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 March 31, 2015

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

Commission File Number 1-9861

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(716) 842-5445

(Registrant’s telephone number, including area code)

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

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

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 30, 2015: 132,970,139 shares.

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2015


Table of Contents of Information Required in Report		Page

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements.

	CONSOLIDATED BALANCE SHEET - March 31, 2015 and December 31, 2014		3

	CONSOLIDATED STATEMENT OF INCOME - Three months ended March 31, 2015 and 2014		4

	CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three months ended March 31, 2015 and 2014		5

	CONSOLIDATED STATEMENT OF CASH FLOWS - Three months ended March 31, 2015 and 2014		6

	CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Three months ended March 31, 2015 and 2014		7

	NOTES TO FINANCIAL STATEMENTS		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		50

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		91

Item 4.	Controls and Procedures.		91

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings.		91

Item 1A.	Risk Factors.		92

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		93

Item 3.	Defaults Upon Senior Securities.		93

Item 4.	Mine Safety Disclosures.		93

Item 5.	Other Information.		93

Item 6.	Exhibits.		94

SIGNATURES			95

EXHIBIT INDEX			95

- 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		March 31, 2015			December 31, 2014

Assets	Cash and due from banks	$	1,269,816			1,289,965
	Interest-bearing deposits at banks		6,291,491			6,470,867
	Federal funds sold		97,037			83,392
	Trading account		363,085			308,175
	Investment securities (includes pledged securities that can be sold or repledged of $1,611,069 at March 31, 2015; $1,631,267 at December 31, 2014)
	Available for sale (cost: $10,425,720 at March 31, 2015; $8,919,324 at December 31, 2014)		10,703,500			9,156,932
	Held to maturity (fair value: $3,411,834 at March 31, 2015; $3,538,282 at December 31, 2014)		3,360,812			3,507,868
	Other (fair value: $328,958 at March 31, 2015; $328,742 at December 31, 2014)		328,958			328,742

	Total investment securities		14,393,270			12,993,542

	Loans and leases		67,328,490			66,899,369
	Unearned discount		(229,448	)		(230,413	)

	Loans and leases, net of unearned discount		67,099,042			66,668,956
	Allowance for credit losses		(921,373	)		(919,562	)

	Loans and leases, net		66,177,669			65,749,394

	Premises and equipment		602,096			612,984
	Goodwill		3,524,625			3,524,625
	Core deposit and other intangible assets		28,234			35,027
	Accrued interest and other assets		5,630,460			5,617,564

	Total assets	$	98,377,783			96,685,535


Liabilities	Noninterest-bearing deposits	$	27,181,120			26,947,880
	NOW accounts		2,149,537			2,307,815
	Savings deposits		41,138,792			41,085,803
	Time deposits		2,946,126			3,063,973
	Deposits at Cayman Islands office		178,545			176,582

	Total deposits		73,594,120			73,582,053

	Federal funds purchased and agreements to repurchase securities		193,495			192,676
	Accrued interest and other liabilities		1,552,724			1,567,951
	Long-term borrowings		10,509,143			9,006,959

	Total liabilities		85,849,482			84,349,639

Shareholders’ equity	Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at March 31, 2015 and at December 31, 2014; Liquidation preference of $10,000 per share: 50,000 shares at March 31, 2015 and December 31, 2014		1,231,500			1,231,500
	Common stock, $.50 par, 250,000,000 shares authorized, 132,909,718 shares issued at March 31, 2015; 132,312,931 shares issued at December 31, 2014		66,455			66,157
	Common stock issuable, 36,360 shares at March 31, 2015; 41,330 shares at December 31, 2014		2,310			2,608
	Additional paid-in capital		3,445,707			3,409,506
	Retained earnings		7,934,820			7,807,119
	Accumulated other comprehensive income (loss), net		(152,491	)		(180,994	)

	Total shareholders’ equity		12,528,301			12,335,896

	Total liabilities and shareholders’ equity	$	98,377,783			96,685,535

- 3 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


		Three months ended March 31
In thousands, except per share		2015			2014
Interest income	Loans and leases, including fees	$	647,179			645,222
	Deposits at banks		3,118			1,884
	Federal funds sold		24			16
	Trading account		491			427
	Investment securities
	Fully taxable		85,957			73,899
	Exempt from federal taxes		1,318			1,504

	Total interest income		738,087			722,952

Interest expense	NOW accounts		311			297
	Savings deposits		10,219			11,601
	Time deposits		3,740			3,940
	Deposits at Cayman Islands office		147			208
	Short-term borrowings		34			32
	Long-term borrowings		64,048			50,441

	Total interest expense		78,499			66,519

	Net interest income		659,588			656,433
	Provision for credit losses		38,000			32,000

	Net interest income after provision for credit losses		621,588			624,433

Other income	Mortgage banking revenues		101,601			80,049
	Service charges on deposit accounts		102,344			104,198
	Trust income		123,734			121,252
	Brokerage services income		15,461			16,500
	Trading account and foreign exchange gains		6,231			6,447
	Loss on bank investment securities		(98	)		—
	Equity in earnings of Bayview Lending Group LLC		(4,191	)		(4,454	)
	Other revenues from operations		95,121			96,115

	Total other income		440,203			420,107

Other expense	Salaries and employee benefits		389,893			371,326
	Equipment and net occupancy		66,470			71,167
	Printing, postage and supplies		9,590			10,956
	Amortization of core deposit and other intangible assets		6,793			10,062
	FDIC assessments		10,660			15,488
	Other costs of operations		202,969			211,235

	Total other expense		686,375			690,234

	Income before taxes		375,416			354,306
	Income taxes		133,803			125,289

	Net income	$	241,613			229,017


	Net income available to common shareholders
	Basic	$	218,830			211,720
	Diluted		218,837			211,731
	Net income per common share
	Basic	$	1.66			1.63
	Diluted		1.65			1.61
	Cash dividends per common share	$	.70			.70
	Average common shares outstanding
	Basic		132,049			130,212
	Diluted		132,769			131,126

- 4 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended March 31
In thousands	2015			2014

Net income	$	241,613		$	229,017
Other comprehensive income, net of tax and reclassification adjustments:
Net unrealized gains on investment securities		25,339			38,214
Cash flow hedges adjustments		871			—
Foreign currency translation adjustment		(2,384	)		(136	)
Defined benefit plans liability adjustment		4,677			820

Total other comprehensive income		28,503			38,898

Total comprehensive income	$	270,116		$	267,915

- 5 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


		Three months ended March 31
In thousands		2015			2014
Cash flows from operating activities	Net income	$	241,613			229,017
	Adjustments to reconcile net income to net cash provided by operating activities
	Provision for credit losses		38,000			32,000
	Depreciation and amortization of premises and equipment		24,178			24,708
	Amortization of capitalized servicing rights		12,199			17,792
	Amortization of core deposit and other intangible assets		6,793			10,062
	Provision for deferred income taxes		37,052			42,256
	Asset write-downs		2,379			1,117
	Net gain on sales of assets		(1,066	)		(852	)
	Net change in accrued interest receivable, payable		(2,200	)		(3,185	)
	Net change in other accrued income and expense		(80,084	)		57,884
	Net change in loans originated for sale		197,708			122,406
	Net change in trading account assets and liabilities		(18,206	)		27,893

	Net cash provided by operating activities		458,366			561,098

Cash flows from investing activities	Proceeds from sales of investment securities
	Available for sale		693			—
	Other		132			146
	Proceeds from maturities of investment securities
	Available for sale		369,649			166,324
	Held to maturity		148,708			92,305
	Purchases of investment securities
	Available for sale		(1,871,491	)		(1,709,847	)
	Held to maturity		(7,442	)		(3,238	)
	Other		(348	)		(258	)
	Net increase in loans and leases		(666,220	)		(220,551	)
	Net (increase) decrease in interest bearing deposits at banks		179,376			(1,648,047	)
	Capital expenditures, net		(9,598	)		(16,725	)
	Net (increase) decrease in loan servicing advances		76,145			(122,910	)
	Other, net		(21,940	)		21,763

	Net cash used by investing activities		(1,802,336	)		(3,441,038	)

Cash flows from financing activities	Net increase (decrease) in deposits		(4,543	)		1,581,705
	Net increase (decrease) in short-term borrowings		819			(30,246	)
	Proceeds from long-term borrowings		1,500,000			1,498,688
	Payments on long-term borrowings		(1,797	)		(352,245	)
	Proceeds from issuance of preferred stock		—			346,500
	Dividends paid - common		(93,631	)		(92,406	)
	Dividends paid - preferred		(17,368	)		(6,080	)
	Other, net		(46,014	)		24,208

	Net cash provided by financing activities		1,337,466			2,970,124

	Net increase (decrease) in cash and cash equivalents		(6,504	)		90,184
	Cash and cash equivalents at beginning of period		1,373,357			1,672,934

	Cash and cash equivalents at end of period	$	1,366,853			1,763,118

Supplemental disclosure of cash flow information	Interest received during the period	$	726,475			695,653
	Interest paid during the period		75,776			61,841
	Income taxes paid during the period		88,578			4,789

Supplemental schedule of noncash investing and financing activities	Securitization of residential mortgage loans allocated to
	Available-for-sale investment securities	$	12,920			29,785
	Capitalized servicing rights		143			372
	Real estate acquired in settlement of loans		10,846			8,886

- 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
2014
Balance - January 1, 2014	$	881,500		65,258		2,915			3,232,014			7,188,004			(64,159	)		11,305,532
Total comprehensive income		—		—		—			—			229,017			38,898			267,915
Preferred stock cash dividends		—		—		—			—			(14,674	)		—			(14,674	)
Issuance of Series E preferred stock		350,000		—		—			(3,500	)		—			—			346,500
Stock-based compensation plans:
Compensation expense, net		—		123		—			13,999			—			—			14,122
Exercises of stock options, net		—		266		—			49,228			—			—			49,494
Stock purchase plan		—		43		—			9,545			—			—			9,588
Directors’ stock plan		—		2		—			439			—			—			441
Deferred compensation plans, net, including dividend equivalents		—		2		(299	)		265			(29	)		—			(61	)
Other		—		—		—			412			—			—			412
Common stock cash dividends - $.70 per share		—		—		—			—			(92,406	)		—			(92,406	)

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

2015
Balance - January 1, 2015	$	1,231,500		66,157		2,608			3,409,506			7,807,119			(180,994	)		12,335,896
Total comprehensive income		—		—		—			—			241,613			28,503			270,116
Preferred stock cash dividends		—		—		—			—			(20,318	)		—			(20,318	)
Exercise of 2,315 Series A stock warrants into 904 shares of common stock		—		1		—			(1	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		147		—			5,425			—			—			5,572
Exercises of stock options, net		—		101		—			19,378			—			—			19,479
Stock purchase plan				45					10,301									10,346
Directors’ stock plan		—		2		—			423			—			—			425
Deferred compensation plans, net, including dividend equivalents		—		2		(298	)		270			(25	)		—			(51	)
Other		—		—		—			405			—			—			405
Common stock cash dividends - $.70 per share		—		—		—			—			(93,569	)		—			(93,569	)

Balance - March 31, 2015	$	1,231,500		66,455		2,310			3,445,707			7,934,820			(152,491	)		12,528,301

- 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 2014 Annual Report. Additionally, effective January 1, 2015 the Company made an accounting policy election in accordance with amended accounting guidance issued by the Financial Accounting Standards Board in January 2014 to account for investments in qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The adoption of the amended guidance did not have a significant effect on the Company’s financial position or results of operation, but did result in the restatement of the consolidated statement of income for the three-month period ended March 31, 2014 to remove $12 million of losses associated with qualified affordable housing projects from “other costs of operations” and include the amortization of the initial cost of the investment in income tax expense. The cumulative effect adjustment associated with adopting the amended guidance was not material as of the beginning of any period presented in these consolidated financial statements. See note 11 for information regarding the Company’s investments in qualified affordable housing projects.

In the opinion of management, all adjustments necessary for a fair presentation have been made and, except as described above, were all of a normal recurring nature.

2.	Acquisitions

On August 27, 2012, M&T announced that it had entered into a definitive agreement with Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey, under which Hudson City would be acquired by M&T. Pursuant to the terms of the agreement, Hudson City shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). As of March 31, 2015 total consideration to be paid was valued at approximately $5.5 billion.

At March 31, 2015, Hudson City had $36.1 billion of assets, including $20.9 billion of loans and $8.3 billion of investment securities, and $31.3 billion of liabilities, including $18.9 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 commenced a major initiative, including the hiring of outside consulting firms, intended to fully address the Federal Reserve Bank’s concerns. On April 3, 2015, M&T was advised that the Federal Reserve Board intends to act on the M&T and Hudson City merger application no later than September 30, 2015. As a result, M&T and Hudson City extended the date after which either party may elect to terminate the merger agreement if the merger has not yet been completed from

- 8 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

2.	Acquisitions, continued

April 30, 2015 to October 31, 2015. Nevertheless, there can be no assurances that the merger will be completed by that date.

3.	Investment securities

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


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
March 31, 2015
Investment securities available for sale:
U.S. Treasury and federal agencies	$	161,672		1,563		1	$	163,234
Obligations of states and political subdivisions		7,704		199		53		7,850
Mortgage-backed securities:
Government issued or guaranteed		10,008,191		265,739		8,709		10,265,221
Privately issued		96		2		3		95
Collateralized debt obligations		29,704		19,360		1,786		47,278
Other debt securities		138,366		1,909		19,002		121,273
Equity securities		79,987		18,999		437		98,549

		10,425,720		307,771		29,991		10,703,500


Investment securities held to maturity:
Obligations of states and political subdivisions		148,698		2,178		350		150,526
Mortgage-backed securities:
Government issued or guaranteed		3,007,420		88,417		4,024		3,091,813
Privately issued		197,509		1,421		36,620		162,310
Other debt securities		7,185		—		—		7,185

		3,360,812		92,016		40,994		3,411,834

Other securities		328,958		—		—		328,958

Total	$	14,115,490		399,787		70,985	$	14,444,292


December 31, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	161,408		544		5	$	161,947
Obligations of states and political subdivisions		8,027		224		53		8,198
Mortgage-backed securities:
Government issued or guaranteed		8,507,571		223,889		337		8,731,123
Privately issued		104		2		3		103
Collateralized debt obligations		30,073		21,276		1,033		50,316
Other debt securities		138,240		1,896		18,648		121,488
Equity securities		73,901		11,020		1,164		83,757

		8,919,324		258,851		21,243		9,156,932

Investment securities held to maturity:
Obligations of states and political subdivisions		148,961		2,551		189		151,323
Mortgage-backed securities:
Government issued or guaranteed		3,149,320		78,485		7,000		3,220,805
Privately issued		201,733		1,143		44,576		158,300
Other debt securities		7,854		—		—		7,854

		3,507,868		82,179		51,765		3,538,282

Other securities		328,742		—		—		328,742

Total	$	12,755,934		341,030		73,008	$	13,023,956

- 9 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

There were no significant gross realized gains or losses from sales of investment securities for the quarters ended March 31, 2015 and 2014.

At March 31, 2015, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:


	Amortized cost		Estimated fair value
	(in thousands)
Debt securities available for sale:
Due in one year or less	$	9,059		9,117
Due after one year through five years		163,114		165,027
Due after five years through ten years		3,272		3,314
Due after ten years		162,001		162,177

		337,446		339,635
Mortgage-backed securities available for sale		10,008,287		10,265,316

	$	10,345,733		10,604,951


Debt securities held to maturity:
Due in one year or less	$	27,663		27,865
Due after one year through five years		87,320		88,357
Due after five years through ten years		33,715		34,304
Due after ten years		7,185		7,185

		155,883		157,711
Mortgage-backed securities held to maturity		3,204,929		3,254,123

	$	3,360,812		3,411,834

- 10 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

A summary of investment securities that as of March 31, 2015 and December 31, 2014 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:


	Less than 12 months					12 months or more
	Fair value		Unrealized losses			Fair value		Unrealized losses
	(in thousands)
March 31, 2015
Investment securities available for sale:
U.S. Treasury and federal agencies	$	4,681		(1	)		—		—
Obligations of states and political subdivisions		986		(4	)		1,524		(49	)
Mortgage-backed securities:
Government issued or guaranteed		1,603,068		(8,597	)		4,138		(112	)
Privately issued		—		—			59		(3	)
Collateralized debt obligations		6,091		(1,255	)		5,220		(531	)
Other debt securities		12,689		(443	)		92,304		(18,559	)
Equity securities		374		(437	)		—		—

		1,627,889		(10,737	)		103,245		(19,254	)


Investment securities held to maturity:
Obligations of states and political subdivisions		35,272		(317	)		1,802		(33	)
Mortgage-backed securities:
Government issued or guaranteed		16,660		(85	)		266,979		(3,939	)
Privately issued		—		—			131,779		(36,620	)

		51,932		(402	)		400,560		(40,592	)

Total	$	1,679,821		(11,139	)		503,805		(59,846	)


December 31, 2014
Investment securities available for sale:
U.S. Treasury and federal agencies	$	6,505		(5	)		—		—
Obligations of states and political subdivisions		1,785		(52	)		121		(1	)
Mortgage-backed securities:
Government issued or guaranteed		39,001		(186	)		5,555		(151	)
Privately issued		—		—			65		(3	)
Collateralized debt obligations		2,108		(696	)		5,512		(337	)
Other debt securities		14,017		(556	)		92,661		(18,092	)
Equity securities		2,138		(1,164	)		—		—

		65,554		(2,659	)		103,914		(18,584	)


Investment securities held to maturity:
Obligations of states and political subdivisions		29,886		(184	)		268		(5	)
Mortgage-backed securities:
Government issued or guaranteed		137,413		(361	)		446,780		(6,639	)
Privately issued		—		—			127,512		(44,576	)

		167,299		(545	)		574,560		(51,220	)

Total	$	232,853		(3,204	)		678,474		(69,804	)

- 11 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

The Company owned 294 individual investment securities with aggregate gross unrealized losses of $71 million at March 31, 2015. Based on a review of each of the securities in the investment securities portfolio at March 31, 2015, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 2015, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At March 31, 2015, 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 that is included in the consolidated balance sheet were as follows:


	March 31, 2015		December 31, 2014
	(in thousands)

Outstanding principal balance	$	2,837,256		3,070,268
Carrying amount:
Commercial, financial, leasing, etc.		207,884		247,820
Commercial real estate		869,700		961,828
Residential real estate		434,454		453,360
Consumer		888,985		933,537

	$	2,401,023		2,596,545

Purchased impaired loans included in the table above totaled $184 million at March 31, 2015 and $198 million at December 31, 2014, 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-month periods ended March 31, 2015 and 2014 follows:


	Three months ended March 31, 2015
	Purchased impaired			Other acquired			Total
	(in thousands)

Balance at beginning of period	$	76,518			397,379			473,897
Interest income		(5,206	)		(41,277	)		(46,483	)
Reclassifications from nonaccretable balance, net		110			183			293
Other (a)		—			1,610			1,610

Balance at end of period	$	71,422			357,895			429,317

- 12 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended March 31, 2014
	Purchased impaired			Other acquired			Total
	(in thousands)

Balance at beginning of period	$	37,230			538,633			575,863
Interest income		(6,328	)		(52,633	)		(58,961	)
Reclassifications from nonaccretable balance, net		37			—			37
Other (a)		—			(838	)		(838	)

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

(a)

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

A summary of current, past due and nonaccrual loans as of March 31, 2015 and December 31, 2014 were as 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)
March 31, 2015
Commercial, financial, leasing, etc.	$	19,519,566		43,213		4,265		3,323		9,724		195,403		19,775,494
Real estate:
Commercial		22,225,088		116,465		27,261		17,187		45,752		142,007		22,573,760
Residential builder and developer		1,460,981		6,119		—		6,953		91,839		65,310		1,631,202
Other commercial construction		3,575,578		18,244		3,864		1,721		17,061		24,280		3,640,748
Residential		7,580,514		189,901		197,299		20,058		17,283		171,496		8,176,551
Residential Alt-A		241,467		11,831		—		—		—		74,270		327,568
Consumer:
Home equity lines and loans		5,783,865		35,478		—		13,298		2,359		87,985		5,922,985
Automobile		2,024,526		25,322		—		—		—		14,100		2,063,948
Other		2,921,142		28,407		3,932		17,570		—		15,735		2,986,786

Total	$	65,332,727		474,980		236,621		80,110		184,018		790,586		67,099,042

- 13 -

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, 2014
Commercial, financial, leasing, etc.	$	19,228,265		37,246		1,805		6,231		10,300		177,445		19,461,292
Real estate:
Commercial		22,208,491		118,704		22,170		14,662		51,312		141,600		22,556,939
Residential builder and developer		1,273,607		11,827		492		9,350		98,347		71,517		1,465,140
Other commercial construction		3,484,932		17,678		—		—		17,181		25,699		3,545,490
Residential		7,640,368		226,932		216,489		35,726		18,223		180,275		8,318,013
Residential Alt-A		249,810		11,774		—		—		—		77,704		339,288
Consumer:
Home equity lines and loans		5,859,378		42,945		—		27,896		2,374		89,291		6,021,884
Automobile		1,931,138		30,500		—		133		—		17,578		1,979,349
Other		2,909,791		33,295		4,064		16,369		—		18,042		2,981,561

Total	$	64,785,780		530,901		245,020		110,367		197,737		799,151		66,668,956

(a)

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

(b)

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

One-to-four family residential mortgage loans held for sale were $423 million and $435 million at March 31, 2015 and December 31, 2014, respectively. Commercial mortgage loans held for sale were $117 million at March 31, 2015 and $308 million at December 31, 2014.

Changes in the allowance for credit losses for the three months ended March 31, 2015 were as follows:


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

Beginning balance	$	288,038			307,927			61,910			186,033			75,654		919,562
Provision for credit losses		1,442			15,542			960			19,574			482		38,000
Net charge-offs
Charge-offs		(12,350	)		(6,679	)		(3,118	)		(25,329	)		—		(47,476	)
Recoveries		3,939			585			989			5,774			—		11,287

Net charge-offs		(8,411	)		(6,094	)		(2,129	)		(19,555	)		—		(36,189	)

Ending balance	$	281,069			317,375			60,741			186,052			76,136		921,373

- 14 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


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

Beginning balance	$	273,383			324,978			78,656			164,644			75,015		916,676
Provision for credit losses		12,598			116			4,228			14,141			917		32,000
Net charge-offs
Charge-offs		(14,809	)		(3,486	)		(7,453	)		(21,691	)		—		(47,439	)
Recoveries		5,663			3,197			1,631			5,040			—		15,531

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

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

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 loans and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and 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 collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the

- 15 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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 March 31, 2015 and December 31, 2014 and for the three month periods ended March 31, 2015 and 2014.


	March 31, 2015						December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
With an allowance recorded:
Commercial, financial, leasing, etc.	$	108,870		130,029		19,335		132,340		165,146		31,779
Real estate:
Commercial		99,729		122,098		15,836		83,955		96,209		14,121
Residential builder and developer		6,512		8,731		591		17,632		22,044		805
Other commercial construction		5,116		6,084		831		5,480		6,484		900
Residential		86,691		104,630		4,405		88,970		107,343		4,296
Residential Alt-A		97,984		110,835		11,000		101,137		114,565		11,000
Consumer:
Home equity lines and loans		19,701		20,794		6,304		19,771		20,806		6,213
Automobile		27,122		27,122		6,983		30,317		30,317		8,070
Other		18,814		18,814		5,297		18,973		18,973		5,459

		470,539		549,137		70,582		498,575		581,887		82,643

With no related allowance recorded:
Commercial, financial, leasing, etc.		116,325		135,534		—		73,978		81,493		—
Real estate:
Commercial		51,734		59,235		—		66,777		78,943		—
Residential builder and developer		62,611		101,964		—		58,820		96,722		—
Other commercial construction		19,657		40,072		—		20,738		41,035		—
Residential		17,203		27,886		—		16,815		26,750		—
Residential Alt-A		24,785		43,635		—		26,752		46,964		—

		292,315		408,326		—		263,880		371,907		—


Total:
Commercial, financial, leasing, etc.		225,195		265,563		19,335		206,318		246,639		31,779
Real estate:
Commercial		151,463		181,333		15,836		150,732		175,152		14,121
Residential builder and developer		69,123		110,695		591		76,452		118,766		805
Other commercial construction		24,773		46,156		831		26,218		47,519		900
Residential		103,894		132,516		4,405		105,785		134,093		4,296
Residential Alt-A		122,769		154,470		11,000		127,889		161,529		11,000
Consumer:
Home equity lines and loans		19,701		20,794		6,304		19,771		20,806		6,213
Automobile		27,122		27,122		6,983		30,317		30,317		8,070
Other		18,814		18,814		5,297		18,973		18,973		5,459

Total	$	762,854		957,463		70,582		762,455		953,794		82,643

- 16 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended March 31, 2015						Three months ended March 31, 2014
			Interest income recognized						Interest income recognized
	Average recorded investment		Total		Cash basis		Average recorded investment		Total		Cash basis
	(in thousands)
Commercial, financial, leasing, etc.	$	214,618		604		604		134,306		548		548
Real estate:
Commercial		153,070		1,102		1,102		185,425		926		926
Residential builder and developer		73,151		63		63		101,253		74		74
Other commercial construction		25,540		55		55		87,292		1,087		1,087
Residential		104,490		1,446		910		174,168		1,400		902
Residential Alt-A		125,654		1,610		647		139,651		1,626		559
Consumer:
Home equity lines and loans		19,683		201		48		15,676		121		29
Automobile		29,013		450		54		39,383		625		87
Other		18,861		174		33		17,700		174		52

Total	$	764,080		5,705		3,516		894,854		6,581		4,264

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

- 17 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential Builder and Developer		Other Commercial Construction
	(in thousands)
March 31, 2015
Pass	$	18,880,311		21,755,661		1,522,471		3,466,705
Criticized accrual		699,780		676,092		43,421		149,763
Criticized nonaccrual		195,403		142,007		65,310		24,280

Total	$	19,775,494		22,573,760		1,631,202		3,640,748


December 31, 2014
Pass	$	18,695,440		21,837,022		1,347,778		3,347,522
Criticized accrual		588,407		578,317		45,845		172,269
Criticized nonaccrual		177,445		141,600		71,517		25,699

Total	$	19,461,292		22,556,939		1,465,140		3,545,490

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a second lien position. 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 $62 million and $20 million, respectively, at March 31, 2015 and $63 million and $18 million, respectively, at December 31, 2014. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance totaled $24 million and $29 million, respectively, at March 31, 2015 and $27 million and $28 million, respectively, at December 31, 2014.

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

- 18 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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)
March 31, 2015
Individually evaluated for impairment	$	19,335		16,921		14,811		18,584	$	69,651
Collectively evaluated for impairment		258,028		299,262		43,547		166,296		767,133
Purchased impaired		3,706		1,192		2,383		1,172		8,453

Allocated	$	281,069		317,375		60,741		186,052		845,237

Unallocated										76,136


Total									$	921,373


December 31, 2014
Individually evaluated for impairment	$	31,779		15,490		14,703		19,742	$	81,714
Collectively evaluated for impairment		251,607		291,244		45,061		165,140		753,052
Purchased impaired		4,652		1,193		2,146		1,151		9,142

Allocated	$	288,038		307,927		61,910		186,033		843,908

Unallocated										75,654


Total									$	919,562

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)
March 31, 2015
Individually evaluated for impairment	$	225,195		244,340		225,364		65,637	$	760,536
Collectively evaluated for impairment		19,540,575		27,446,718		8,261,472		10,905,723		66,154,488
Purchased impaired		9,724		154,652		17,283		2,359		184,018


Total	$	19,775,494		27,845,710		8,504,119		10,973,719	$	67,099,042


December 31, 2014
Individually evaluated for impairment	$	206,318		252,347		232,398		69,061	$	760,124
Collectively evaluated for impairment		19,244,674		27,148,382		8,406,680		10,911,359		65,711,095
Purchased impaired		10,300		166,840		18,223		2,374		197,737


Total	$	19,461,292		27,567,569		8,657,301		10,982,794	$	66,668,956

- 19 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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.

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2015 and 2014:


			Recorded investment				Financial effects of modification
Three months ended March 31, 2015	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
			(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		21	$	1,572	$	1,557	$	(15	)	$	—
Interest rate reduction		1		99		99		—			(19	)
Combination of concession types		3		9,155		6,989		(2,166	)		—
Real estate:
Commercial
Principal deferral		7		3,792		3,776		(16	)		—
Combination of concession types		4		1,646		1,637		(9	)		(52	)
Residential builder and developer
Principal deferral		1		1,398		1,398		—			—
Residential
Principal deferral		7		721		742		21			—
Combination of concession types		3		294		349		55			(34	)
Residential Alt-A
Combination of concession types		1		210		210		—			(4	)
Consumer:
Home equity lines and loans
Principal deferral		1		21		21		—			—
Combination of concession types		5		196		196		—			(13	)
Automobile
Principal deferral		35		303		303		—			—
Interest rate reduction		3		42		42		—			(3	)
Other		10		20		20		—			—
Combination of concession types		8		84		84		—			(7	)
Other
Principal deferral		22		296		296		—			—
Other		5		59		59		—			—
Combination of concession types		13		224		224		—			(25	)

Total		150	$	20,132	$	18,002	$	(2,130	)	$	(157	)

(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.

- 20 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


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

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

(a)

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

(b)

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2015 and 2014 and for which there was a subsequent payment default during the three-month periods ended March 31, 2015 and 2014, respectively, were not material.

Effective January 1, 2015, the Company adopted amended accounting and disclosure guidance for reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amended guidance clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real

- 21 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The adoption resulted in an insignificant increase in other real estate owned. The amount of foreclosed residential real estate property held by the Company was $42 million and $44 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, there were $158 million in loans secured by residential real estate that were in the process of foreclosure.

5.	Borrowings

During February 2015, M&T Bank issued $1.5 billion of fixed rate senior notes pursuant to a Bank Note Program, of which $750 million have a 2.10% interest rate and mature in 2020 and $750 million have a 2.90% interest rate and mature in 2025.

M&T had $836 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2015 that are held by various trusts and were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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 April 15, 2015, M&T redeemed all of the issued and outstanding Capital Securities issued by M&T Capital Trust I, M&T Capital Trust II and M&T Capital Trust III, and the related Junior Subordinated Debentures held by those respective trusts. In the aggregate, $323 million of Junior Subordinated Debentures were redeemed. In February 2014, M&T redeemed all of the issued and outstanding 8.5% $350 million Capital Securities issued by M&T Capital Trust IV and the related Junior Subordinated Debentures held by M&T Capital Trust IV.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

5.	Borrowings, continued

Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of March 31, 2015 and December 31, 2014. The agreements reflect various repurchase dates in 2016 and 2017 and are subject to legally enforceable master netting arrangements, however the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $1.5 billion at each of March 31, 2015 and December 31, 2014.

6.	Shareholders’ equity

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

Issued and outstanding preferred stock of M&T as of March 31, 2015 and December 31, 2014 is presented below:


	Shares issued and outstanding		Carrying value
	(dollars in thousands)
Series A (a)
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference per share		230,000	$	230,000

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

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

Series E (c)
Fixed-to-Floating Rate Non-cumulative Perpetual Preferred Stock, Series E, $1,000 liquidation preference per share		350,000	$	350,000

(a)

Dividends, if declared, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 719,175 at March 31, 2015 and 721,490 at December 31, 2014.

(b)

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

- 23 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6.	Shareholders’ equity, continued

(c)

Dividends, if declared, are paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month London Interbank Offered Rate (“LIBOR”) plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 regulatory capital, M&T may redeem all of the shares within 90 days following that occurrence.

In addition to the Series A warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at March 31, 2015 and December 31, 2014. The obligation under that warrant was assumed by M&T in an acquisition.

7.	Pension plans and other postretirement benefits

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


	Pension benefits						Other postretirement benefits
	Three months ended March 31
	2015			2014			2015			2014
	(in thousands)

Service cost	$	6,000			5,100			200			150
Interest cost on projected benefit obligation		17,775			17,250			650			675
Expected return on plan assets		(23,575	)		(22,925	)		—			—
Amortization of prior service credit		(1,525	)		(1,650	)		(350	)		(350	)
Amortization of net actuarial loss		11,175			3,350			25			—


Net periodic benefit cost	$	9,850			1,125			525			475

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $16,750,000 and $15,732,000 for the three months ended March 31, 2015 and 2014, respectively.

- 24 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8.	Earnings per common share

The computations of basic earnings per common share follow:


	Three months ended March 31
	2015			2014
	(in thousands, except per share)
Income available to common shareholders:

Net income	$	241,613			229,017
Less: Preferred stock dividends (a)		(20,318	)		(14,674	)

Net income available to common equity		221,295			214,343
Less: Income attributable to unvested stock-based compensation awards		(2,465	)		(2,623	)


Net income available to common shareholders	$	218,830			211,720

Weighted-average shares outstanding:

Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards		133,542			131,800
Less: Unvested stock-based compensation awards		(1,493	)		(1,588	)


Weighted-average shares outstanding		132,049			130,212

Basic earnings per common share	$	1.66			1.63

(a)

Including impact of not as yet declared cumulative dividends.

- 25 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8.	Earnings per common share, continued

The computations of diluted earnings per common share follow:


	Three months ended March 31
	2015			2014
	(in thousands, except per share)

Net income available to common equity	$	221,295			214,343
Less: Income attributable to unvested stock-based compensation awards		(2,458	)		(2,612	)


Net income available to common shareholders	$	218,837			211,731

Adjusted weighted-average shares outstanding:

Common and unvested stock-based compensation awards		133,542			131,800
Less: Unvested stock-based compensation awards		(1,493	)		(1,588	)
Plus: Incremental shares from assumed conversion of stock-based compensation awards		720			914


Adjusted weighted-average shares outstanding		132,769			131,126

Diluted earnings per common share	$	1.65			1.61

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 2.7 million and 3.0 million common shares during the three-month periods ended March 31, 2015 and 2014, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

- 26 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9.	Comprehensive income

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


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

Balance – January 1, 2015	$	7,438		201,828		(503,027	)		(4,082	)	$	(297,843	)		116,849		$	(180,994	)

Other comprehensive income before reclassifications:
Unrealized holding gains, net		8,011		32,063		—			—			40,074			(15,247	)		24,827
Foreign currency translation adjustment		—		—		—			(3,732	)		(3,732	)		1,348			(2,384	)
Gains on cash flow hedges		—		—		—			1,453			1,453			(568	)		885

Total other comprehensive income before reclassifications		8,011		32,063		—			(2,279	)		37,795			(14,467	)		23,328


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

Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities		—		739		—			—			739	(b)		(289	)		450
Losses realized in net income		—		98		—			—			98	(c)		(36	)		62
Accretion of gain on terminated cash flow hedges		—		—		—			(24	)		(24	) (d)		10			(14	)
Amortization of prior service credit		—		—		(1,875	)		—			(1,875	) (e)		934			(941	)
Amortization of actuarial losses		—		—		11,200			—			11,200	(e)		(5,582	)		5,618

Total reclassifications		—		837		9,325			(24	)		10,138			(4,963	)		5,175


Total gain (loss) during the period		8,011		32,900		9,325			(2,303	)		47,933			(19,430	)		28,503


Balance – March 31, 2015	$	15,449		234,728		(493,702	)		(6,385	)	$	(249,910	)		97,419		$	(152,491	)

- 27 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9.	Comprehensive income, continued


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

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

Other comprehensive income before reclassifications:
Unrealized holding gains, net		19,968		42,119		—			—			62,087			(24,374	)		37,713
Foreign currency translation adjustment		—		—		—			(234	)		(234	)		98			(136	)

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


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

Accretion of unrealized holding losses on HTM securities		2		823		—			—			825	(b)		(324	)		501
Amortization of prior service credit		—		—		(2,000	)		—			(2,000	) (e)		785			(1,215	)
Amortization of actuarial losses		—		—		3,350			—			3,350	(e)		(1,315	)		2,035

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


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


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

(a)

Other-than-temporary impairment

(b)

Included in interest income

(c)

Included in loss on bank investment securities

(d)

Included in interest expense

(e)	Included in salaries and employee benefits

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


	Investment securities				Defined benefit
	With OTTI		All other		plans			Other			Total
	(in thousands)

Balance – December 31, 2014	$	4,518		122,683		(305,589	)		(2,606	)	$	(180,994	)

Net gain (loss) during period		4,898		20,441		4,677			(1,513	)		28,503


Balance – March 31, 2015	$	9,416		143,124		(300,912	)		(4,119	)	$	(152,491	)

- 28 -

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 was not significant as of March 31, 2015.

The net effect of interest rate swap agreements was to increase net interest income by $11 million for each of the three-month periods ended March 31, 2015 and 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)
March 31, 2015
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		2.4		4.42	%		1.22	%


December 31, 2014
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		2.7		4.42	%		1.19	%

(a)

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

The use of cash flow hedges to manage the variability of cash flows associated with the then-forecasted issuance of long-term debt did not have a significant impact on the Company’s consolidated financial position or results of operations.

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

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $17.1 billion and $17.6 billion at March 31, 2015 and December 31, 2014, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.4 billion and $1.3 billion at March 31, 2015 and December 31, 2014, respectively.

- 29 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued

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


	Asset derivatives				Liability derivatives
	Fair value				Fair value
	March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014
	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	72,855		73,251	$	—		—
Commitments to sell real estate loans (a)		662		728		3,529		4,217

		73,517		73,979		3,529		4,217

Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		26,295		17,396		65		49
Commitments to sell real estate loans (a)		1,571		754		8,552		4,330
Trading:
Interest rate contracts (b)		246,819		215,614		204,484		173,513
Foreign exchange and other option and futures contracts (b)		37,957		31,112		35,684		29,950

		312,642		264,876		248,785		207,842


Total derivatives	$	386,159		338,855	$	252,314		212,059

(a)

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

(b)

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

- 30 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued


	Amount of unrealized gain (loss) recognized
	Three months ended March 31, 2015					Three months ended March 31, 2014
	Derivative			Hedged item		Derivative			Hedged item
	(in thousands)
Derivatives in fair value hedging relationships

Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(396	)		161	$	(8,160	)		7,920


Derivatives not designated as hedging instruments

Trading:
Interest rate contracts (b)	$	660				$	(302	)
Foreign exchange and other option and futures contracts (b)		(167	)				(5,030	)


Total	$	493				$	(5,332	)

(a)

Reported as other revenues from operations.

(b)

Reported as trading account and foreign exchange gains.

In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately at $31 million and $28 million March 31, 2015 and December 31, 2014, respectively. Changes in unrealized gains and losses are included in mortgage banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied.

The Company does not offset derivative asset and liability positions in its consolidated financial statements. The 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 $174 million and $161 million at March 31, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $114 million and $103 million at March 31, 2015 and December 31, 2014, respectively. The Company was required to post collateral relating to those positions of $102 million and $90 million, at March 31, 2015 and December 31, 2014, 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

- 31 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued

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 March 31, 2015 was $22 million, for which the Company had posted collateral of $15 million in the normal course of business. If the credit risk-related contingent features had been triggered on March 31, 2015, the maximum amount of additional collateral the Company would have been required to post with counterparties was $7 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $106 million and $104 million at March 31, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $46 million at each of March 31, 2015 and December 31, 2014. Counterparties posted collateral relating to those positions of $47 million and $46 million at March 31, 2015 and December 31, 2014, 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.

In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral for contracts in a net liability position. The net fair values of derivative instruments cleared through clearinghouses at March 31, 2015 was a net liability position of $65 million and at December 31, 2014 was a net liability position of $35 million. Collateral posted with clearinghouses was $97 million and $61 million at March 31, 2015 and December 31, 2014, respectively.

11.

Variable interest entities and asset securitizations

During the first quarter of 2015, the Company securitized approximately $13 million of one-to-four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with the Government National Mortgage Association (“Ginnie Mae”) and retained the resulting securities in its investment securities portfolio. In similar transactions for the three months ended March 31, 2014, the Company securitized $29 million of one-to-four family residential real estate loans. Gains associated with those transactions were not significant.

In accordance with GAAP, the Company determined that it was the primary beneficiary of a residential mortgage loan securitization trust considering its role as servicer and its retained subordinated interests in the trust. As a result, the Company has included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. At March 31, 2015 and December 31, 2014, the carrying values of the loans in the securitization trust were $93 million and $98 million, respectively. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to M&T at March 31, 2015 and December 31, 2014 was $14 million and $15 million, respectively. Because the transaction was non-recourse, the Company’s maximum exposure to loss as a result of its association with the trust at March 31, 2015 is limited to realizing the carrying value of the loans less the amount of the mortgage-backed securities held by third parties.

- 32 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

11.

Variable interest entities and asset securitizations, continued

As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Company’s consolidated financial statements. At March 31, 2015 and December 31, 2014, 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 Capital Securities described in note 5.

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.2 billion at March 31, 2015 and December 31, 2014. 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 on its investments in such partnerships was $303 million, including $88 million of unfunded commitments, at March 31, 2015 and $243 million, including $56 million of unfunded commitments, at December 31, 2014. Contingent commitments to provide additional capital contributions to these partnerships were not material at March 31, 2015. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as a 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. As described in note 1, effective January 1, 2015 the Company retrospectively adopted for all periods presented amended accounting guidance on the accounting for investments in qualified affordable housing projects whereby the Company’s investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company amortized $10 million and $12 million of its investments in qualified affordable housing projects to income tax expense during the three-month periods ended March 31, 2015 and 2014, respectively, and recognized $14 million and $17 million of tax credits and other tax benefits during those respective periods.

12.

Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at March 31, 2015.

Pursuant to GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

•

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 with offsetting positions with third parties to minimize the Company’s risk with respect to such transactions. The Company generally determines the fair value of its derivative trading account assets and liabilities using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. Mutual funds held in connection with deferred compensation arrangements have been classified as Level 1 valuations. Valuations of investments in municipal and other bonds can generally be obtained through reference to quoted prices in less active markets for the same or similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2.

Investment securities available for sale

The majority of the Company’s available-for-sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Certain investments in mutual funds and equity securities are actively traded and, therefore, have been classified as Level 1 valuations.

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at March 31, 2015 and December 31, 2014. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR ranging from 5% to 10%, with a weighted-average of 8%, was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

significant unobservable inputs to Level 3 measurements. At March 31, 2015, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $30 million and $47 million, respectively, and at December 31, 2014 were $30 million and $50 million, respectively. Securities backed by trust preferred securities issued by financial institutions and other entities constituted substantially all of the available-for-sale investment securities classified as Level 3 valuations.

The Company ensures an appropriate control framework is in place over the valuation processes and techniques used for Level 3 fair value measurements. Internal pricing models used for significant valuation measurements have generally been subjected to validation procedures including review of mathematical constructs, 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 held for sale from the date of close through the sale date. The fair value of hedged real estate loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans with similar characteristics and, accordingly, such loans have been classified as a Level 2 valuation.

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

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

Interest rate swap agreements used for interest rate risk management

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

The following tables present assets and liabilities at March 31, 2015 and December 31, 2014 measured at estimated fair value on a recurring basis:


	Fair value measurements at March 31, 2015		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)

Trading account assets	$	363,085		48,978		314,107		—
Investment securities available for sale:
U.S. Treasury and federal agencies		163,234		—		163,234		—
Obligations of states and political subdivisions		7,850		—		7,850		—
Mortgage-backed securities:
Government issued or guaranteed		10,265,221		—		10,265,221		—
Privately issued		95		—		—		95
Collateralized debt obligations		47,278		—		—		47,278
Other debt securities		121,273		—		121,273		—
Equity securities		98,549		71,804		26,745		—

		10,703,500		71,804		10,584,323		47,373


Real estate loans held for sale		540,546		—		540,546		—
Other assets (b)		101,383		—		75,088		26,295

Total assets	$	11,708,514		120,782		11,514,064		73,668


Trading account liabilities	$	240,168		—		240,168		—
Other liabilities (b)		12,146		—		12,081		65

Total liabilities	$	252,314		—		252,249		65

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued


	Fair value measurements at December 31, 2014		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)

Trading account assets	$	308,175		51,416		256,759		—
Investment securities available for sale:
U.S. Treasury and federal agencies		161,947		—		161,947		—
Obligations of states and political subdivisions		8,198		—		8,198		—
Mortgage-backed securities:
Government issued or guaranteed		8,731,123		—		8,731,123		—
Privately issued		103		—		—		103
Collateralized debt obligations		50,316		—		—		50,316
Other debt securities		121,488		—		121,488		—
Equity securities		83,757		64,841		18,916		—

		9,156,932		64,841		9,041,672		50,419


Real estate loans held for sale		742,249		—		742,249		—
Other assets (b)		92,129		—		74,733		17,396

Total assets	$	10,299,485		116,257		10,115,413		67,815


Trading account liabilities	$	203,464		—		203,464		—
Other liabilities (b)		8,596		—		8,547		49

Total liabilities	$	212,060		—		212,011		49

(a)

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2015 and the year ended December 31, 2014.

(b)

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2015 were as follows:


	Investment securities available for sale						Other assets and other liabilities
	Privately issued mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)

Balance – January 1, 2015	$	103		$	50,316		$	17,347

Total gains (losses) realized/unrealized:
Included in earnings		—			—			29,770	(a)
Included in other comprehensive income		—			(2,004	) (d)		—
Settlements		(8	)		(1,034	)		—
Transfers in and/or out of Level 3 (b)		—			—			(20,887	) (c)


Balance – March 31, 2015	$	95		$	47,278		$	26,230


Changes in unrealized gains included in earnings related to assets still held at March 31, 2015	$	—		$	—		$	22,636	(a)

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2014 were as follows:


	Investment securities available for sale						Other assets and other liabilities
	Privately issued mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)

Balance – January 1, 2014	$	1,850		$	63,083		$	3,941

Total gains (losses) realized/unrealized:
Included in earnings		—			—			22,383	(a)
Included in other comprehensive income		67	(d)		4,646	(d)		—
Settlements		(1,221	)		(5,961	)		—
Transfers in and/or out of Level 3 (b)		—			—			(13,735	) (c)


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


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

(a)

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

(b)

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

(c)

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

(d)

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

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

Loans

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 10% to 80% at March 31, 2015. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $101 million at March 31, 2015 ($67 million and $34 million of which were classified as Level 2 and Level 3, respectively), $173 million at December 31, 2014 ($94 million and $79 million of which were classified as Level 2 and Level 3, respectively) and $161 million at March 31, 2014 ($100 million and $61 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on March 31, 2015 and 2014 were decreases of $8 million and $15 million for the three-month periods ended March 31, 2015 and 2014, respectively.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $11 million at each of March 31, 2015 and March 31, 2014. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three-month periods ended March 31, 2015 and 2014.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

Significant unobservable inputs to Level 3 measurements

The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at March 31, 2015 and December 31, 2014:

Fair value at
March 31, 2015

Valuation
technique

Unobservable
input/assumptions

Range

(weighted-

average)

(in thousands)

Recurring fair value measurements

Privately issued mortgage–backed securities

Two
independent
pricing
quotes

—

Collateralized debt obligations

47,278

Discounted
cash flow

Probability
of default

12%-57% (45%)

Loss severity

100%

Net other assets (liabilities) (a)

26,230

Discounted
cash flow

Commitment
expirations

0%-96% (19%)

Fair value at
December 31,
2014

Valuation
technique

Unobservable
input/assumptions

Range

(weighted-

average)

(in thousands)

Recurring fair value measurements

Privately issued mortgage–backed securities

103

Two
independent
pricing
quotes

—

Collateralized debt obligations

50,316

Discounted
cash flow

Probability
of default

12%-57% (36%)

Loss severity

100%

Net other assets (liabilities) (a)

17,347

Discounted
cash flow

Commitment
expirations

0%-96% (17%)

(a)

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

Sensitivity of fair value measurements to changes in unobservable inputs

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

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

Disclosures of fair value of financial instruments

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


	March 31, 2015
	Carrying amount			Estimated fair value			Level 1		Level 2			Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	1,366,853		$	1,366,853		$	1,311,917	$	54,936		$	—
Interest-bearing deposits at banks		6,291,491			6,291,491			—		6,291,491			—
Trading account assets		363,085			363,085			48,978		314,107			—
Investment securities		14,393,270			14,444,292			71,804		14,162,805			209,683
Loans and leases:
Commercial loans and leases		19,775,494			19,484,920			—		—			19,484,920
Commercial real estate loans		27,845,710			27,746,166			—		117,366			27,628,800
Residential real estate loans		8,504,119			8,609,248			—		5,119,739			3,489,509
Consumer loans		10,973,719			10,880,895			—		—			10,880,895
Allowance for credit losses		(921,373	)		—			—		—			—

Loans and leases, net		66,177,669			66,721,229			—		5,237,105			61,484,124
Accrued interest receivable		244,079			244,079			—		244,079			—

Financial liabilities:
Noninterest-bearing deposits	$	(27,181,120	)	$	(27,181,120	)	$	—	$	(27,181,120	)	$	—
Savings deposits and NOW accounts		(43,288,329	)		(43,288,329	)		—		(43,288,329	)		—
Time deposits		(2,946,126	)		(2,967,329	)		—		(2,967,329	)		—
Deposits at Cayman Islands office		(178,545	)		(178,545	)		—		(178,545	)		—
Short-term borrowings		(193,495	)		(193,495	)		—		(193,495	)		—
Long-term borrowings		(10,509,143	)		(10,641,367	)		—		(10,641,367	)		—
Accrued interest payable		(77,903	)		(77,903	)		—		(77,903	)		—
Trading account liabilities		(240,168	)		(240,168	)		—		(240,168	)		—

Other financial instruments:
Commitments to originate real estate loans for sale	$	26,230		$	26,230		$	—	$	—		$	26,230
Commitments to sell real estate loans		(9,848	)		(9,848	)		—		(9,848	)		—
Other credit-related commitments		(112,511	)		(112,511	)		—		—			(112,511	)
Interest rate swap agreements used for interest rate risk management		72,855			72,855			—		72,855			—

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued


	December 31, 2014
	Carrying amount			Estimated fair value			Level 1		Level 2			Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	1,373,357		$	1,373,357		$	1,296,923	$	76,434		$	—
Interest-bearing deposits at banks		6,470,867			6,470,867			—		6,470,867			—
Trading account assets		308,175			308,175			51,416		256,759			—
Investment securities		12,993,542			13,023,956			64,841		12,750,396			208,719
Loans and leases:
Commercial loans and leases		19,461,292			19,188,574			—		—			19,188,574
Commercial real estate loans		27,567,569			27,487,818			—		307,667			27,180,151
Residential real estate loans		8,657,301			8,729,056			—		5,189,086			3,539,970
Consumer loans		10,982,794			10,909,623			—		—			10,909,623
Allowance for credit losses		(919,562	)		—			—		—			—

Loans and leases, net		65,749,394			66,315,071			—		5,496,753			60,818,318
Accrued interest receivable		227,348			227,348			—		227,348			—

Financial liabilities:
Noninterest-bearing deposits	$	(26,947,880	)	$	(26,947,880	)	$	—	$	(26,947,880	)	$	—
Savings deposits and NOW accounts		(43,393,618	)		(43,393,618	)		—		(43,393,618	)		—
Time deposits		(3,063,973	)		(3,086,126	)		—		(3,086,126	)		—
Deposits at Cayman Islands office		(176,582	)		(176,582	)		—		(176,582	)		—
Short-term borrowings		(192,676	)		(192,676	)		—		(192,676	)		—
Long-term borrowings		(9,006,959	)		(9,139,789	)		—		(9,139,789	)		—
Accrued interest payable		(63,372	)		(63,372	)		—		(63,372	)		—
Trading account liabilities		(203,464	)		(203,464	)		—		(203,464	)		—

Other financial instruments:
Commitments to originate real estate loans for sale	$	17,347		$	17,347		$	—	$	—		$	17,347
Commitments to sell real estate loans		(7,065	)		(7,065	)		—		(7,065	)		—
Other credit-related commitments		(119,079	)		(119,079	)		—		—			(119,079	)
Interest rate swap agreements used for interest rate risk management		73,251			73,251			—		73,251			—

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

Cash and cash equivalents, interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable

Due to the nature of cash and cash equivalents and the near maturity of interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable, the Company estimated that the carrying amount of such instruments approximated estimated fair value.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

Investment securities

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

Loans and leases

In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses. However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans and leases would seek.

Deposits

Pursuant to GAAP, the estimated fair value ascribed to noninterest-bearing deposits, savings deposits and NOW accounts must be established at carrying value because of the customers’ ability to withdraw funds immediately. Time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to time deposits were based on discounted cash flow calculations using prevailing market interest rates based on the Company’s pricing at the respective date for deposits with comparable remaining terms to maturity.

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

Long-term borrowings

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

Other commitments and contingencies

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

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

- 44 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.

13.

Commitments and contingencies

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


	March 31, 2015		December 31, 2014
	(in thousands)
Commitments to extend credit
Home equity lines of credit	$	6,219,783		6,194,516
Commercial real estate loans to be sold		346,664		212,257
Other commercial real estate and construction		5,161,878		4,834,699
Residential real estate loans to be sold		661,132		432,352
Other residential real estate		581,384		524,399
Commercial and other		11,493,613		11,080,856

Standby letters of credit		3,648,095		3,706,888

Commercial letters of credit		42,291		46,965

Financial guarantees and indemnification contracts		2,535,609		2,490,050

Commitments to sell real estate loans		1,322,998		1,237,294

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

13.

Commitments and contingencies, continued

Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in financial guarantees and indemnification contracts are loan principal amounts sold with recourse in conjunction with the Company’s involvement in the Fannie Mae Delegated Underwriting and Servicing program. The Company’s maximum credit risk for recourse associated with loans sold under this program totaled approximately $2.4 billion at each of March 31, 2015 and December 31, 2014.

Since many loan commitments, standby letters of credit, and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows.

The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the fair value of real estate loans held for sale. Such commitments are considered derivatives and along with commitments to originate real estate loans to be held for sale are generally recorded in the consolidated balance sheet at estimated fair market value.

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

The Company is contractually obligated to repurchase previously sold residential real estate loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan documentation. When required to do so, the Company may reimburse loan purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues by an estimate for losses related to its obligations to loan purchasers. The amount of those charges is based on the volume of loans sold, the level of reimbursement requests received from loan purchasers and estimates of losses that may be associated with previously sold loans. At March 31, 2015, management believes that any further liability arising out of the Company’s obligation to loan purchasers is not material to the Company’s consolidated financial position.

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Company’s liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible further losses in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14.

Segment information

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

The financial information of the Company’s segments was compiled utilizing the accounting policies described in note 22 to the Company’s consolidated financial statements as of and for the year ended December 31, 2014. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, the financial information of the reported segments is not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. Effective January 1, 2015, the Company made certain changes to its methodology for measuring segment profit and loss. Those changes in the measurement of segment profitability were largely the result of updated funds transfer pricing and various cost allocation reviews. The most significant changes to the funds transfer pricing resulted from ascribing a longer duration to non-maturity deposits, which significantly benefitted the Retail Banking segment. The cost allocation review having the largest impact related to a branch cost study. That study consisted of transaction reviews and time studies which resulted in a higher cost allocation from the Retail Banking segment to the Business Banking segment. As a result of the changes, prior period financial information has been restated to provide segment information on a comparable basis, as noted below:


	Three months ended March 31, 2014
	Net income (loss) as previously reported			Impact of changes			Net income (loss) as restated
	(in thousands)

Business Banking	$	28,598			(3,625	)		24,973

Commercial Banking		99,765			(924	)		98,841

Commercial Real Estate		74,561			(2,009	)		72,552

Discretionary Portfolio		11,279			81			11,360

Residential Mortgage Banking		19,411			(831	)		18,580

Retail Banking		29,711			39,323			69,034

All Other		(34,308	)		(32,015	)		(66,323	)


Total	$	229,017			—			229,017

As also described in note 22 to the Company’s 2014 consolidated financial statements, neither goodwill nor core deposit and other intangible assets (and the amortization charges associated with such assets) resulting from acquisitions of financial institutions have been allocated to the Company’s reportable segments, but are included in the “All Other” category. The Company does, however, assign such intangible assets to business units for purposes of testing for impairment.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14.

Segment information, continued

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


	Three months ended March 31
	2015								2014
	Total revenues (a)		Inter- segment revenues			Net income (loss)			Total revenues (a)		Inter- segment revenues			Net income (loss)
	(in thousands)

Business Banking	$	108,560		1,045			24,811		$	111,770		1,057			24,973

Commercial Banking		246,581		1,085			96,423			249,349		1,197			98,841

Commercial Real Estate		163,320		82			80,086			157,323		348			72,552

Discretionary Portfolio		15,474		(5,443	)		5,954			24,657		(5,039	)		11,360

Residential Mortgage Banking		111,458		11,387			31,965			93,765		9,748			18,580

Retail Banking		300,391		3,137			68,888			306,780		3,505			69,034

All Other		154,007		(11,293	)		(66,514	)		132,896		(10,816	)		(66,323	)


Total	$	1,099,791		—			241,613		$	1,076,540		—			229,017


	Average total assets
	Three months ended March 31				Year ended December 31
	2015		2014		2014
	(in millions)

Business Banking	$	5,300		5,242		5,281

Commercial Banking		23,683		22,523		22,892

Commercial Real Estate		18,019		16,937		17,113

Discretionary Portfolio		22,714		18,581		20,798

Residential Mortgage Banking		3,512		3,157		3,333

Retail Banking		10,788		10,155		10,449

All Other		11,876		10,070		12,277


Total	$	95,892		86,665		92,143

(a)

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

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

14.

Segment information, continued

(e.g. deposits). The taxable-equivalent adjustment aggregated $5,838,000 and $5,945,000 for the three-month periods ended March 31, 2015 and 2014, respectively, and is eliminated in “All Other” total revenues. Intersegment revenues are included in total revenues of the reportable segments. The elimination of intersegment revenues is included in the determination of “All Other” total revenues.

15.

Relationship with Bayview Lending Group LLC and Bayview Financial Holdings, L.P.

M&T holds a 20% minority interest in Bayview Lending Group LLC (“BLG”), a privately-held commercial mortgage company. M&T recognizes income or loss from BLG using the equity method of accounting. The carrying value of that investment was $43 million at March 31, 2015.

Bayview Financial Holdings, L.P. (together with its affiliates, “Bayview Financial”), a privately-held specialty mortgage finance company, is BLG’s majority investor. In addition to their common investment in BLG, the Company and Bayview Financial conduct other business activities with each other. The Company has obtained loan servicing rights for mortgage loans from BLG and Bayview Financial having outstanding principal balances of $4.6 billion and $4.8 billion at March 31, 2015 and December 31, 2014, respectively. Revenues from those servicing rights were $6 million and $7 million during the three-month periods ended March 31, 2015 and 2014, respectively. The Company sub-services residential mortgage loans for Bayview Financial having outstanding principal balances totaling $39.5 billion and $41.3 billion at March 31, 2015 and December 31, 2014, respectively. Revenues earned for sub-servicing loans for Bayview Financial were $35 million and $26 million for the three-month periods ended March 31, 2015 and 2014, respectively. In addition, the Company held $198 million and $202 million of mortgage-backed securities in its held-to-maturity portfolio at March 31, 2015 and December 31, 2014, respectively, that were securitized by Bayview Financial.

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Item 2.

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

Overview

M&T Bank Corporation (“M&T”) recorded net income in the first quarter of 2015 of $242 million or $1.65 of diluted earnings per common share, compared with $229 million or $1.61 of diluted earnings per common share in the initial 2014 quarter. During the fourth quarter of 2014, net income totaled $278 million or $1.92 of diluted earnings per common share. Basic earnings per common share were $1.66 in the recent quarter, compared with $1.63 and $1.93 in the first and fourth quarters of 2014, respectively. The annualized rate of return on average total assets for M&T and its consolidated subsidiaries (“the Company”) in the initial 2015 quarter was 1.02%, compared with 1.07% in the year-earlier quarter and 1.12% in the fourth quarter of 2014. The annualized rate of return on average common shareholders’ equity was 7.99% in the first three months of 2015, compared with 8.22% and 9.10% in the first and fourth quarters of 2014, respectively.

On March 12, 2015, M&T announced that the Federal Reserve did not object to M&T’s proposed 2015 Capital Plan. Accordingly, M&T may maintain a quarterly common stock dividend of $.70 per share; pay dividends and interest on other equity and debt instruments included in regulatory capital, including preferred stock, trust preferred securities and subordinated debt that were outstanding at December 31, 2014, consistent with the contractual terms of those instruments; repurchase up to $200 million of common shares during the first half of 2016; and redeem or repurchase up to $310 million of trust preferred securities. Common and preferred dividends are subject to approval by M&T’s Board of Directors in the ordinary course of business. On April 15, 2015, M&T redeemed $310 million of trust preferred securities in accordance with the 2015 Capital Plan.

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 common shareholders will receive consideration for each common share of Hudson City in an amount valued at .08403 of an M&T share in the form of either M&T common stock or cash, based on the election of each Hudson City shareholder, subject to proration as specified in the merger agreement (which provides for an aggregate split of total consideration of 60% common stock of M&T and 40% cash). The estimated purchase price considering the closing price of M&T’s common stock of $127.00 on March 31, 2015 was $5.5 billion.

At March 31, 2015, Hudson City reported $36.1 billion of assets, including $20.9 billion of loans (predominantly residential real estate loans) and $8.3 billion of investment securities, and $31.3 billion of liabilities, including $18.9 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 conditions, including regulatory approvals.

On June 17, 2013, M&T and M&T Bank entered into a written agreement with the Federal Reserve Bank of New York. Under the terms of the agreement, M&T and M&T Bank are required to submit to the Federal Reserve Bank of New York a revised compliance risk management program designed to ensure compliance with the Bank Secrecy Act and anti-money-laundering laws and regulations (“BSA/AML”) and to take certain other steps to enhance their compliance practices. The Company commenced a major initiative, including the hiring of outside consulting firms, intended to fully address those regulator concerns. M&T and M&T Bank continue to make progress towards completing this initiative. On April 3, 2015, M&T was advised by the Federal Reserve that the Federal Reserve Board intends to act on the M&T and Hudson City merger application no later than September 30, 2015. As a result, M&T and Hudson City extended the date after

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which either party may elect to terminate the merger agreement if the merger has not yet been completed from April 30, 2015 to October 31, 2015. Nevertheless, M&T’s pending acquisition of Hudson City still remains subject to regulatory approval, including approval by the Federal Reserve, and certain other closing conditions and, as a result, there can be no assurances that the merger will be completed by that date.

Effective January 1, 2015, the Company elected to account for its investments in qualified affordable housing projects using the proportional amortization method as allowed by the Financial Accounting Standards Board (“FASB”). Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The adoption is required to be applied retrospectively. As a result, financial statements for periods prior to 2015 have been restated. The adoption did not have a significant effect on the Company’s financial position or results of operations, but the restatement of the consolidated statement of income for the three-month period ended March 31, 2014 resulted in the removal of $12 million of losses associated with qualified affordable housing projects from “other costs of operations” and added the amortization of the initial cost of the investment of a similar amount to income tax expense. The similar restatement for the second, third and fourth quarters of 2014 each reflected approximately $14 million of amortization.

Recent Legislative Developments

As discussed in M&T’s Form 10-K for the year ended December 31, 2014, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) that was signed into law on July 21, 2010 has and will continue to significantly change the bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, and the system of regulatory oversight of the Company. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. Not all of the rules required or expected to be implemented under the Dodd-Frank Act have been proposed or adopted, and certain of the rules that have been proposed or adopted under the Dodd-Frank Act are subject to phase-in or transitional periods. The implications of the Dodd-Frank Act for the Company’s businesses continue to depend to a large extent on the implementation of the legislation by the Federal Reserve and other agencies.

A discussion of the provisions of the Dodd-Frank Act is included in Part I, Item 1 of M&T’s Form 10-K for the year ended December 31, 2014.

In July 2013, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation approved final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. These rules went into effect as to M&T on January 1, 2015. The New Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework for strengthening international capital standards (referred to as “Basel III”) and are intended to ensure that banking organizations have adequate capital levels given the risk levels of assets and off-balance sheet obligations. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including M&T and M&T Bank, as compared to the U.S. general risk-based capital rules that were applicable to M&T and M&T Bank through December 31, 2014.

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The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, subject to phase-out in the case of bank holding companies, such as M&T, that had $15 billion or more in total consolidated assets as of December 31, 2009. As a result, beginning in 2015 25% of M&T’s trust preferred securities are includable in Tier 1 capital, and in 2016 and thereafter, none of M&T’s trust preferred securities will be includable in Tier 1 capital. Trust preferred securities no longer included in M&T’s Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out and irrespective of whether such securities otherwise meet the revised definition of Tier 2 capital set forth in the New Capital Rules. In the first quarter of 2014, M&T redeemed $350 million of 8.50% junior subordinated debentures associated with the trust preferred capital securities of M&T Capital Trust IV and issued a like amount of 6.45% preferred stock that qualifies as Tier 1 regulatory capital. On April 15, 2015, in accordance with its 2015 Capital Plan M&T redeemed the junior subordinated debentures associated with $310 million of trust preferred securities of M&T Capital Trust I, II and III. A detailed discussion of the New Capital Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2014 under the heading “Capital Requirements.” A further discussion of the Company’s regulatory capital ratios is presented herein under the heading “Capital.”

On December 10, 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission adopted the final version of the Volcker Rule, which was mandated under the Dodd-Frank Act. Pursuant to the Volcker Rule, banking entities are generally prohibited from engaging in proprietary trading. Under the rule, the Company was required to be in compliance with the prohibition on proprietary trading and the requirement to develop an extensive compliance program by July 2015; however, in December 2014, the Federal Reserve extended the compliance period to July 2016 for investments in and relationships with covered funds that were in place prior to December 31, 2013. The Federal Reserve has indicated that it intends to further extend the compliance period to July 2017.

The Company does not believe that it engages in any significant amount of proprietary trading as defined in the Volcker Rule and that any impact would be minimal. In addition, a review of the Company’s investments was undertaken to determine if any meet the Volcker Rule’s definition of “covered funds.” Based on that review, the Company believes that any impact related to investments considered to be covered funds would not have a material effect on the Company’s financial condition or its results of operations. Nevertheless, the Company may be required to divest certain investments subject to the Volcker Rule.

On September 3, 2014, the Federal Reserve and other banking regulators adopted final rules (“Final LCR Rule”) implementing a U.S. version of the Basel Committee’s Liquidity Coverage Ratio requirement (“LCR”) including the modified version applicable to bank holding companies, such as M&T, with $50 billion in total consolidated assets that are not “advanced approaches” institutions. The LCR is intended to ensure that banks hold a sufficient amount of so-called “high quality liquid assets” (“HQLA”) to cover the anticipated net cash outflows during a hypothetical acute 30-day stress scenario. The LCR is the ratio of an institution’s amount of HQLA (the numerator) over projected net cash outflows over the 30-day horizon (the denominator), in each case, as calculated pursuant to the Final LCR Rule. Once fully phased-in, a subject institution must maintain an LCR equal to at least 100% in order to satisfy this regulatory requirement. Only specific classes of assets, including U.S. Treasury securities, other U.S. government obligations and agency mortgage-backed securities, qualify under the rule as HQLA, with classes of assets deemed relatively less liquid and/or subject to greater degree of credit risk subject to certain haircuts and caps for purposes of calculating the numerator under the Final LCR Rule.

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The initial compliance date for the modified LCR is January 2016, with the requirement fully phased-in by January 2017. The Company intends to comply with the LCR when it becomes effective. A detailed discussion of the LCR and its requirements is included in Part I, Item 1 of M&T’s Form 10-K for the year ended December 31, 2014 under the heading “Liquidity Ratios under Basel III.”

Supplemental Reporting of Non-GAAP Results of Operations

M&T consistently provides supplemental reporting of its results on a “net operating” or “tangible” basis, from which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts) and gains and expenses associated with merging acquired operations into the Company, since such items are considered by management to be “nonoperating” in nature. As a result of business combinations and other acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $3.6 billion at each of March 31, 2015, March 31, 2014 and December 31, 2014. Included in such intangible assets was goodwill of $3.5 billion at each of those dates. Amortization of core deposit and other intangible assets, after tax effect, was $4 million during each of the quarters ended March 31, 2015 and December 31, 2014 ($.03 per diluted common share), compared with $6 million ($.05 per diluted common share) during the first quarter of 2014. There were no merger-related gains or expenses in the first quarters of 2015 and 2014 or in the final quarter of 2014. Although “net operating income” as defined by M&T is not a GAAP measure, M&T’s management believes that this information helps investors understand the effect of acquisition activity in reported results.

Net operating income aggregated $246 million in the initial quarter of 2015, compared with $235 million in the first quarter of 2014. Diluted net operating earnings per common share for the recent quarter were $1.68, compared with $1.66 in the year-earlier quarter. Net operating income and diluted net operating earnings per common share were $282 million and $1.95, respectively, in the final 2014 quarter.

Net operating income in the first quarter of 2015 expressed as an annualized rate of return on average tangible assets was 1.08%, compared with 1.15% and 1.18% in the first and fourth quarters of 2014, respectively. Net operating income represented an annualized return on average tangible common equity of 11.90% in the recent quarter, compared with 12.76% in the year-earlier quarter and 13.55% in the fourth quarter of 2014.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in table 2.

Taxable-equivalent Net Interest Income

Taxable-equivalent net interest income was $665 million in the first quarter of 2015, up from $662 million in the year-earlier period. The impact of higher average earning assets, which rose $8.9 billion, or 12%, to $85.2 billion from $76.3 billion in the first quarter of 2014, was largely offset by a 35 basis point (hundredths of one percent) narrowing of the Company’s net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets. The higher level of average earning assets reflected a $4.1 billion rise in average balances of investment securities, a $2.8 billion increase in average loans and leases and a $2.0 billion increase in lower-yielding average interest-bearing deposits at the Federal Reserve Bank of New York. The increase in investment securities resulted from purchases of Ginnie Mae and Fannie Mae mortgage-

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backed securities. Taxable-equivalent net interest income in the recent quarter was below the $688 million recorded in the fourth quarter of 2014, reflecting two less days in the recent quarter, lower average balances of interest-bearing deposits at banks and the net impact of actions taken in response to liquidity requirements that take effect in 2016.

Average loans and leases rose $2.8 billion or 4% to $66.6 billion in the initial 2015 quarter from $63.8 billion in the first quarter of 2014. Commercial loans and leases averaged $19.5 billion in the recent quarter, up $1.0 billion or 5% from $18.5 billion in the year-earlier quarter. Average commercial real estate loans rose $1.5 billion or 6% to $27.6 billion in the first quarter of 2015 from $26.1 billion in the corresponding quarter of 2014. Average residential real estate loans outstanding decreased $272 million to $8.6 billion in the first quarter of 2015 from $8.8 billion in the similar 2014 quarter. Included in that portfolio were loans held for sale, which averaged $387 million in the recent quarter, compared with $329 million in the year-earlier quarter. Average consumer loans and leases totaled $11.0 billion in the initial quarter of 2015, $662 million or 6% higher than $10.3 billion in the first quarter of 2014. The predominant factor for the higher consumer loans was a 41% increase in average automobile loans that is reflective of consumer demand, higher industry sales and generally favorable interest rates.

Average loan balances in the first quarter of 2015 increased $820 million from the fourth quarter of 2014. Average outstanding commercial loan and lease balances rose $340 million, or 2%, average balances of commercial real estate loans increased $532 million, or 2%, average residential real estate loan balances were down $82 million and average outstanding consumer loans increased $29 million from the final 2014 quarter. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.

AVERAGE LOANS AND LEASES

(net of unearned discount)

Dollars in millions


			Percent increase (decrease) from
	1st Qtr. 2015		1st Qtr. 2014			4th Qtr. 2014
Commercial, financial, etc.	$	19,457		5	%		2	%
Real estate – commercial		27,596		6			2
Real estate – consumer		8,572		(3	)		(1	)
Consumer
Automobile		2,024		41			5
Home equity lines		5,704		(1	)		(1	)
Home equity loans		264		(23	)		(7	)
Other		2,970		7			—

Total consumer		10,962		6			—

Total	$	66,587		4	%		1	%

The investment securities portfolio averaged $13.4 billion in the recent quarter, up $4.1 billion or 44% from $9.3 billion in the initial quarter of 2014 and $397 million above the $13.0 billion averaged in the fourth quarter of 2014. The increase from the year-earlier quarter reflects the net effect of purchases, partially offset by maturities and paydowns of mortgage-backed securities. The Company purchased approximately $4.6 billion of Fannie Mae securities and $602 million of Ginnie Mae securities that were added to the investment securities portfolio during 2014, and another $1.4 billion of Fannie Mae securities and $470 million of Ginnie Mae securities were purchased during the first quarter of 2015. Those purchases reflect increased holdings of investment securities to satisfy the requirements of the LCR that will become effective in January 2016.

The investment securities portfolio is largely comprised of residential mortgage-backed securities, debt securities issued by municipalities, trust preferred securities issued by certain financial institutions, and shorter-term

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U.S. Treasury and federal agency notes. When purchasing investment securities, the Company also considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to risks assumed, including prepayments. In managing its investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, or as