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

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

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

Commission File Number 1-9861

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)

New York

16-0968385

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One M & T Plaza

Buffalo, New York

14203

(Address of principal executive offices)

(Zip Code)

(716) 635-4000

(Registrant’s telephone number, including area code)

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

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

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on October 31, 2014: 132,111,892 shares.

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2014


Table of Contents of Information Required in Report		Page

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements.

	CONSOLIDATED BALANCE SHEET - September 30, 2014 and December 31, 2013		3

	CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2014 and 2013		4

	CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three and nine months ended September 30, 2014 and 2013		5

	CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2014 and 2013		6

	CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Nine months ended September 30, 2014 and 2013		7

	NOTES TO FINANCIAL STATEMENTS		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		55

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		102

Item 4.	Controls and Procedures.		102

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings.		102

Item 1A.	Risk Factors.		103

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		104

Item 3.	Defaults Upon Senior Securities.		104

Item 4.	Mine Safety Disclosures.		104

Item 5.	Other Information.		104

Item 6.	Exhibits.		105

SIGNATURES			105

EXHIBIT INDEX			106

- 2 -

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)


Dollars in thousands, except per share		September 30, 2014			December 31, 2013
Assets
	Cash and due from banks	$	1,445,877			1,573,361
	Interest-bearing deposits at banks		7,676,064			1,651,138
	Federal funds sold		77,766			99,573
	Trading account		296,913			376,131
	Investment securities (includes pledged securities that can be sold or repledged of $1,634,682 at September 30, 2014; $1,696,438 at December 31, 2013)
	Available for sale (cost: $9,175,295 at September 30, 2014; $4,444,365 at December 31, 2013)		9,384,017			4,531,786
	Held to maturity (fair value: $3,621,391 at September 30, 2014; $3,860,127 at December 31, 2013)		3,635,815			3,966,130
	Other (fair value: $328,536 at September 30, 2014; $298,581 at December 31, 2013)		328,536			298,581

	Total investment securities		13,348,368			8,796,497

	Loans and leases		65,800,972			64,325,783
	Unearned discount		(228,613	)		(252,624	)

	Loans and leases, net of unearned discount		65,572,359			64,073,159
	Allowance for credit losses		(918,633	)		(916,676	)

	Loans and leases, net		64,653,726			63,156,483

	Premises and equipment		612,076			633,520
	Goodwill		3,524,625			3,524,625
	Core deposit and other intangible assets		42,197			68,851
	Accrued interest and other assets		5,550,730			5,282,212

	Total assets	$	97,228,342			85,162,391

Liabilities
	Noninterest-bearing deposits	$	27,440,524			24,661,007
	NOW accounts		2,098,577			1,989,441
	Savings deposits		41,389,867			36,621,580
	Time deposits		3,170,998			3,523,838
	Deposits at Cayman Islands office		241,536			322,746

	Total deposits		74,341,502			67,118,612

	Federal funds purchased and agreements to repurchase securities		164,609			260,455
	Accrued interest and other liabilities		1,327,524			1,368,922
	Long-term borrowings		9,061,391			5,108,870

	Total liabilities		84,895,026			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 September 30, 2014; 381,500 shares at December 31, 2013; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2014 and December 31, 2013		1,231,500			881,500
	Common stock, $.50 par, 250,000,000 shares authorized, 132,100,384 shares issued at September 30, 2014; 130,516,364 shares issued at December 31, 2013		66,050			65,258
	Common stock issuable, 41,261 shares at September 30, 2014; 47,231 shares at December 31, 2013		2,590			2,915
	Additional paid-in capital		3,377,714			3,232,014
	Retained earnings		7,642,995			7,188,004
	Accumulated other comprehensive income (loss), net		12,467			(64,159	)

	Total shareholders’ equity		12,333,316			11,305,532

	Total liabilities and shareholders’ equity	$	97,228,342			85,162,391

- 3 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


		Three months ended September 30						Nine months ended September 30
In thousands, except per share		2014			2013			2014			2013
Interest income	Loans and leases, including fees	$	647,280			683,482		$	1,937,531			2,071,332
	Investment securities
	Fully taxable		91,036			55,746			250,145			141,799
	Exempt from federal taxes		1,271			1,617			4,068			5,223
	Deposits at banks		3,198			1,650			7,617			3,372
	Other		238			191			904			1,142

	Total interest income		743,023			742,686			2,200,265			2,222,868

Interest expense	NOW accounts		394			333			1,021			976
	Savings deposits		11,532			13,733			34,314			41,560
	Time deposits		3,805			6,129			11,600			21,809
	Deposits at Cayman Islands office		161			213			550			801
	Short-term borrowings		19			58			76			385
	Long-term borrowings		58,053			49,112			158,098			150,592

	Total interest expense		73,964			69,578			205,659			216,123

	Net interest income		669,059			673,108			1,994,606			2,006,745
	Provision for credit losses		29,000			48,000			91,000			143,000

	Net interest income after provision for credit losses		640,059			625,108			1,903,606			1,863,745

Other income	Mortgage banking revenues		93,532			64,731			269,237			249,096
	Service charges on deposit accounts		110,071			113,839			321,637			336,505
	Trust income		128,671			123,801			379,816			370,132
	Brokerage services income		17,416			16,871			51,403			49,840
	Trading account and foreign exchange gains		6,988			8,987			21,477			27,138
	Gain on bank investment securities		—			—			—			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		(4,114	)		(3,881	)		(12,623	)		(9,990	)
	Other revenues from operations		98,547			153,040			296,683			349,581

	Total other income		451,111			477,388			1,327,630			1,418,959

Other expense	Salaries and employee benefits		348,776			339,332			1,059,815			1,019,019
	Equipment and net occupancy		67,713			66,220			206,964			195,657
	Printing, postage and supplies		9,184			9,752			29,320			30,749
	Amortization of core deposit and other intangible assets		7,358			10,628			26,654			36,473
	FDIC assessments		13,193			14,877			43,836			52,010
	Other costs of operations		233,060			217,817			696,160			558,905

	Total other expense		679,284			658,626			2,062,749			1,892,813

	Income before taxes		411,886			443,870			1,168,487			1,389,891
	Income taxes		136,542			149,391			379,790			472,833

	Net income	$	275,344			294,479		$	788,697			917,058


	Net income available to common shareholders
	Basic	$	251,905			275,336		$	724,307			858,944
	Diluted		251,917			275,356			724,344			859,000

	Net income per common share
	Basic	$	1.92			2.13		$	5.54			6.69
	Diluted		1.91			2.11			5.50			6.64

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

	Average common shares outstanding
	Basic		131,265			129,171			130,782			128,369
	Diluted		132,128			130,265			131,698			129,312

- 4 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended September 30					Nine months ended September 30
In thousands	2014			2013		2014			2013

Net income	$	275,344			294,479	$	788,697			917,058
Other comprehensive income (loss), net of tax and reclassification adjustments:
Net unrealized gains (losses) on investment securities		(27,637	)		23,367		75,229			26,724
Reclassification to income for amortization of gains on terminated cash flow hedges		613			—		(98	)		—
Foreign currency translation adjustment		(1,817	)		1,251		(1,504	)		205
Defined benefit plans liability adjustment		1,000			5,091		2,999			15,273

Total other comprehensive income (loss)		(27,841	)		29,709		76,626			42,202

Total comprehensive income	$	247,503			324,188	$	865,323			959,260

- 5 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


		Nine months ended September 30
In thousands		2014			2013
Cash flows from operating activities	Net income	$	788,697			917,058
	Adjustments to reconcile net income to net cash provided by operating activities
	Provision for credit losses		91,000			143,000
	Depreciation and amortization of premises and equipment		74,516			66,547
	Amortization of capitalized servicing rights		51,572			46,966
	Amortization of core deposit and other intangible assets		26,654			36,473
	Provision for deferred income taxes		33,777			93,229
	Asset write-downs		5,114			16,204
	Net gain on sales of assets		(3,771	)		(124,375	)
	Net change in accrued interest receivable, payable		9,638			(2,819	)
	Net change in other accrued income and expense		(89,425	)		115,400
	Net change in loans originated for sale		(224,425	)		(808,778	)
	Net change in trading account assets and liabilities		11,163			4,772

	Net cash provided by operating activities		774,510			503,677

Cash flows from investing activities	Proceeds from sales of investment securities
	Available for sale		16			1,081,747
	Other		23,309			12,994
	Proceeds from maturities of investment securities
	Available for sale		686,183			887,092
	Held to maturity		337,677			216,627
	Purchases of investment securities
	Available for sale		(5,310,246	)		(41,358	)
	Held to maturity		(15,202	)		(1,586,425	)
	Other		(53,264	)		(8,825	)
	Net (increase) decrease in loans and leases		(1,420,572	)		905,491
	Net increase in interest-bearing deposits at banks		(6,024,926	)		(1,795,866	)
	Capital expenditures, net		(50,400	)		(85,964	)
	Net increase in loan servicing advances		(340,750	)		(185,507	)
	Other, net		38,707			37,860

	Net cash used by investing activities		(12,129,468	)		(562,134	)

Cash flows from financing activities	Net increase in deposits		7,225,487			604,311
	Net decrease in short-term borrowings		(95,846	)		(828,463	)
	Proceeds from long-term borrowings		4,345,478			799,760
	Payments on long-term borrowings		(373,642	)		(258,937	)
	Proceeds from issuance of preferred stock		346,500			—
	Dividends paid - common		(278,118	)		(273,518	)
	Dividends paid - preferred		(46,966	)		(31,494	)
	Other, net		82,774			119,936

	Net cash provided by financing activities		11,205,667			131,595

	Net increase (decrease) in cash and cash equivalents		(149,291	)		73,138
	Cash and cash equivalents at beginning of period		1,672,934			1,986,615

	Cash and cash equivalents at end of period	$	1,523,643			2,059,753

Supplemental disclosure of cash flow information	Interest received during the period	$	2,147,236			2,184,128
	Interest paid during the period		185,377			226,335
	Income taxes paid during the period		329,621			331,117

Supplemental schedule of noncash investing and financing activities	Securitization of residential mortgage loans allocated to
	Available for sale investment securities	$	110,971			1,807,180
	Held to maturity investment securities		—			917,045
	Capitalized servicing rights		1,429			29,264
	Real estate acquired in settlement of loans		35,422			35,865

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

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

2014
Balance - January 1, 2014	$	881,500		65,258		2,915			3,232,014			7,188,004			(64,159	)		11,305,532
Total comprehensive income		—		—		—			—			788,697			76,626			865,323
Preferred stock cash dividends		—		—		—			—			(55,560	)		—			(55,560	)
Issuance of Series E preferred stock		350,000		—		—			(3,500	)		—			—			346,500
Exercise of 395,905 Series A stock warrants into 156,521 shares of common stock		—		78		—			(78	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		128		—			34,117			—			—			34,245
Exercises of stock options, net		—		535		—			102,695			—			—			103,230
Stock purchase plan		—		43		—			9,545			—			—			9,588
Directors’ stock plan		—		5		—			1,266			—			—			1,271
Deferred compensation plans, net, including dividend equivalents		—		3		(325	)		335			(87	)		—			(74	)
Other		—		—		—			1,320			—			—			1,320
Common stock cash dividends - $2.10 per share		—		—		—			—			(278,059	)		—			(278,059	)

Balance - September 30, 2014	$	1,231,500		66,050		2,590			3,377,714			7,642,995			12,467			12,333,316

- 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 September 30, 2014, total consideration to be paid was valued at approximately $5.4 billion.

At September 30, 2014, Hudson City had $37.2 billion of assets, including $22.4 billion of loans and $8.4 billion of investment securities, and $32.3 billion of liabilities, including $20.0 billion of deposits. The merger has received the approval of the common shareholders of M&T and Hudson City. However, the merger is subject to a number of other conditions, including regulatory approvals.

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

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

- 8 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

2.	Acquisitions, continued

A summary of merger-related expenses in 2013 associated with the pending Hudson City acquisition included in the consolidated statement of income is presented below. There were no merger-related expenses during the three-month or nine-month periods ended September 30, 2014, or during the three-month period ended September 30, 2013.


	Nine months ended September 30, 2013
	(in thousands)

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

	$	12,364

3.	Investment securities

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


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
September 30, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	166,092		206		111	$	166,187
Obligations of states and political subdivisions		9,174		270		53		9,391
Mortgage-backed securities:
Government issued or guaranteed		8,751,108		145,708		2,765		8,894,051
Privately issued		112		4		4		112
Collateralized debt obligations		30,788		24,383		363		54,808
Other debt securities		138,278		2,304		15,183		125,399
Equity securities		79,743		54,732		406		134,069

		9,175,295		227,607		18,885		9,384,017

Investment securities held to maturity:
Obligations of states and political subdivisions		151,789		3,284		92		154,981
Mortgage-backed securities:
Government issued or guaranteed		3,269,344		50,477		18,196		3,301,625
Privately issued		206,695		—		49,897		156,798
Other debt securities		7,987		—		—		7,987

		3,635,815		53,761		68,185		3,621,391

Other securities		328,536		—		—		328,536

Total	$	13,139,646		281,368		87,070	$	13,333,944

- 9 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
December 31, 2013
Investment securities available for sale:
U.S. Treasury and federal agencies	$	37,396		382		2	$	37,776
Obligations of states and political subdivisions		10,484		333		6		10,811
Mortgage-backed securities:
Government issued or guaranteed		4,123,435		61,001		19,350		4,165,086
Privately issued		1,468		387		5		1,850
Collateralized debt obligations		42,274		21,666		857		63,083
Other debt securities		137,828		1,722		19,465		120,085
Equity securities		91,480		41,842		227		133,095

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

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

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

Other securities		298,581		—		—		298,581

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

There were no gross realized gains or losses from the sale of investment securities for the three-month and nine-month periods ended September 30, 2014 or for the three-month period ended September 30, 2013. Gross realized gains on investment securities were $116 million for the nine-month period ended September 30, 2013. During the second quarter of 2013, the Company sold its holdings of Visa Class B shares for a gain of approximately $90 million and its holdings of MasterCard Class B shares for a gain of $13 million. Gross realized losses on investment securities were $60 million for the nine-month period ended September 30, 2013. During the second quarter of 2013, the Company sold substantially all of its privately issued mortgage-backed securities 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 for future collateral performance. The Company did not recognize any OTTI losses during the first nine months of 2014 or during the second and third quarters of 2013.

- 10 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

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


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

Beginning balance	$	794			197,809
Additions for credit losses not previously recognized		—			9,800
Reductions for realized losses		(626	)		(207,441	)


Ending balance	$	168			168

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

At September 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	$	12,359		12,439
Due after one year through five years		164,546		164,995
Due after five years through ten years		4,322		4,456
Due after ten years		163,105		173,895

		344,332		355,785
Mortgage-backed securities available for sale		8,751,220		8,894,163

	$	9,095,552		9,249,948


Debt securities held to maturity:
Due in one year or less	$	21,190		21,354
Due after one year through five years		80,804		82,554
Due after five years through ten years		49,795		51,073
Due after ten years		7,987		7,987

		159,776		162,968
Mortgage-backed securities held to maturity		3,476,039		3,458,423

	$	3,635,815		3,621,391

- 11 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

A summary of investment securities that as of September 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)
September 30, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	104,495		(111	)		—		—
Obligations of states and political subdivisions		1,756		(52	)		323		(1	)
Mortgage-backed securities:
Government issued or guaranteed		1,420,096		(2,560	)		8,006		(205	)
Privately issued		—		—			72		(4	)
Collateralized debt obligations		2,436		(340	)		5,871		(23	)
Other debt securities		4,506		(58	)		95,497		(15,125	)
Equity securities		2,264		(406	)		—		—

		1,535,553		(3,527	)		109,769		(15,358	)


Investment securities held to maturity:
Obligations of states and political subdivisions		15,456		(77	)		1,836		(15	)
Mortgage-backed securities:
Government issued or guaranteed		180,033		(1,168	)		705,988		(17,028	)
Privately issued		—		—			156,798		(49,897	)

		195,489		(1,245	)		864,622		(66,940	)


Total	$	1,731,042		(4,772	)		974,391		(82,298	)


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

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


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

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

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

- 12 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

The Company owned 386 individual investment securities with aggregate gross unrealized losses of $87 million at September 30, 2014. Based on a review of each of the securities in the investment securities portfolio at September 30, 2014, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 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 September 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 $329 million of cost method investment securities.

4.	Loans and leases and the allowance for credit losses

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


	September 30, 2014		December 31, 2013
	(in thousands)

Outstanding principal balance	$	3,416,175		4,656,811
Carrying amount:
Commercial, financial, leasing, etc.		299,161		580,685
Commercial real estate		1,094,030		1,541,368
Residential real estate		485,365		576,473
Consumer		1,013,238		1,308,926

	$	2,891,794		4,007,452

Purchased impaired loans included in the table above totaled $237 million at September 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 nine months ended September 30, 2014 and 2013 follows:


	Three months ended September 30
	2014						2013
	Purchased impaired			Other acquired			Purchased impaired			Other acquired
	(in thousands)

Balance at beginning of period	$	26,082			450,970		$	55,149			622,093
Interest income		(4,149	)		(39,019	)		(10,428	)		(60,786	)
Reclassifications from nonaccretable balance, net		129			9,673			172			—
Other (a)		—			1,870			—			6,254

Balance at end of period	$	22,062			423,494		$	44,893			567,561


	Nine months ended September 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		(15,583	)		(135,105	)		(28,879	)		(190,072	)
Reclassifications from nonaccretable balance, net		415			10,448			31,520			122,519
Other (a)		—			9,518			—			(3,158	)

Balance at end of period	$	22,062			423,494		$	44,893			567,561

(a)

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

- 13 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

A summary of current, past due and nonaccrual loans as of September 30, 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)
September 30, 2014
Commercial, financial, leasing, etc.	$	18,855,986		41,296		3,278		5,422		14,777		191,250	$	19,112,009
Real estate:
Commercial		21,646,276		101,671		36,688		24,196		62,739		173,285		22,044,855
Residential builder and developer		1,211,005		21,432		1,615		13,786		96,917		73,296		1,418,051
Other commercial construction		3,392,260		18,749		3,927		1,516		36,114		27,375		3,479,941
Residential		7,578,177		222,214		263,529		42,286		23,551		183,681		8,313,438
Residential Alt-A		254,188		15,765		—		—		—		80,017		349,970
Consumer:
Home equity lines and loans		5,909,631		36,408		—		28,320		2,564		85,122		6,062,045
Automobile		1,808,300		24,692		—		209		—		17,417		1,850,618
Other		2,869,863		34,863		3,953		16,412		—		16,341		2,941,432

Total	$	63,525,686		517,090		312,990		132,147		236,662		847,784	$	65,572,359


			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.

- 14 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

One-to-four family residential mortgage loans originated for sale were $466 million and $401 million at September 30, 2014 and December 31, 2013, respectively. Commercial mortgage loans held for sale were $159 million at September 30, 2014 and $68 million at December 31, 2013.

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


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

Beginning balance	$	292,251			311,254			72,404			165,871			75,886		$	917,666
Provision for credit losses		2,373			8,046			(3,187	)		21,815			(47	)		29,000
Net charge-offs
Charge-offs		(15,921	)		(1,666	)		(4,193	)		(21,312	)		—			(43,092	)
Recoveries		7,849			1,267			2,498			3,445			—			15,059

Net charge-offs		(8,072	)		(399	)		(1,695	)		(17,867	)		—			(28,033	)

Ending balance	$	286,552			318,901			67,522			169,819			75,839		$	918,633

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


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

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

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

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

Changes in the allowance for credit losses for the nine months ended September 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		40,527			(4,067	)		(916	)		54,632			824		91,000
Net charge-offs
Charge-offs		(44,872	)		(7,966	)		(17,124	)		(62,407	)		—		(132,369	)
Recoveries		17,514			5,956			6,906			12,950			—		43,326

Net charge-offs		(27,358	)		(2,010	)		(10,218	)		(49,457	)		—		(89,043	)

Ending balance	$	286,552			318,901			67,522			169,819			75,839	$	918,633

- 15 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


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

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

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

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

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

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

- 16 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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.

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


	September 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.	$	138,884		168,163		33,805		90,293		112,092		24,614
Real estate:
Commercial		94,124		112,373		16,172		113,570		132,325		19,520
Residential builder and developer		16,306		20,309		1,218		33,311		55,122		4,379
Other commercial construction		12,937		15,302		4,071		86,260		90,515		4,022
Residential		88,879		106,795		4,621		96,508		114,521		7,146
Residential Alt-A		105,489		119,616		9,000		111,911		124,528		14,000
Consumer:
Home equity lines and loans		19,343		20,436		6,030		13,672		14,796		3,312
Automobile		31,843		31,843		8,516		40,441		40,441		11,074
Other		18,743		18,743		5,051		17,660		17,660		4,541

		526,548		613,580		88,484		603,626		702,000		92,608

With no related allowance recorded:
Commercial, financial, leasing, etc.		78,849		82,176		—		28,093		33,095		—
Real estate:
Commercial		88,258		97,806		—		65,271		84,333		—
Residential builder and developer		67,401		103,996		—		72,366		104,768		—
Other commercial construction		14,974		34,212		—		7,369		11,493		—
Residential		18,155		27,999		—		84,144		95,358		—
Residential Alt-A		25,110		45,705		—		28,357		52,211		—

		292,747		391,894		—		285,600		381,258		—


Total:
Commercial, financial, leasing, etc.		217,733		250,339		33,805		118,386		145,187		24,614
Real estate:
Commercial		182,382		210,179		16,172		178,841		216,658		19,520
Residential builder and developer		83,707		124,305		1,218		105,677		159,890		4,379
Other commercial construction		27,911		49,514		4,071		93,629		102,008		4,022
Residential		107,034		134,794		4,621		180,652		209,879		7,146
Residential Alt-A		130,599		165,321		9,000		140,268		176,739		14,000
Consumer:
Home equity lines and loans		19,343		20,436		6,030		13,672		14,796		3,312
Automobile		31,843		31,843		8,516		40,441		40,441		11,074
Other		18,743		18,743		5,051		17,660		17,660		4,541

Total	$	819,295		1,005,474		88,484		889,226		1,083,258		92,608

- 17 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended September 30, 2014						Three months ended September 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.	$	228,749		611		611		149,357		516		516
Real estate:
Commercial		189,952		821		821		205,971		716		716
Residential builder and developer		90,493		18		18		130,855		213		188
Other commercial construction		58,500		251		251		95,486		208		208
Residential		104,516		1,328		776		180,995		1,391		865
Residential Alt-A		131,574		1,643		681		147,056		1,763		692
Consumer:
Home equity lines and loans		19,268		219		81		12,810		167		49
Automobile		33,666		528		67		42,957		710		127
Other		18,677		177		44		15,791		161		50

Total	$	875,395		5,596		3,350		981,278		5,845		3,411


	Nine months ended September 30, 2014						Nine months ended September 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.	$	171,227		1,379		1,379		164,877		6,358		6,358
Real estate:
Commercial		194,337		2,616		2,616		200,354		1,428		1,428
Residential builder and developer		94,453		131		131		159,308		871		637
Other commercial construction		74,531		1,694		1,694		97,268		3,322		3,322
Residential		132,606		7,784		6,146		184,719		4,795		3,188
Residential Alt-A		135,374		5,002		1,900		151,992		5,173		1,799
Consumer:
Home equity lines and loans		17,902		540		182		12,633		499		127
Automobile		36,560		1,742		228		45,075		2,226		404
Other		18,229		517		145		15,438		468		153

Total	$	875,219		21,405		14,421		1,031,664		25,140		17,416

- 18 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


			Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential Builder and Developer		Other Commercial Construction
	(in thousands)
September 30, 2014
Pass	$	18,283,543		21,236,852		1,293,815		3,285,953
Criticized accrual		637,216		634,718		50,940		166,613
Criticized nonaccrual		191,250		173,285		73,296		27,375

Total	$	19,112,009		22,044,855		1,418,051		3,479,941


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

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

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of the original balance of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. The carrying value of residential real estate loans and home equity loans and lines of credit for which a partial charge-off has been recognized aggregated $64 million and $18 million, respectively, at September 30, 2014 and $58 million and $18 million, respectively, at December 31, 2013.

- 19 -

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, Leasing, etc.		Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
September 30, 2014
Individually evaluated for impairment	$	33,805		21,148		13,602		19,597	$	88,152
Collectively evaluated for impairment		247,951		297,169		52,206		149,430		746,756
Purchased impaired		4,796		584		1,714		792		7,886

Allocated	$	286,552		318,901		67,522		169,819		842,794

Unallocated										75,839


Total									$	918,633


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

- 20 -

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, Leasing, etc.		Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
September 30, 2014
Individually evaluated for impairment	$	217,733		292,932		237,247		69,929	$	817,841
Collectively evaluated for impairment		18,879,499		26,454,145		8,402,610		10,781,602		64,517,856
Purchased impaired		14,777		195,770		23,551		2,564		236,662


Total	$	19,112,009		26,942,847		8,663,408		10,854,095	$	65,572,359


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.

- 21 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


			Recorded investment				Financial effects of modification
Three months ended September 30, 2014	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		15	$	1,305	$	1,300	$	(5	)	$	—
Real estate:
Commercial
Principal deferral		8		2,081		2,068		(13	)		—
Other		1		650		—		(650	)		—
Combination of concession types		4		483		478		(5	)		(95	)
Residential builder and developer
Principal deferral		1		241		241		—			—
Other commercial construction
Principal deferral		1		145		142		(3	)		—
Residential
Principal deferral		3		98		97		(1	)		—
Combination of concession types		8		1,100		1,136		36			(135	)
Residential Alt-A
Combination of concession types		3		349		369		20			(64	)
Consumer:
Home equity lines and loans
Combination of concession types		5		519		519		—			(67	)
Automobile
Principal deferral		45		1,003		1,003		—			—
Interest rate reduction		3		30		30		—			(2	)
Other		7		96		96		—			—
Combination of concession types		19		348		348		—			(21	)
Other
Principal deferral		6		48		48		—			—
Interest rate reduction		1		2		2		—			—
Combination of concession types		24		511		511		—			(121	)

Total		154	$	9,009	$	8,388	$	(621	)	$	(505	)

(a)

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

(b)

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

- 22 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


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

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

(a)

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

(b)

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

- 23 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


			Recorded investment				Financial effects of modification
Nine months ended September 30, 2014	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		66	$	20,673	$	20,499	$	(174	)	$	—
Other		1		19,593		19,593		—			—
Combination of concession types		5		9,836		9,766		(70	)		(14	)
Real estate:
Commercial
Principal deferral		32		17,452		17,384		(68	)		—
Other		1		650		—		(650	)		—
Interest rate reduction		1		255		252		(3	)		(48	)
Combination of concession types		6		892		940		48			(208	)
Residential builder and developer
Principal deferral		2		1,639		1,639		—			—
Other commercial construction
Principal deferral		4		6,703		6,611		(92	)		—
Residential
Principal deferral		19		1,842		1,926		84			—
Interest rate reduction		1		98		104		6			(32	)
Other		1		188		188		—			—
Combination of concession types		30		4,211		4,287		76			(483	)
Residential Alt-A
Principal deferral		5		828		900		72			—
Combination of concession types		19		3,101		3,134		33			(345	)
Consumer:
Home equity lines and loans
Principal deferral		3		280		280		—			—
Interest rate reduction		5		341		341		—			(76	)
Combination of concession types		41		4,147		4,147		—			(443	)
Automobile
Principal deferral		168		2,599		2,599		—			—
Interest rate reduction		6		90		90		—			(5	)
Other		26		204		204		—			—
Combination of concession types		65		939		939		—			(83	)
Other
Principal deferral		21		141		141		—			—
Interest rate reduction		4		293		293		—			(63	)
Other		1		45		45		—			—
Combination of concession types		57		1,883		1,883		—			(585	)

Total		590	$	98,923	$	98,185	$	(738	)	$	(2,385	)

(a)

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

(b)

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

- 24 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


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

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

(a)

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

(b)

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended September 30, 2014 and for which there was a subsequent payment default during the nine-month period ended September 30, 2014 were $3 million. Loans that were modified as troubled debt restructurings during the twelve months ended September 30, 2013 and for

- 25 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

which there was a subsequent payment default during the nine-month period ended September 30, 2013 were $20 million (largely commercial real estate loans).

5.	Borrowings

M&T had $835 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at September 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 September 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 September 30, 2014 and $1.6 billion at December 31, 2013.

- 26 -

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 September 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 nine months ended September 30, 2014, 395,905 of the Series A warrants were exercised in “cashless” exercises, resulting in the issuance of 156,521 common shares. Remaining outstanding Series A warrants were 753,490 at September 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 (“LIBOR”) plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&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.

- 27 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6.	Shareholders’ equity, continued

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 September 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 September 30
	2014			2013			2014			2013
	(in thousands)

Service cost	$	5,130			6,090			151			186
Interest cost on projected benefit obligation		17,290			15,032			695			673
Expected return on plan assets		(22,892	)		(21,838	)		—			—
Amortization of prior service cost		(1,638	)		(1,639	)		(340	)		(340	)
Amortization of net actuarial loss		3,624			10,269			—			90


Net periodic benefit cost	$	1,514			7,914			506			609


	Pension benefits						Other postretirement benefits
	Nine months ended September 30
	2014			2013			2014			2013
	(in thousands)

Service cost	$	15,390			18,270			453			557
Interest cost on projected benefit obligation		51,871			45,097			2,084			2,018
Expected return on plan assets		(68,676	)		(65,515	)		—			—
Amortization of prior service cost		(4,914	)		(4,917	)		(1,019	)		(1,019	)
Amortization of net actuarial loss		10,871			30,807			—			270


Net periodic benefit cost	$	4,542			23,742			1,518			1,826

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $13,558,000 and $12,440,000 for the three months ended September 30, 2014 and 2013, respectively, and $41,963,000 and $40,757,000 for the nine months ended September 30, 2014 and 2013, respectively.

- 28 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8.	Earnings per common share

The computations of basic earnings per common share follow:


	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands, except per share)
Income available to common shareholders:

Net income	$	275,344			294,479		$	788,697			917,058
Less: Preferred stock dividends (a)		(20,443	)		(13,363	)		(55,560	)		(40,088	)
Amortization of preferred stock discount (a)		—			(2,235	)		—			(6,575	)

Net income available to common equity		254,901			278,881			733,137			870,395
Less: Income attributable to unvested stock-based compensation awards		(2,996	)		(3,545	)		(8,830	)		(11,451	)


Net income available to common shareholders	$	251,905			275,336		$	724,307			858,944

Weighted-average shares outstanding:

Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards		132,832			130,836			132,372			130,088
Less: Unvested stock-based compensation awards		(1,567	)		(1,665	)		(1,590	)		(1,719	)


Weighted-average shares outstanding		131,265			129,171			130,782			128,369

Basic earnings per common share	$	1.92			2.13		$	5.54			6.69

(a)

Including impact of not as yet declared cumulative dividends.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

8.	Earnings per common share, continued

The computations of diluted earnings per common share follow:


	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
	(in thousands, except per share)

Net income available to common equity	$	254,901			278,881		$	733,137			870,395

Less: Income attributable to unvested stock-based compensation awards		(2,984	)		(3,525	)		(8,793	)		(11,395	)


Net income available to common shareholders	$	251,917			275,356		$	724,344			859,000

Adjusted weighted-average shares outstanding:

Common and unvested stock-based compensation awards		132,832			130,836			132,372			130,088
Less: Unvested stock-based compensation awards		(1,567	)		(1,665	)		(1,590	)		(1,719	)
Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock		863			1,094			916			943


Adjusted weighted-average shares outstanding		132,128			130,265			131,698			129,312

Diluted earnings per common share	$	1.91			2.11		$	5.50			6.64

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 3.1 million common shares during the three-month periods ended September 30, 2014 and 2013, respectively, and 2.1 million and 4.1 million common shares during the nine-month periods ended September 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 table displays the components of other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income (loss) to net income:


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

Balance – January 1, 2014	$	37,255		18,450		(161,617	)		115		$	(105,797	)		41,638		$	(64,159	)

Other comprehensive income before reclassifications:
Unrealized holding gains, net		12,038		109,263		—			—			121,301			(47,615	)		73,686
Foreign currency translation adjustment		—		—		—			(2,314	)		(2,314	)		810			(1,504	)
Unrealized losses on cash flow hedges		—		—		—			(162	)		(162	)		64			(98	)

Total other comprehensive income before reclassifications		12,038		109,263		—			(2,476	)		118,825			(46,741	)		72,084


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

Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities		1		2,539		—			—			2,540	(a)		(997	)		1,543
Amortization of prior service credit		—		—		(5,933	)		—			(5,933	)(d)		2,328			(3,605	)
Amortization of actuarial losses		—		—		10,871			—			10,871	(d)		(4,267	)		6,604

Total reclassifications		1		2,539		4,938			—			7,478			(2,936	)		4,542


Total gain (loss) during the period		12,039		111,802		4,938			(2,476	)		126,303			(49,677	)		76,626


Balance – September 30, 2014	$	49,294		130,252		(156,679	)		(2,361	)	$	20,506			(8,039	)	$	12,467

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

9.	Comprehensive income, continued


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

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

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

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


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

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

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


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


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

(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
	(in thousands)

Balance – December 31, 2013	$	22,632		11,294		(98,182	)		97		$	(64,159	)

Net gain (loss) during period		7,314		67,915		2,999			(1,602	)		76,626


Balance – September 30, 2014	$	29,946		79,209		(95,183	)		(1,505	)	$	12,467

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments

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

The net effect of interest rate swap agreements was to increase net interest income by $11 million for each of the three-month periods ended September 30, 2014 and 2013, and $34 million and $30 million for the nine-month periods ended September 30, 2014 and 2013, respectively.

At September 30, 2014, interest rate swap agreements were used as fair value hedges for approximately $1.4 billion of outstanding fixed rate long-term borrowings. Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows:


	Notional amount		Average maturity		Weighted- average rate
	Notional amount		Average maturity		Fixed			Variable
	(in thousands)		(in years)
September 30, 2014
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		2.9		4.42	%		1.19	%


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

(a)

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

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

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $17.2 billion and $17.4 billion at September 30, 2014 and December 31, 2013, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.0 billion and $1.4 billion at September 30, 2014 and December 31, 2013, respectively.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued

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


	Asset derivatives				Liability derivatives
	Fair value				Fair value
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	76,249		102,875	$	—		—
Commitments to sell real estate loans (a)		1,454		6,957		2,438		487

		77,703		109,832		2,438		487
Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		16,732		7,616		240		3,675
Commitments to sell real estate loans (a)		1,387		6,120		3,157		230
Trading:
Interest rate contracts (b)		203,779		274,864		165,065		234,455
Foreign exchange and other option and futures contracts (b)		17,049		15,831		16,677		15,342

		238,947		304,431		185,139		253,702


Total derivatives	$	316,650		414,263	$	187,577		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 September 30, 2014					Three months ended September 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)	$	(16,792	)		16,380	$	(86	)		(20	)


Derivatives not designated as hedging instruments

Trading:
Interest rate contracts (b)	$	132				$	2,778
Foreign exchange and other option and futures contracts (b)		(781	)				(862	)


Total	$	(649	)			$	1,916


	Amount of unrealized gain (loss) recognized
	Nine months ended September 30, 2014					Nine months ended September 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)	$	(26,627	)		25,658	$	(29,097	)		27,733


Derivatives not designated as hedging instruments

Trading:
Interest rate contracts (b)	$	1,214				$	5,974
Foreign exchange and other option and futures contracts (b)		(6,597	)				(2,469	)


Total	$	(5,383	)			$	3,505

(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 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 $28 million and $23 million at September 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 $149 million and $194 million at September 30, 2014 and December 31, 2013, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $89 million and $107 million at September 30, 2014 and December 31, 2013, respectively. The Company was required to post collateral relating to those positions of $81 million and $95 million at September 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 to the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit-risk-related contingent features in a net liability position on September 30, 2014 was $26 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 September 30, 2014, the maximum amount of additional collateral the Company would have been required to post to counterparties was $8 million.

The aggregate fair value of derivative financial instruments in an as