ended June 30, 2014 and 2013		4

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME—Three and six months ended June 30, 2014 and 2013		5

CONSOLIDATED STATEMENT OF CASH FLOWS—Six months ended June 30, 2014 and 2013		6

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY—Six months ended June 30, 2014 and 2013		7

NOTES TO FINANCIAL STATEMENTS		8

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.		105

Item 4. Controls and Procedures.		105

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.		105

Item 1A. Risk Factors.		106

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		107

Item 3. Defaults Upon Senior Securities.		107

Item 4. Mine Safety Disclosures.		107

Item 5. Other Information.		107

Item 6. Exhibits.		108

SIGNATURES		108

EXHIBIT INDEX		109

-2-

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)


		June 30,			December 31,
Dollars in thousands, except per share		2014			2013
Assets	Cash and due from banks	$	1,827,197			1,573,361
	Interest-bearing deposits at banks		3,032,530			1,651,138
	Federal funds sold		90,239			99,573
	Trading account		313,325			376,131
	Investment securities (includes pledged securities that can be sold or repledged of $1,620,148 at June 30, 2014; $1,696,438 at December 31, 2013)
	Available for sale (cost: $7,753,752 at June 30, 2014; $4,444,365 at December 31, 2013)		8,008,779			4,531,786
	Held to maturity (fair value: $3,765,849 at June 30, 2014; $3,860,127 at December 31, 2013)		3,760,665			3,966,130
	Other (fair value: $350,751 at June 30, 2014; $298,581 at December 31, 2013)		350,751			298,581

	Total investment securities		12,120,195			8,796,497

	Loans and leases		64,980,824			64,325,783
	Unearned discount		(233,131	)		(252,624	)

	Loans and leases, net of unearned discount		64,747,693			64,073,159
	Allowance for credit losses		(917,666	)		(916,676	)

	Loans and leases, net		63,830,027			63,156,483

	Premises and equipment		625,006			633,520
	Goodwill		3,524,625			3,524,625
	Core deposit and other intangible assets		49,555			68,851
	Accrued interest and other assets		5,422,303			5,282,212

	Total assets	$	90,835,002			85,162,391

Liabilities	Noninterest-bearing deposits	$	26,088,763			24,661,007
	NOW accounts		2,007,336			1,989,441
	Savings deposits		38,209,271			36,621,580
	Time deposits		3,285,995			3,523,838
	Deposits at Cayman Islands office		237,890			322,746

	Total deposits		69,829,255			67,118,612

	Federal funds purchased and agreements to repurchase securities		161,631			260,455
	Accrued interest and other liabilities		1,283,430			1,368,922
	Long-term borrowings		7,391,931			5,108,870

	Total liabilities		78,666,247			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 June 30, 2014; 381,500 shares at December 31, 2013; Liquidation preference of $10,000 per share: 50,000 shares at June 30, 2014 and December 31, 2013		1,231,500			881,500
	Common stock, $.50 par, 250,000,000 shares authorized, 131,911,359 shares issued at June 30, 2014; 130,516,364 shares issued at December 31, 2013		65,956			65,258
	Common stock issuable, 41,635 shares at June 30, 2014; 47,231 shares at December 31, 2013		2,600			2,915
	Additional paid-in capital		3,347,314			3,232,014
	Retained earnings		7,481,077			7,188,004
	Accumulated other comprehensive income (loss), net		40,308			(64,159	)

	Total shareholders’ equity		12,168,755			11,305,532

	Total liabilities and shareholders’ equity	$	90,835,002			85,162,391

-3-

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


		Three months ended June 30						Six months ended June 30
In thousands, except per share		2014			2013			2014			2013
Interest income	Loans and leases, including fees	$	645,029			705,395		$	1,290,251			1,387,850
	Investment securities
	Fully taxable		85,210			41,293			159,109			86,053
	Exempt from federal taxes		1,293			1,777			2,797			3,606
	Deposits at banks		2,535			1,455			4,419			1,722
	Other		223			287			666			951

	Total interest income		734,290			750,207			1,457,242			1,480,182

Interest expense	NOW accounts		330			321			627			643
	Savings deposits		11,181			13,790			22,782			27,827
	Time deposits		3,855			7,484			7,795			15,680
	Deposits at Cayman Islands office		181			200			389			588
	Short-term borrowings		25			96			57			327
	Long-term borrowings		49,604			50,729			100,045			101,480

	Total interest expense		65,176			72,620			131,695			146,545

	Net interest income		669,114			677,587			1,325,547			1,333,637
	Provision for credit losses		30,000			57,000			62,000			95,000

	Net interest income after provision for credit losses		639,114			620,587			1,263,547			1,238,637

Other income	Mortgage banking revenues		95,656			91,262			175,705			184,365
	Service charges on deposit accounts		107,368			111,717			211,566			222,666
	Trust income		129,893			124,728			251,145			246,331
	Brokerage services income		17,487			17,258			33,987			32,969
	Trading account and foreign exchange gains		8,042			9,224			14,489			18,151
	Gain on bank investment securities		—			56,457			—			56,457
	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		(4,055	)		(2,453	)		(8,509	)		(6,109	)
	Other revenues from operations		102,021			100,496			198,136			196,541

	Total other income		456,412			508,689			876,519			941,571

Other expense	Salaries and employee benefits		339,713			323,136			711,039			679,687
	Equipment and net occupancy		68,084			64,278			139,251			129,437
	Printing, postage and supplies		9,180			10,298			20,136			20,997
	Amortization of core deposit and other intangible assets		9,234			12,502			19,296			25,845
	FDIC assessments		15,155			17,695			30,643			37,133
	Other costs of operations		239,828			170,682			463,100			341,088

	Total other expense		681,194			598,591			1,383,465			1,234,187

	Income before taxes		414,332			530,685			756,601			946,021
	Income taxes		129,996			182,219			243,248			323,442

	Net income	$	284,336			348,466		$	513,353			622,579

	Net income available to common shareholders
	Basic	$	260,680			328,538		$	472,404			583,597
	Diluted		260,695			328,557			472,429			583,633
	Net income per common share
	Basic	$	1.99			2.56		$	3.62			4.56
	Diluted		1.98			2.55			3.59			4.53
	Cash dividends per common share	$	.70			.70		$	1.40			1.40
	Average common shares outstanding
	Basic		130,856			128,252			130,536			127,962
	Diluted		131,828			129,017			131,479			128,828

-4-

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended June 30						Six months ended June 30
In thousands	2014			2013			2014			2013
Net income	$	284,336			348,466		$	513,353			622,579
Other comprehensive income (loss), net of tax and reclassification adjustments:
Net unrealized gains (losses) on investment securities		64,652			(6,722	)		102,866			3,357
Unrealized losses on cash flow hedges		(711	)		—			(711	)		—
Foreign currency translation adjustment		449			(114	)		313			(1,046	)
Defined benefit plans liability adjustment		1,179			5,018			1,999			10,182

Total other comprehensive income (loss)		65,569			(1,818	)		104,467			12,493

Total comprehensive income	$	349,905			346,648		$	617,820			635,072

-5-

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


		Six months ended June 30
In thousands		2014			2013
Cash flows from operating activities	Net income	$	513,353			622,579
	Adjustments to reconcile net income to net cash provided by operating activities
	Provision for credit losses		62,000			95,000
	Depreciation and amortization of premises and equipment		49,133			43,354
	Amortization of capitalized servicing rights		34,868			30,653
	Amortization of core deposit and other intangible assets		19,296			25,845
	Provision for deferred income taxes		40,964			30,373
	Asset write-downs		2,015			15,043
	Net gain on sales of assets		(1,991	)		(59,134	)
	Net change in accrued interest receivable, payable		10,036			(1,131	)
	Net change in other accrued income and expense		(82,817	)		20,336
	Net change in loans originated for sale		(192,521	)		(220,784	)
	Net change in trading account assets and liabilities		15,168			14,362

	Net cash provided by operating activities		469,504			616,496

Cash flows from investing activities	Proceeds from sales of investment securities
	Available for sale		16			1,081,496
	Other		734			5,439
	Proceeds from maturities of investment securities
	Available for sale		375,372			652,074
	Held to maturity		211,005			141,255
	Purchases of investment securities
	Available for sale		(3,609,758	)		(39,411	)
	Held to maturity		(10,745	)		(11,252	)
	Other		(52,904	)		(8,540	)
	Net increase in loans and leases		(566,803	)		(228,853	)
	Net increase in interest-bearing deposits at banks		(1,381,392	)		(2,425,409	)
	Capital expenditures, net		(37,747	)		(43,663	)
	Net (increase) decrease in loan servicing advances		(257,704	)		47,290
	Other, net		16,990			38,072

	Net cash used by investing activities		(5,312,936	)		(791,502	)

Cash flows from financing activities	Net increase in deposits		2,712,470			54,101
	Net decrease in short-term borrowings		(98,824	)		(766,742	)
	Proceeds from long-term borrowings		2,647,688			799,760
	Payments on long-term borrowings		(360,345	)		(257,178	)
	Proceeds from issuance of preferred stock		346,500			—
	Dividends paid—common		(185,134	)		(181,842	)
	Dividends paid—preferred		(29,348	)		(26,725	)
	Other, net		54,927			41,519

	Net cash provided (used) by financing activities		5,087,934			(337,107	)

	Net increase (decrease) in cash and cash equivalents		244,502			(512,113	)
	Cash and cash equivalents at beginning of period		1,672,934			1,986,615

	Cash and cash equivalents at end of period	$	1,917,436			1,474,502

Supplemental disclosure of cash flow information	Interest received during the period	$	1,420,720			1,459,142
	Interest paid during the period		120,109			151,737
	Income taxes paid during the period		198,028			226,406

Supplemental schedule of noncash investing and financing activities	Securitization of residential mortgage loans allocated to
	Available-for-sale investment securities	$	76,097			—
	Held to maturity investment securities		—			917,045
	Capitalized servicing rights		976			8,907
	Real estate acquired in settlement of loans		18,677			15,502

-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		—		—		—			—			622,579			12,493			635,072
Preferred stock cash dividends		—		—		—			—			(26,725	)		—			(26,725	)
Amortization of preferred stock discount		4,296		—		—			—			(4,296	)		—			—
Exercise of 407,542 Series C stock warrants into 186,589 shares of common stock		—		93		—			(93	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		153		—			21,056			—			—			21,209
Exercises of stock options, net		—		366		—			63,505			—			—			63,871
Directors’ stock plan		—		4		—			793			—			—			797
Deferred compensation plans, net, including dividend equivalents		—		5		(613	)		564			(66	)					(110	)
Other		—		—		—			1,321			—			—			1,321
Common stock cash dividends—$1.40 per share		—		—		—			—			(181,698	)		—			(181,698	)

Balance—June 30, 2013	$	876,796		64,709		2,860			3,112,666			6,887,070			(227,771	)		10,716,330

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		—		—		—			—			513,353			104,467			617,820
Preferred stock cash dividends		—		—		—			—			(35,117	)		—			(35,117	)
Issuance of Series E preferred stock		350,000		—		—			(3,500	)		—			—			346,500
Exercise of 379,376 Series A stock warrants into 149,834 shares of common stock		—		75		—			(75	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		131		—			23,250			—			—			23,381
Exercises of stock options, net		—		442		—			84,002			—			—			84,444
Stock purchase plan		—		43		—			9,545			—			—			9,588
Directors’ stock plan		—		4		—			875			—			—			879
Deferred compensation plans, net, including dividend equivalents		—		3		(315	)		309			(58	)		—			(61	)
Other		—		—		—			894			—			—			894
Common stock cash dividends—$1.40 per share		—		—		—			—			(185,105	)		—			(185,105	)

Balance—June 30, 2014	$	1,231,500		65,956		2,600			3,347,314			7,481,077			40,308			12,168,755

-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 would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of June 30, 2014, total consideration to be paid was valued at approximately $5.4 billion.

At June 30, 2014, Hudson City had $37.7 billion of assets, including $23.3 billion of loans and $8.2 billion of investment securities, and $32.9 billion of liabilities, including $20.5 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 incurred in 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 months or six months ended June 30, 2014.


	Three months ended		Six months ended
	June 30, 2013		June 30, 2013
	(in thousands)
Salaries and employee benefits	$	300	$	836
Equipment and net occupancy		489		690
Printing, postage and supplies		998		1,825
Other costs of operations		5,845		9,013

	$	7,632	$	12,364

-9-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities

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


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
June 30, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	42,600		324		3	$	42,921
Obligations of states and political subdivisions		9,999		302		59		10,242
Mortgage-backed securities:
Government issued or guaranteed		7,426,259		191,716		348		7,617,627
Privately issued		119		4		4		119
Collateralized debt obligations		32,548		24,100		448		56,200
Other debt securities		138,362		2,185		15,784		124,763
Equity securities		103,865		54,119		1,077		156,907

		7,753,752		272,750		17,723		8,008,779

Investment securities held to maturity:
Obligations of states and political subdivisions		154,733		3,289		88		157,934
Mortgage-backed securities:
Government issued or guaranteed		3,387,213		67,816		14,881		3,440,148
Privately issued		210,388		—		50,952		159,436
Other debt securities		8,331		—		—		8,331

		3,760,665		71,105		65,921		3,765,849

Other securities		350,751		—		—		350,751

Total	$	11,865,168		343,855		83,644	$	12,125,379

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

-10-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

There were no gross realized gains or losses from the sale of investment securities for the three-month and six-month periods ended June 30, 2014. Gross realized gains on investment securities were $116 million for the three-month and six-month periods ended June 30, 2013. During the second quarter of 2013, the Company sold its holdings of Visa Class B shares for a gain of approximately $90 million and its holdings of MasterCard Class B shares for a gain of $13 million. Gross realized losses on investment securities were $60 million for the three-month and six-month periods ended June 30, 2013. During the second quarter of 2013, the Company sold substantially all of its privately issued mortgage-backed securities that had been held in the available-for-sale investment securities portfolio. In total, $1.0 billion of such securities were sold for a net loss of approximately $46 million.

There were $10 million of pre-tax other-than-temporary impairment (“OTTI”) losses recognized during the first quarter of 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. The Company did not recognize any OTTI losses during the first or second quarters of 2014 or the second quarter of 2013.

Changes in credit losses associated with debt securities for which OTTI losses had been recognized in earnings for the three months and six months ended June 30, 2013 follow:


	Three months ended			Six months ended
	June 30, 2013			June 30, 2013
	(in thousands)
Beginning balance	$	187,114			197,809
Additions for credit losses not previously recognized		—			9,800
Reductions for realized losses		(186,320	)		(206,815	)

Ending balance	$	794			794

There were no significant credit losses associated with debt securities held by the Company as of June 30, 2014 or December 31, 2013.

-11-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

At June 30, 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	$	7,513		7,592
Due after one year through five years		46,209		46,952
Due after five years through ten years		5,009		5,145
Due after ten years		164,778		174,437

		223,509		234,126
Mortgage-backed securities available for sale		7,426,378		7,617,746

	$	7,649,887		7,851,872

Debt securities held to maturity:
Due in one year or less	$	21,159		21,326
Due after one year through five years		78,588		80,389
Due after five years through ten years		54,986		56,219
Due after ten years		8,331		8,331

		163,064		166,265
Mortgage-backed securities held to maturity		3,597,601		3,599,584

	$	3,760,665		3,765,849

-12-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

A summary of investment securities that as of June 30, 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)
June 30, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	5,865		(3	)		—		—
Obligations of states and political subdivisions		1,832		(55	)		437		(4	)
Mortgage-backed securities:
Government issued or guaranteed		42,896		(158	)		8,254		(190	)
Privately issued		—		—			77		(4	)
Collateralized debt obligations		2,633		(114	)		5,557		(334	)
Other debt securities		157		(10	)		99,118		(15,774	)
Equity securities		3,240		(1,077	)		—		—

		56,623		(1,417	)		113,443		(16,306	)

Investment securities held to maturity:
Obligations of states and political subdivisions		8,329		(34	)		3,753		(54	)
Mortgage-backed securities:
Government issued or guaranteed		140,724		(878	)		730,795		(14,003	)
Privately issued		—		—			159,436		(50,952	)

		149,053		(912	)		893,984		(65,009	)

Total	$	205,676		(2,329	)		1,007,427		(81,315	)

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	)

-13-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

The Company owned 289 individual investment securities with aggregate gross unrealized losses of $84 million at June 30, 2014. Based on a review of each of the securities in the investment securities portfolio at June 30, 2014, the Company concluded that it expected to recover the amortized cost basis of its investment. As of June 30, 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 June 30, 2014, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $351 million of cost method investment securities.

4. Loans and leases and the allowance for credit losses

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


	June 30,		December 31,
	2014		2013
	(in thousands)
Outstanding principal balance	$	3,828,214		4,656,811
Carrying amount:
Commercial, financial, leasing, etc.		396,166		580,685
Commercial real estate		1,285,386		1,541,368
Residential real estate		515,791		576,473
Consumer		1,051,728		1,308,926

	$	3,249,071		4,007,452

Purchased impaired loans included in the table above totaled $283 million at June 30, 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 and six months ended June 30, 2014 and 2013 follows:


	Three months ended June 30
	2014						2013
	Purchased impaired			Other acquired			Purchased impaired			Other acquired
	(in thousands)
Balance at beginning of period	$	30,939			485,162		$	33,728			577,609
Interest income		(5,106	)		(43,452	)		(9,747	)		(67,539	)
Reclassifications from nonaccretable balance, net		249			774			31,168			111,702
Other (a)		—			8,486			—			321

Balance at end of period	$	26,082			450,970		$	55,149			622,093

-14-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Six months ended June 30
	2014						2013
	Purchased impaired			Other acquired			Purchased impaired			Other acquired
	(in thousands)
Balance at beginning of period	$	37,230			538,633		$	42,252			638,272
Interest income		(11,434	)		(96,085	)		(18,451	)		(129,286	)
Reclassifications from nonaccretable balance, net		286			774			31,348			122,519
Other (a)		—			7,648			—			(9,412	)

Balance at end of period	$	26,082			450,970		$	55,149			622,093

(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 June 30, 2014 and December 31, 2013 follows:


			30-89		90 Days or more past due and accruing				Purchased
	Current		Days past due		Non- acquired		Acquired (a)		impaired (b)		Nonaccrual		Total
	(in thousands)
June 30, 2014
Commercial, financial, leasing, etc.	$	18,831,026		56,292		3,910		5,769		16,702		192,193	$	19,105,892
Real estate:
Commercial		21,335,953		142,904		9,862		36,554		82,554		188,951		21,796,778
Residential builder and developer		1,203,959		10,417		—		9,505		111,937		83,624		1,419,442
Other commercial construction		3,075,240		11,764		—		4,018		43,511		23,521		3,158,054
Residential		7,499,250		261,083		270,492		42,245		25,231		198,816		8,297,117
Residential Alt-A		258,899		22,064		—		—		—		78,686		359,649
Consumer:
Home equity lines and loans		5,917,670		34,440		—		25,577		2,582		83,991		6,064,260
Automobile		1,621,311		23,629		—		218		—		16,075		1,661,233
Other		2,821,175		34,370		4,752		10,694		—		14,277		2,885,268

Total	$	62,564,483		596,963		289,016		134,580		282,517		880,134	$	64,747,693

-15-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			30-89		90 Days or more past due and accruing				Purchased
	Current		Days past due		Non- acquired		Acquired (a)		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 originated for sale were $419 million and $401 million at June 30, 2014 and December 31, 2013, respectively. Commercial mortgage loans held for sale were $205 million at June 30, 2014 and $68 million at December 31, 2013.

Changes in the allowance for credit losses for the three months ended June 30, 2014 were as follows:


	Commercial, Financial,			Real Estate
	Leasing, etc.			Commercial			Residential			Consumer			Unallocated			Total
	(in thousands)
Beginning balance	$	276,835			324,805			77,062			162,134			75,932		$	916,768
Provision for credit losses		25,556			(12,229	)		(1,957	)		18,676			(46	)		30,000
Net charge-offs
Charge-offs		(14,142	)		(2,814	)		(5,478	)		(19,404	)		—			(41,838	)
Recoveries		4,002			1,492			2,777			4,465			—			12,736

Net charge-offs		(10,140	)		(1,322	)		(2,701	)		(14,939	)		—			(29,102	)

Ending balance	$	292,251			311,254			72,404			165,871			75,886		$	917,666

-16-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


	Commercial, Financial,			Real Estate
	Leasing, etc.			Commercial			Residential			Consumer			Unallocated			Total
	(in thousands)
Beginning balance	$	257,851			328,016			90,122			176,793			74,335		$	927,117
Provision for credit losses		55,647			(10,913	)		(1,438	)		13,707			(3	)		57,000
Net charge-offs
Charge-offs		(46,312	)		(4,204	)		(5,092	)		(21,018	)		—			(76,626	)
Recoveries		1,681			11,365			1,719			4,809			—			19,574

Net charge-offs		(44,631	)		7,161			(3,373	)		(16,209	)		—			(57,052	)

Ending balance	$	268,867			324,264			85,311			174,291			74,332		$	927,065

Changes in the allowance for credit losses for the six months ended June 30, 2014 were as follows:


	Commercial, Financial,			Real Estate
	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		38,154			(12,113	)		2,271			32,817			871		62,000
Net charge-offs
Charge-offs		(28,951	)		(6,300	)		(12,931	)		(41,095	)		—		(89,277	)
Recoveries		9,665			4,689			4,408			9,505			—		28,267

Net charge-offs		(19,286	)		(1,611	)		(8,523	)		(31,590	)		—		(61,010	)

Ending balance	$	292,251			311,254			72,404			165,871			75,886	$	917,666

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


	Commercial, Financial,			Real Estate
	Leasing, etc.			Commercial			Residential			Consumer			Unallocated		Total
	(in thousands)
Beginning balance	$	246,759			337,101			88,807			179,418			73,775	$	925,860
Provision for credit losses		73,527			(11,225	)		3,598			28,543			557		95,000
Net charge-offs
Charge-offs		(55,856	)		(13,792	)		(13,263	)		(42,663	)		—		(125,574	)
Recoveries		4,437			12,180			6,169			8,993			—		31,779

Net charge-offs		(51,419	)		(1,612	)		(7,094	)		(33,670	)		—		(93,795	)

Ending balance	$	268,867			324,264			85,311			174,291			74,332	$	927,065

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.

-17-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

-18-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The following tables provide information with respect to loans and leases that were considered impaired as of June 30, 2014 and December 31, 2013 and for the three months and six months ended June 30, 2014 and June 30, 2013:


	June 30, 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.	$	165,446		189,110		39,874		90,293		112,092		24,614
Real estate:
Commercial		95,543		112,623		16,330		113,570		132,325		19,520
Residential builder and developer		28,048		36,634		1,694		33,311		55,122		4,379
Other commercial construction		71,379		74,401		4,883		86,260		90,515		4,022
Residential		90,895		109,723		4,103		96,508		114,521		7,146
Residential Alt-A		108,426		123,349		12,000		111,911		124,528		14,000
Consumer:
Home equity lines and loans		19,358		20,424		5,877		13,672		14,796		3,312
Automobile		35,426		35,426		9,248		40,441		40,441		11,074
Other		18,561		18,561		4,831		17,660		17,660		4,541

		633,082		720,251		98,840		603,626		702,000		92,608

With no related allowance recorded:
Commercial, financial, leasing, etc.		52,913		55,167		—		28,093		33,095		—
Real estate:
Commercial		102,890		124,701		—		65,271		84,333		—
Residential builder and developer		66,149		99,746		—		72,366		104,768		—
Other commercial construction		9,453		14,306		—		7,369		11,493		—
Residential		19,681		29,512		—		84,144		95,358		—
Residential Alt-A		24,523		44,784		—		28,357		52,211		—

		275,609		368,216		—		285,600		381,258		—

Total:
Commercial, financial, leasing, etc.		218,359		244,277		39,874		118,386		145,187		24,614
Real estate:
Commercial		198,433		237,324		16,330		178,841		216,658		19,520
Residential builder and developer		94,197		136,380		1,694		105,677		159,890		4,379
Other commercial construction		80,832		88,707		4,883		93,629		102,008		4,022
Residential		110,576		139,235		4,103		180,652		209,879		7,146
Residential Alt-A		132,949		168,133		12,000		140,268		176,739		14,000
Consumer:
Home equity lines and loans		19,358		20,424		5,877		13,672		14,796		3,312
Automobile		35,426		35,426		9,248		40,441		40,441		11,074
Other		18,561		18,561		4,831		17,660		17,660		4,541

Total	$	908,691		1,088,467		98,840		889,226		1,083,258		92,608

-19-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended June 30, 2014						Three months ended June 30, 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.	$	150,625		220		220		183,544		3,408		3,408
Real estate:
Commercial		207,633		869		869		201,236		409		409
Residential builder and developer		91,614		39		39		162,567		518		384
Other commercial construction		77,801		356		356		97,975		2,479		2,479
Residential		119,133		5,056		4,468		185,751		1,934		1,401
Residential Alt-A		134,895		1,733		660		151,977		1,670		516
Consumer:
Home equity lines and loans		18,762		200		72		12,619		165		39
Automobile		36,631		589		74		44,641		740		131
Other		18,309		166		49		15,564		156		49

Total	$	855,403		9,228		6,807		1,055,874		11,479		8,816


	Six months ended June 30, 2014						Six months ended June 30, 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.	$	142,466		768		768		172,637		5,842		5,842
Real estate:
Commercial		196,529		1,795		1,795		197,546		712		712
Residential builder and developer		96,434		113		113		173,535		658		449
Other commercial construction		82,546		1,443		1,443		98,160		3,114		3,114
Residential		146,651		6,456		5,370		186,582		3,404		2,323
Residential Alt-A		137,273		3,359		1,219		154,461		3,410		1,107
Consumer:
Home equity lines and loans		17,219		321		101		12,544		332		78
Automobile		38,007		1,214		161		46,134		1,516		277
Other		18,005		340		101		15,261		307		103

Total	$	875,130		15,809		11,071		1,056,860		19,295		14,005

-20-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


			Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential Builder and Developer		Other Commercial Construction
	(in thousands)
June 30, 2014
Pass	$	18,287,252		21,012,039		1,277,387		3,079,596
Criticized accrual		626,447		595,788		58,431		54,937
Criticized nonaccrual		192,193		188,951		83,624		23,521

Total	$	19,105,892		21,796,778		1,419,442		3,158,054

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.

-21-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

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


	Commercial, Financial,		Real Estate
	Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
June 30, 2014
Individually evaluated for impairment	$	39,874		22,576		16,084		19,956	$	98,490
Collectively evaluated for impairment		247,542		287,975		54,604		145,199		735,320
Purchased impaired		4,835		703		1,716		716		7,970

Allocated	$	292,251		311,254		72,404		165,871		841,780

Unallocated										75,886

Total									$	917,666

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

-22-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


	Commercial, Financial,		Real Estate
	Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
June 30, 2014
Individually evaluated for impairment	$	218,359		371,950		242,967		73,345	$	906,621
Collectively evaluated for impairment		18,870,831		25,764,322		8,388,568		10,534,834		63,558,555
Purchased impaired		16,702		238,002		25,231		2,582		282,517

Total	$	19,105,892		26,374,274		8,656,766		10,610,761	$	64,747,693

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 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.

-23-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended June 30, 2014 and 2013:


			Recorded investment				Financial effects of modification
Three months ended June 30, 2014	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		21	$	4,414	$	4,351	$	(63	)	$	—
Other		1		19,593		19,593		—			—
Combination of concession types		3		9,795		9,727		(68	)		(10	)
Real estate:
Commercial
Principal deferral		11		8,327		8,314		(13	)		—
Interest rate reduction		1		255		252		(3	)		(48	)
Combination of concession types		1		63		61		(2	)		(9	)
Residential builder and developer
Principal deferral		1		1,398		1,398		—			—
Other commercial construction
Principal deferral		2		6,407		6,318		(89	)		—
Residential
Principal deferral		3		142		166		24			—
Combination of concession types		8		923		991		68			(66	)
Residential Alt-A
Principal deferral		3		662		698		36			—
Combination of concession types		6		1,006		1,029		23			(220	)
Consumer:
Home equity lines and loans
Interest rate reduction		5		341		341		—			(76	)
Combination of concession types		21		1,772		1,772		—			(204	)
Automobile
Principal deferral		43		603		603		—			—
Interest rate reduction		3		60		60		—			(3	)
Other		8		47		47		—			—
Combination of concession types		23		341		341		—			(36	)
Other
Principal deferral		7		38		38		—			—
Interest rate reduction		3		291		291		—			(63	)
Combination of concession types		19		906		906		—			(276	)

Total		193	$	57,384	$	57,297	$	(87	)	$	(1,011	)

(a)

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

(b)

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

-24-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			Recorded investment				Financial effects of modification
Three months ended June 30, 2013	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		15	$	4,870	$	4,822	$	(48	)	$	—
Other		1		1,460		1,657		197			—
Combination of concession types		2		1,490		980		(510	)		—
Real estate:
Commercial
Principal deferral		5		15,549		15,530		(19	)		—
Residential builder and developer
Principal deferral		7		17,496		16,722		(774	)		—
Other		1		4,039		3,888		(151	)		—
Combination of concession types		2		13,879		13,823		(56	)		(535	)
Other commercial construction
Principal deferral		2		364		363		(1	)		—
Residential
Principal deferral		8		1,216		1,358		142			—
Combination of concession types		18		69,210		65,890		(3,320	)		(186	)
Residential Alt-A
Principal deferral		1		99		102		3			—
Combination of concession types		8		1,187		1,294		107			(278	)
Consumer:
Home equity lines and loans
Principal deferral		2		101		103		2			—
Interest rate reduction		1		99		99		—			(8	)
Other		1		106		106		—			—
Combination of concession types		8		406		406		—			(64	)
Automobile
Principal deferral		117		1,629		1,629		—			—
Interest rate reduction		7		104		104		—			(10	)
Other		28		73		73		—			—
Combination of concession types		62		1,044		1,044		—			(87	)
Other
Principal deferral		14		185		185		—			—
Interest rate reduction		1		12		12		—			(2	)
Combination of concession types		30		707		707		—			(234	)

Total		341	$	135,325	$	130,897	$	(4,428	)	$	(1,404	)

(a)

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

(b)

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

-25-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the six months ended June 30, 2014 and 2013:


			Recorded investment				Financial effects of modification
Six months ended June 30, 2014	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		51	$	19,368	$	19,199	$	(169	)	$	—
Other		1		19,593		19,593		—			—
Combination of concession types		5		9,836		9,766		(70	)		(14	)
Real estate:
Commercial
Principal deferral		24		15,371		15,316		(55	)		—
Interest rate reduction		1		255		252		(3	)		(48	)
Combination of concession types		2		409		462		53			(113	)
Residential builder and developer
Principal deferral		1		1,398		1,398		—			—
Other commercial construction
Principal deferral		3		6,558		6,469		(89	)		—
Residential
Principal deferral		16		1,744		1,829		85			—
Interest rate reduction		1		98		104		6			(32	)
Other		1		188		188		—			—
Combination of concession types		22		3,111		3,151		40			(348	)
Residential Alt-A
Principal deferral		5		828		900		72			—
Combination of concession types		16		2,752		2,765		13			(281	)
Consumer:
Home equity lines and loans
Principal deferral		3		280		280		—			—
Interest rate reduction		5		341		341		—			(76	)
Combination of concession types		36		3,628		3,628		—			(376	)
Automobile
Principal deferral		123		1,596		1,596		—			—
Interest rate reduction		3		60		60		—			(3	)
Other		19		108		108		—			—
Combination of concession types		46		591		591		—			(62	)
Other
Principal deferral		15		93		93		—			—
Interest rate reduction		3		291		291		—			(63	)
Other		1		45		45		—			—
Combination of concession types		33		1,372		1,372		—			(464	)

Total		436	$	89,914	$	89,797	$	(117	)	$	(1,880	)

(a)

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

(b)

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

-26-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			Recorded investment				Financial effects of modification
Six months ended June 30, 2013	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		39	$	6,876	$	6,804	$	(72	)	$	—
Other		2		48,660		48,857		197			—
Combination of concession types		3		1,832		1,322		(510	)		—
Real estate:
Commercial
Principal deferral		13		34,027		33,893		(134	)		—
Combination of concession types		2		582		581		(1	)		(56	)
Residential builder and developer
Principal deferral		15		18,853		18,062		(791	)		—
Other		1		4,039		3,888		(151	)		—
Combination of concession types		3		15,580		15,514		(66	)		(535	)
Other commercial construction
Principal deferral		2		364		363		(1	)		—
Residential
Principal deferral		15		1,782		1,965		183			—
Other		1		195		195		—			—
Combination of concession types		38		71,659		68,426		(3,233	)		(557	)
Residential Alt-A
Principal deferral		1		99		102		3			—
Combination of concession types		13		2,094		2,219		125			(388	)
Consumer:
Home equity lines and loans
Principal deferral		4		180		182		2			—
Interest rate reduction		1		99		99		—			(8	)
Other		1		106		106		—			—
Combination of concession types		10		617		617		—			(97	)
Automobile
Principal deferral		238		3,215		3,215		—			—
Interest rate reduction		9		140		140		—			(15	)
Other		45		232		232		—			—
Combination of concession types		123		1,597		1,597		—			(129	)
Other
Principal deferral		20		230		230		—			—
Interest rate reduction		1		12		12		—			(2	)
Other		1		12		12		—			—
Combination of concession types		72		1,924		1,924		—			(501	)

Total		673	$	215,006	$	210,557	$	(4,449	)	$	(2,288	)

(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 June 30, 2014 and 2013 and for which there was a subsequent payment default during the six-month periods ended June 30, 2014 and 2013, were not material.

-27-

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 June 30, 2014 which are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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

Holders of the Capital Securities receive preferential cumulative cash distributions unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures as allowed by the terms of each such debenture, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. In 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 June 30, 2014 and December 31, 2013. The agreements are subject to legally enforceable master netting arrangements, however the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral of $1.5 billion at June 30, 2014 and $1.6 billion at December 31, 2013.

-28-

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 June 30, 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 the six months ended June 30, 2014, 379,376 of the Series A warrants were exercised in “cashless” exercises, resulting in the issuance of 149,834 common shares. Remaining outstanding Series A warrants were 770,019 at June 30, 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.

(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

-29-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6. Shareholders’ equity, continued

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 June 30, 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 defined benefit cost for defined benefit plans consisted of the following:


	Pension benefits						Other postretirement benefits
	Three months ended June 30
	2014			2013			2014			2013
	(in thousands)
Service cost	$	5,160			6,130			152			171
Interest cost on projected benefit obligation		17,331			14,939			714			670
Expected return on plan assets		(22,859	)		(21,802	)		—			—
Amortization of prior service cost		(1,626	)		(1,628	)		(329	)		(329	)
Amortization of net actuarial loss		3,897			10,138			—			80

Net periodic benefit cost	$	1,903			7,777			537			592


	Pension benefits						Other postretirement benefits
	Six months ended June 30
	2014			2013			2014			2013
	(in thousands)
Service cost	$	10,260			12,180			302			371
Interest cost on projected benefit obligation		34,581			30,065			1,389			1,345
Expected return on plan assets		(45,784	)		(43,677	)		—			—
Amortization of prior service cost		(3,276	)		(3,278	)		(679	)		(679	)
Amortization of net actuarial loss		7,247			20,538			—			180

Net periodic benefit cost	$	3,028			15,828			1,012			1,217

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $12,673,000 and $12,563,000 for the three months ended June 30, 2014 and 2013, respectively, and $28,405,000 and $28,318,000 for the six months ended June 30, 2014 and 2013, respectively.

-30-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8. Earnings per common share

The computations of basic earnings per common share follow:


	Three months ended June 30						Six months ended June 30
	2014			2013			2014			2013
	(in thousands, except per share)
Income available to common shareholders:
Net income	$	284,336			348,466		$	513,353			622,579
Less: Preferred stock dividends (a)		(20,443	)		(13,362	)		(35,117	)		(26,725	)
Amortization of preferred stock discount (a)		—			(2,193	)		—			(4,340	)

Net income available to common equity		263,893			332,911			478,236			591,514
Less: Income attributable to unvested stock-based compensation awards		(3,213	)		(4,373	)		(5,832	)		(7,917	)

Net income available to common shareholders	$	260,680			328,538		$	472,404			583,597
Weighted-average shares outstanding:
Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards		132,473			129,964			132,139			129,708
Less: Unvested stock-based compensation awards		(1,617	)		(1,712	)		(1,603	)		(1,746	)

Weighted-average shares outstanding		130,856			128,252			130,536			127,962
Basic earnings per common share	$	1.99			2.56		$	3.62			4.56

(a)

Including impact of not as yet declared cumulative dividends.

-31-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8. Earnings per common share, continued

The computations of diluted earnings per common share follow:


	Three months ended June 30						Six months ended June 30
	2014			2013			2014			2013
	(in thousands, except per share)
Net income available to common equity	$	263,893			332,911		$	478,236			591,514
Less: Income attributable to unvested stock-based compensation awards		(3,198	)		(4,354	)		(5,807	)		(7,881	)

Net income available to common shareholders	$	260,695			328,557		$	472,429			583,633
Adjusted weighted-average shares outstanding:
Common and unvested stock-based compensation awards		132,473			129,964			132,139			129,708
Less: Unvested stock-based compensation awards		(1,617	)		(1,712	)		(1,603	)		(1,746	)
Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock		972			765			943			866

Adjusted weighted-average shares outstanding		131,828			129,017			131,479			128,828
Diluted earnings per common share	$	1.98			2.55		$	3.59			4.53

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

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 1.7 million and 4.5 million common shares during the three-month periods ended June 30, 2014 and 2013, respectively, and 2.4 million and 4.6 million common shares during the six-month periods ended June 30, 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.

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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				Defined benefit plans			Other			Total amount before tax			Income tax			Net
	With OTTI		All other		Defined benefit plans			Other			Total amount before tax			Income tax			Net
	(in thousands)
Balance—January 1, 2014	$	37,255		18,450		(161,617	)		115		$	(105,797	)		41,638		$	(64,159	)
Other comprehensive income before reclassifications: Unrealized holding gains, net		10,842		156,764		—			—			167,606			(65,774	)		101,832
Foreign currency translation adjustment		—		—		—			479			479			(166	)		313
Unrealized losses on cash flow hedges		—		—		—			(1,170	)		(1,170	)		459			(711	)

Total other comprehensive income before reclassifications		10,842		156,764		—			(691	)		166,915			(65,481	)		101,434

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:
Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities		1		1,702		—			—			1,703	(a)		(669	)		1,034
Amortization of prior service credit		—		—		(3,955	)		—			(3,955	)(d)		1,552			(2,403	)
Amortization of actuarial losses		—		—		7,247			—			7,247	(d)		(2,845	)		4,402

Total reclassifications		1		1,702		3,292			—			4,995			(1,962	)		3,033

Total gain (loss) during the period		10,843		158,466		3,292			(691	)		171,910			(67,443	)		104,467

Balance—June 30, 2014	$	48,098		176,916		(158,325	)		(576	)	$	66,113			(25,805	)	$	40,308

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

9. Comprehensive income, continued


	Investment Securities						Defined benefit plans			Other			Total amount before tax			Income tax			Net
	With OTTI			All other			Defined benefit plans			Other			Total amount before tax			Income tax			Net
	(in thousands)
Balance—January 1, 2013	$	(91,835	)		152,199			(455,590	)		(431	)	$	(395,657	)		155,393		$	(240,264	)
Other comprehensive income before reclassifications:
Unrealized holding gains(losses), net		55,473			(95,167	)		—			—			(39,694	)		15,557			(24,137	)
Foreign currency translation adjustment		—			—			—			(1,644	)		(1,644	)		598			(1,046	)

Total other comprehensive income before reclassifications		55,473			(95,167	)		—			(1,644	)		(41,338	)		16,155			(25,183	)

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:
Accretion of unrealized holding losses on HTM securities		109			2,262			—			—			2,371	(a)		(931	)		1,440
OTTI charges recognized in net income		9,800			—			—			—			9,800	(b)		(3,847	)		5,953
Losses (gains) realized in net income		41,217			(8,129	)		—			—			33,088	(c)		(12,987	)		20,101
Amortization of prior service credit		—			—			(3,957	)		—			(3,957	)(d)		1,553			(2,404	)
Amortization of actuarial losses		—			—			20,718			—			20,718	(d)		(8,132	)		12,586

Total reclassifications		51,126			(5,867	)		16,761			—			62,020			(24,344	)		37,676

Total gain (loss) during the period		106,599			(101,034	)		16,761			(1,644	)		20,682			(8,189	)		12,493

Balance—June 30, 2013	$	14,764			51,165			(438,829	)		(2,075	)	$	(374,975	)		147,204		$	(227,771	)

(a)

Included in interest income

(b)

Included in OTTI losses recognized in earnings

(c)

Included in gain (loss) on bank investment securities

(d)

Included in salaries and employee benefits expense

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


	Investment securities				Defined benefit plans			Other			Total
	With OTTI		All other		Defined benefit plans			Other			Total
Balance—December 31, 2013	$	22,632		11,294		(98,182	)		97		$	(64,159	)
Net gain (loss) during period		6,587		96,279		1,999			(398	)		104,467

Balance—June 30, 2014	$	29,219		107,573		(96,183	)		(301	)	$	40,308

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts is not significant as of June 30, 2014.

The net effect of interest rate swap agreements was to increase net interest income by $12 million and $10 million for the three-month periods ended June 30, 2014 and 2013, respectively, and $23 million and $19 million for the six-month periods ended June 30, 2014 and 2013, respectively.

At June 30, 2014, interest rate swap agreements were used as fair value hedges for approximately $1.4 billion of outstanding fixed rate long-term borrowings. Also at June 30, 2014, the Company had entered into forward-starting interest rate swap agreements used to hedge the variability in the interest payments anticipated to be made upon the future issuance of $300 million of senior notes. These forward-starting interest rate swap agreements were terminated upon the issuance of such notes in July 2014. Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:


	Notional amount		Average maturity		Weighted- average rate
	Notional amount		Average maturity		Fixed			Variable
	(in thousands)		(in years)
June 30, 2014
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		3.2		4.42	%		1.18	%
Cash flow hedges:
Interest payments on forecasted issuance of long-term borrowings (b)		300,000		5.1		1.82	%		0.23	%

	$	1,700,000		3.5		3.96	%		1.02	%

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.

(b)

Under the terms of this agreement, the Company was to receive settlement amounts at a variable rate and pay at a fixed 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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued

contracts entered into for trading purposes had notional values of $17.6 billion and $17.4 billion at June 30, 2014 and December 31, 2013, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes aggregated $866 million and $1.4 billion at June 30, 2014 and December 31, 2013, respectively.

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
	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	93,040		102,875	$	—		—
Commitments to sell real estate loans (a)		1,032		6,957		6,412		487

		94,072		109,832		6,412		487
Cash flow hedges:
Interest rate swap agreements (a)		—		—		1,170		—

Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		22,215		7,616		192		3,675
Commitments to sell real estate loans (a)		1,431		6,120		6,883		230
Trading:
Interest rate contracts (b)		234,436		274,864		194,393		234,455
Foreign exchange and other option and futures contracts (b)		7,784		15,831		7,766		15,342

		265,866		304,431		209,234		253,702

Total derivatives	$	359,938		414,263	$	216,816		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.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued


	Amount of unrealized gain (loss) recognized
	Three months ended June 30, 2014					Three months ended June 30, 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)	$	(1,675	)		1,358	$	(20,138	)		18,853

Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	1,384				$	2,228
Foreign exchange and other option and futures contracts (b)		(786	)				(1,225	)

Total	$	598				$	1,003


	Amount of unrealized gain (loss) recognized
	Six months ended June 30, 2014					Six months ended June 30, 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)	$	(9,835	)		9,278	$	(29,011	)		27,753

Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	1,082				$	3,197
Foreign exchange and other option and futures contracts (b)		(5,816	)				(1,608	)

Total	$	(4,734	)			$	1,589

(a)

Reported as other revenues from operations.

(b)

Reported as trading account and foreign exchange gains.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued

In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans for sale 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 $31 million and $23 million at June 30, 2014 and December 31, 2013, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

The Company does not offset derivative asset and liability positions in its consolidated financial statements. The 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 $177 million and $194 million at June 30, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $107 million at each of June 30, 2014 and December 31, 2013. The Company was required to post collateral relating to those positions of $92 million and $95 million at June 30, 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, 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 June 30, 2014 was $28 million for which the Company had posted collateral of $18 million in the normal course of business. If the credit risk-related contingent features had been triggered on June 30, 2014, the maximum amount of additional collateral the Company would have been required to post to counterparties was $10 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $133 million and $183 million at June 30, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $63 million and $95 million at June 30, 2014 and December 31, 2013, respectively. Counterparties posted collateral relating to those positions of $63 million and $93 million at June 30, 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.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

11. Variable interest entities and asset securitizations

In the second quarter of 2013, the Company securitized approximately $923 million of one-to-four family residential mortgage loans in guaranteed mortgage securitizations with Ginnie Mae. Approximately $296 million of such loans were formerly held in the Company’s loan portfolio, whereas the remaining $627 million of the loans were newly originated. The Company retained $917 million of the resulting securities and recognized gains of $7 million relating to loans previously held for investment, which have been recorded in other revenues from operations, and gains of $10 million on newly originated loans, which have been reflected in mortgage banking revenues. The Company expects no material credit-related losses on the retained securities as a result of the guarantees by Ginnie Mae. At June 30, 2013 the Company had $1.0 billion of loans in its loan portfolio guaranteed by the Federal Housing Administration that the Company securitized with Ginnie Mae in the third quarter of 2013. The Company retained the substantial majority of the resulting securities in its investment portfolio. In similar transactions for the six months ended June 30, 2014, the Company securitized $75 million of one-to-four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with Ginnie Mae and retained the resulting securities in its investment portfolio. Pre-tax gains on such transactions were not material.

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 June 30, 2014 and December 31, 2013, the carrying values of the loans in the securitization trust were $110 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 each of June 30, 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 June 30, 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 June 30, 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 June 30, 2014 and December 31, 2013, respectively. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments 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 $236 million, including $53 million of unfunded commitments, at June 30, 2014 and $236 million, including $45 million of unfunded commitments,

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

11. Variable interest entities and asset securitizations, continued

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 June 30, 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.

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 and 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.

-40-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

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 had 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 June 30, 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 8%, was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At June 30, 2014, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $33 million and $56 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 significant Level 3 fair value measurements. Internal pricing models used for significant valuation measurements have generally been subjected to validation procedures including testing of mathematical constructs, review of valuation methodology and significant assumptions used.

Real estate loans held for sale

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

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.

The following tables present assets and liabilities at June 30, 2014 and December 31, 2013 measured at estimated fair value on a recurring basis:


	Fair value measurements at June 30, 2014		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)
Trading account assets	$	313,325		50,813		262,512		—
Investment securities available for sale:
U.S. Treasury and federal agencies		42,921		—		42,921		—
Obligations of states and political subdivisions		10,242		—		10,242		—
Mortgage-backed securities:
Government issued or guaranteed		7,617,627		—		7,617,627		—
Privately issued		119		—		—		119
Collateralized debt obligations		56,200		—		—		56,200
Other debt securities		124,763		—		124,763