Edgar Filing: M&T BANK CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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) 635-4000

(Registrant’s telephone number, including area code)

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

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on October 23, 2015: 133,289,778 shares.

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2015

Table of Contents of Information Required in Report


		Page
Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	CONSOLIDATED BALANCE SHEET - September 30, 2015 and December 31, 2014		3

	CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 2015 and 2014		4

	CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three and nine months ended September 30, 2015 and 2014		5

	CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 2015 and 2014		6

	CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Nine months ended September 30, 2015 and 2014		7

	NOTES TO FINANCIAL STATEMENTS		8

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		102

Item 4.	Controls and Procedures		102

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings		102

Item 1A.	Risk Factors		103

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

Item 3.	Defaults Upon Senior Securities		104

Item 4.	Mine Safety Disclosures		104

Item 5.	Other Information		104

Item 6.	Exhibits		105

SIGNATURES			105

EXHIBIT INDEX			106

-2-

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)


		September 30,			December 31,
Dollars in thousands, except per share		2015			2014
Assets	Cash and due from banks	$	1,249,704			1,289,965
	Interest-bearing deposits at banks		4,713,266			6,470,867
	Federal funds sold		—			83,392
	Trading account		340,710			308,175
	Investment securities (includes pledged securities that can be sold or repledged of $1,614,909 at September 30, 2015; $1,631,267 at December 31, 2014)
	Available for sale (cost: $10,923,234 at September 30, 2015; $8,919,324 at December 31, 2014)		11,159,509			9,156,932
	Held to maturity (fair value: $3,025,687 at September 30, 2015; $3,538,282 at December 31, 2014)		2,998,486			3,507,868
	Other (fair value: $336,544 at September 30, 2015; $328,742 at December 31, 2014)		336,544			328,742

	Total investment securities		14,494,539			12,993,542

	Loans and leases		68,766,144			66,899,369
	Unearned discount		(225,896	)		(230,413	)

	Loans and leases, net of unearned discount		68,540,248			66,668,956
	Allowance for credit losses		(933,798	)		(919,562	)

	Loans and leases, net		67,606,450			65,749,394

	Premises and equipment		581,976			612,984
	Goodwill		3,513,325			3,524,625
	Core deposit and other intangible assets		18,179			35,027
	Accrued interest and other assets		5,278,913			5,617,564

	Total assets	$	97,797,062			96,685,535

Liabilities	Noninterest-bearing deposits	$	28,189,330			26,947,880
	NOW accounts		2,459,527			2,307,815
	Savings deposits		39,298,134			41,085,803
	Time deposits		2,791,367			3,063,973
	Deposits at Cayman Islands office		206,185			176,582

	Total deposits		72,944,543			73,582,053

	Federal funds purchased and agreements to repurchase securities		173,783			192,676
	Accrued interest and other liabilities		1,582,513			1,567,951
	Long-term borrowings		10,174,289			9,006,959

	Total liabilities		84,875,128			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 September 30, 2015 and December 31, 2014; Liquidation preference of $10,000 per share: 50,000 shares at September 30, 2015 and December 31, 2014		1,231,500			1,231,500
	Common stock, $.50 par, 250,000,000 shares authorized, 133,274,963 shares issued at September 30, 2015; 132,312,931 shares issued at December 31, 2014		66,637			66,157
	Common stock issuable, 36,462 shares at September 30, 2015; 41,330 shares at December 31, 2014		2,341			2,608
	Additional paid-in capital		3,511,182			3,409,506
	Retained earnings		8,273,747			7,807,119
	Accumulated other comprehensive income (loss), net		(163,473	)		(180,994	)

	Total shareholders’ equity		12,921,934			12,335,896

	Total liabilities and shareholders’ equity	$	97,797,062			96,685,535

-3-

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


		Three months ended September 30						Nine months ended September 30
In thousands, except per share		2015			2014			2015			2014
Interest income	Loans and leases, including fees	$	672,092			647,280		$	1,981,904			1,937,531
	Investment securities
	Fully taxable		93,062			91,036			272,163			250,145
	Exempt from federal taxes		950			1,271			3,330			4,068
	Deposits at banks		3,852			3,198			10,321			7,617
	Other		70			238			749			904

	Total interest income		770,026			743,023			2,268,467			2,200,265

Interest expense	NOW accounts		360			394			1,020			1,021
	Savings deposits		10,937			11,532			31,517			34,314
	Time deposits		3,643			3,805			11,073			11,600
	Deposits at Cayman Islands office		151			161			448			550
	Short-term borrowings		32			19			102			76
	Long-term borrowings		62,076			58,053			188,764			158,098

	Total interest expense		77,199			73,964			232,924			205,659

	Net interest income		692,827			669,059			2,035,543			1,994,606
	Provision for credit losses		44,000			29,000			112,000			91,000

	Net interest income after provision for credit losses		648,827			640,059			1,923,543			1,903,606

Other income	Mortgage banking revenues		84,035			93,532			288,238			269,237
	Service charges on deposit accounts		107,259			110,071			314,860			321,637
	Trust income		113,744			128,671			356,076			379,816
	Brokerage services income		16,902			17,416			49,224			51,403
	Trading account and foreign exchange gains		8,362			6,988			20,639			21,477
	Loss on bank investment securities		—			—			(108	)		—
	Equity in earnings of Bayview Lending Group LLC		(3,721	)		(4,114	)		(11,043	)		(12,623	)
	Other revenues from operations		113,118			98,547			359,043			296,683

	Total other income		439,699			451,111			1,376,929			1,327,630

Other expense	Salaries and employee benefits		363,567			348,776			1,115,117			1,059,815
	Equipment and net occupancy		68,470			67,713			201,792			206,964
	Printing, postage and supplies		8,691			9,184			27,586			29,320
	Amortization of core deposit and other intangible assets		4,090			7,358			16,848			26,654
	FDIC assessments		11,090			13,193			32,551			43,836
	Other costs of operations		197,908			219,135			642,925			656,664

	Total other expense		653,816			665,359			2,036,819			2,023,253

	Income before taxes		434,710			425,811			1,263,653			1,207,983
	Income taxes		154,309			150,467			454,951			419,286

	Net income	$	280,401			275,344		$	808,702			788,697

	Net income available to common shareholders
	Basic	$	257,337			251,905		$	739,627			724,307
	Diluted		257,346			251,917			739,656			724,344
	Net income per common share
	Basic	$	1.94			1.92		$	5.59			5.54
	Diluted		1.93			1.91			5.56			5.50
	Cash dividends per common share	$	.70			.70		$	2.10			2.10
	Average common shares outstanding
	Basic		132,630			131,265			132,347			130,782
	Diluted		133,376			132,128			133,089			131,698

-4-

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended September 30						Nine months ended September 30
In thousands	2015			2014			2015			2014
Net income	$	280,401			275,344		$	808,702			788,697
Other comprehensive income (loss), net of tax and reclassification adjustments:
Net unrealized gains (losses) on investment securities		48,332			(27,637	)		1,053			75,229
Unrealized gains (losses) on cash flow hedges		(24	)		613			823			(98	)
Foreign currency translation adjustment		(3	)		(1,817	)		(521	)		(1,504	)
Defined benefit plans liability adjustment		5,724			1,000			16,166			2,999

Total other comprehensive income (loss)		54,029			(27,841	)		17,521			76,626

Total comprehensive income	$	334,430			247,503		$	826,223			865,323

-5-

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


		Nine months ended September 30
In thousands		2015			2014
Cash flows from operating activities	Net income	$	808,702			788,697
	Adjustments to reconcile net income to net cash provided by operating activities
	Provision for credit losses		112,000			91,000
	Depreciation and amortization of premises and equipment		73,916			74,516
	Amortization of capitalized servicing rights		36,730			51,572
	Amortization of core deposit and other intangible assets		16,848			26,654
	Provision for deferred income taxes		20,141			33,777
	Asset write-downs		5,775			5,114
	Net gain on sales of assets		(61,969	)		(3,771	)
	Net change in accrued interest receivable, payable		(5,484	)		9,638
	Net change in other accrued income and expense		11,200			(89,425	)
	Net change in loans originated for sale		232,974			(224,425	)
	Net change in trading account assets and liabilities		(2,993	)		11,163

	Net cash provided by operating activities		1,247,840			774,510

Cash flows from investing activities	Proceeds from sales of investment securities
	Available for sale		2,579			16
	Other		377			23,309
	Proceeds from maturities of investment securities
	Available for sale		1,343,869			686,183
	Held to maturity		519,359			337,677
	Purchases of investment securities
	Available for sale		(3,320,931	)		(5,310,246	)
	Held to maturity		(22,592	)		(15,202	)
	Other		(8,179	)		(53,264	)
	Net increase in loans and leases		(2,208,660	)		(1,420,572	)
	Net (increase) decrease in interest-bearing deposits at banks		1,757,601			(6,024,926	)
	Capital expenditures, net		(42,744	)		(50,400	)
	Net (increase) decrease in loan servicing advances		461,700			(340,750	)
	Other, net		(75,449	)		38,707

	Net cash used by investing activities		(1,593,070	)		(12,129,468	)

Cash flows from financing activities	Net increase (decrease) in deposits		(636,144	)		7,225,487
	Net decrease in short-term borrowings		(18,893	)		(95,846	)
	Proceeds from long-term borrowings		1,500,000			4,345,478
	Payments on long-term borrowings		(324,308	)		(373,642	)
	Proceeds from issuance of preferred stock		—			346,500
	Dividends paid - common		(281,149	)		(278,118	)
	Dividends paid - preferred		(58,003	)		(46,966	)
	Other, net		40,074			82,774

	Net cash provided by financing activities		221,577			11,205,667

	Net decrease in cash and cash equivalents		(123,653	)		(149,291	)
	Cash and cash equivalents at beginning of period		1,373,357			1,672,934

	Cash and cash equivalents at end of period	$	1,249,704			1,523,643

Supplemental disclosure of cash flow information	Interest received during the period	$	2,234,476			2,147,236
	Interest paid during the period		234,989			185,377
	Income taxes paid during the period		373,016			329,621
Supplemental schedule of noncash investing and financing activities	Securitization of residential mortgage loans allocated to
	Available-for-sale investment securities	$	51,481			110,971
	Capitalized servicing rights		528			1,429
	Real estate acquired in settlement of loans		35,018			35,422

-6-

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


														Accumulated
														other
					Common			Additional						comprehensive
	Preferred		Common		stock			paid-in			Retained			income
In thousands, except per share	stock		stock		issuable			capital			earnings			(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		—		—		—			—			788,697			76,626			865,323
Preferred stock cash dividends		—		—		—			—			(55,560	)		—			(55,560	)
Issuance of Series E preferred stock		350,000		—		—			(3,500	)		—			—			346,500
Exercise of 395,905 Series A stock warrants into 156,521 shares of common stock		—		78		—			(78	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		128		—			34,117			—			—			34,245
Exercises of stock options, net		—		535		—			102,695			—			—			103,230
Stock purchase plan		—		43		—			9,545			—			—			9,588
Directors’ stock plan		—		5		—			1,266			—			—			1,271
Deferred compensation plans, net, including dividend equivalents		—		3		(325	)		335			(87	)		—			(74	)
Other		—		—		—			1,320			—			—			1,320
Common stock cash dividends - $2.10 per share		—		—		—			—			(278,059	)		—			(278,059	)

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

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		—		—		—			—			808,702			17,521			826,223
Preferred stock cash dividends		—		—		—			—			(60,953	)		—			(60,953	)
Exercise of 2,315 Series A stock warrants into 904 shares of common stock		—		1		—			(1	)		—			—			—
Stock-based compensation plans:
Compensation expense, net		—		143		—			31,416			—			—			31,559
Exercises of stock options, net		—		285		—			57,133			—			—			57,418
Stock purchase plan		—		45		—			10,301			—			—			10,346
Directors’ stock plan		—		4		—			1,346			—			—			1,350
Deferred compensation plans, net, including dividend equivalents		—		2		(267	)		290			(76	)		—			(51	)
Other		—		—		—			1,191			—			—			1,191
Common stock cash dividends - $2.10 per share		—		—		—			—			(281,045	)		—			(281,045	)

Balance - September 30, 2015	$	1,231,500		66,637		2,341			3,511,182			8,273,747			(163,473	)		12,921,934

-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 operations, but did result in the restatement of the consolidated statement of income for the three months and nine months ended September 30, 2014 to remove $14 million and $39 million, respectively, 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 September 30, 2015, total consideration to be paid was valued at approximately $5.3 billion.

The merger has received the approval of the common shareholders of M&T and Hudson City. M&T announced on September 30, 2015 that it had received the approval of the Federal Reserve to acquire Hudson City and on October 9, 2015 M&T received approval of the proposed acquisition from the New York State Department of Financial Services. The transaction is expected to be completed on or about November 1, 2015 pending the satisfaction of customary closing conditions. At September 30, 2015, Hudson City had $35.1 billion of assets, including $19.2 billion of loans and $8.3 billion of investment securities, and $30.3 billion of liabilities, including $17.9 billion of deposits.

-8-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities

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


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
September 30, 2015
Investment securities available for sale:
U.S. Treasury and federal agencies	$	197,764		1,630		—	$	199,394
Obligations of states and political subdivisions		6,174		170		48		6,296
Mortgage-backed securities:
Government issued or guaranteed		10,504,756		228,333		19,041		10,714,048
Privately issued		82		2		2		82
Collateralized debt obligations		28,467		22,465		1,056		49,876
Other debt securities		136,793		1,650		17,975		120,468
Equity securities		49,198		20,360		213		69,345

		10,923,234		274,610		38,335		11,159,509

Investment securities held to maturity:
Obligations of states and political subdivisions		125,251		1,395		347		126,299
Mortgage-backed securities:
Government issued or guaranteed		2,679,546		69,486		4,787		2,744,245
Privately issued		186,883		1,628		40,174		148,337
Other debt securities		6,806		—		—		6,806

		2,998,486		72,509		45,308		3,025,687

Other securities		336,544		—		—		336,544

Total	$	14,258,264		347,119		83,643	$	14,521,740

-9-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
December 31, 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

There were no significant gross realized gains or losses from the sale of investment securities for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.

At September 30, 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	$	8,282		8,330
Due after one year through five years		197,796		199,712
Due after five years through ten years		3,296		3,495
Due after ten years		159,824		164,497

		369,198		376,034
Mortgage-backed securities available for sale		10,504,838		10,714,130

	$	10,874,036		11,090,164

Debt securities held to maturity:
Due in one year or less	$	30,523		30,706
Due after one year through five years		74,511		75,150
Due after five years through ten years		20,217		20,443
Due after ten years		6,806		6,806

		132,057		133,105
Mortgage-backed securities held to maturity		2,866,429		2,892,582

	$	2,998,486		3,025,687

-10-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Investment securities, continued

A summary of investment securities that as of September 30, 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)
September 30, 2015
Investment securities available for sale:
Obligations of states and political subdivisions	$	516		(2	)		1,405		(46	)
Mortgage-backed securities:
Government issued or guaranteed		1,942,135		(18,925	)		5,503		(116	)
Privately issued		—		—			48		(2	)
Collateralized debt obligations		5,733		(324	)		2,155		(732	)
Other debt securities		19,335		(458	)		86,813		(17,517	)
Equity securities		—		—			212		(213	)

		1,967,719		(19,709	)		96,136		(18,626	)

Investment securities held to maturity:
Obligations of states and political subdivisions		37,336		(292	)		4,096		(55	)
Mortgage-backed securities:
Government issued or guaranteed		16,619		(129	)		240,730		(4,658	)
Privately issued		—		—			118,840		(40,174	)

		53,955		(421	)		363,666		(44,887	)

Total	$	2,021,674		(20,130	)		459,802		(63,513	)

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 320 individual investment securities with aggregate gross unrealized losses of $84 million at September 30, 2015. Based on a review of each of the securities in the investment securities portfolio at September 30, 2015, the Company concluded that it expected to recover the amortized cost basis of its investment. As of September 30, 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 September 30, 2015, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $337 million of cost method investment securities.

4. Loans and leases and the allowance for credit losses

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


	September 30,		December 31,
	2015		2014
	(in thousands)
Outstanding principal balance	$	2,410,454		3,070,268
Carrying amount:
Commercial, financial, leasing, etc.		103,583		247,820
Commercial real estate		728,376		961,828
Residential real estate		385,885		453,360
Consumer		812,117		933,537

	$	2,029,961		2,596,545

Purchased impaired loans included in the table above totaled $149 million at September 30, 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 months and nine months ended September 30, 2015 and 2014 follows:


	Three months ended September 30
	2015						2014
	Purchased			Other			Purchased			Other
	impaired			acquired			impaired			acquired
	(in thousands)
Balance at beginning of period	$	77,624			344,989		$	26,082			450,970
Interest income		(5,865	)		(37,396	)		(4,149	)		(39,019	)
Reclassifications from nonaccretable balance		47			769			129			9,673
Other (a)		—			4,697			—			1,870

Balance at end of period	$	71,806			313,059		$	22,062			423,494


	Nine months ended September 30
	2015						2014
	Purchased			Other			Purchased			Other
	impaired			acquired			impaired			acquired
	(in thousands)
Balance at beginning of period	$	76,518			397,379		$	37,230			538,633
Interest income		(16,843	)		(118,697	)		(15,583	)		(135,105	)
Reclassifications from nonaccretable balance		12,131			27,792			415			10,448
Other (a)		—			6,585			—			9,518

Balance at end of period	$	71,806			313,059		$	22,062			423,494

(a)

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

-12-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

A summary of current, past due and nonaccrual loans as of September 30, 2015 and December 31, 2014 follows:


			30-89 Days past due		90 Days or more past due and accruing				Purchased impaired (b)		Nonaccrual		Total
	Current		30-89 Days past due		Non- acquired		Acquired (a)		Purchased impaired (b)		Nonaccrual		Total
	(in thousands)
September 30, 2015
Commercial, financial, leasing, etc.	$	19,965,307		29,451		5,882		3,477		4,645		224,415	$	20,233,177
Real estate:
Commercial		23,184,906		105,140		21,629		17,906		45,523		176,491		23,551,595
Residential builder and developer		1,479,659		15,951		—		7,488		65,102		46,022		1,614,222
Other commercial construction		3,493,349		28,433		1,373		1,769		17,484		12,312		3,554,720
Residential		7,323,813		206,044		194,280		16,295		14,392		153,354		7,908,178
Residential Alt-A		226,871		11,662		—		—		—		64,351		302,884
Consumer:
Home equity lines and loans		5,710,632		38,506		—		15,454		2,275		78,126		5,844,993
Automobile		2,319,556		36,867		—		53		—		13,892		2,370,368
Other		3,084,080		31,210		8,301		18,385		—		18,135		3,160,111

Total	$	66,788,173		503,264		231,465		80,827		149,421		787,098	$	68,540,248


	Current		30-89 Days past due		90 Days or more past due and accruing				Purchased impaired (b)		Nonaccrual		Total
	Current		30-89 Days past due		Non- acquired		Acquired (a)		Purchased impaired (b)		Nonaccrual		Total
	(in thousands)
December 31, 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.

-13-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

One-to-four family residential mortgage loans held for sale were $422 million and $435 million at September 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans held for sale were $71 million at September 30, 2015 and $308 million at December 31, 2014.

Changes in the allowance for credit losses for the three months ended September 30, 2015 were as follows:


	Commercial, Financial, Leasing, etc.			Real Estate
	Commercial, Financial, Leasing, etc.			Commercial			Residential			Consumer			Unallocated			Total
	(in thousands)
Beginning balance	$	286,750			311,294			60,294			194,238			77,411		$	929,987
Provision for credit losses		21,507			1,879			(3,155	)		24,448			(679	)		44,000
Net charge-offs
Charge-offs		(26,912	)		(2,203	)		(3,268	)		(20,758	)		—			(53,141	)
Recoveries		5,322			2,119			1,125			4,386			—			12,952

Net charge-offs		(21,590	)		(84	)		(2,143	)		(16,372	)		—			(40,189	)

Ending balance	$	286,667			313,089			54,996			202,314			76,732		$	933,798

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


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

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

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

Changes in the allowance for credit losses for the nine months ended September 30, 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		32,686			13,769			(571	)		65,038			1,078		112,000
Net charge-offs
Charge-offs		(46,990	)		(12,352	)		(9,695	)		(64,542	)		—		(133,579	)
Recoveries		12,933			3,745			3,352			15,785			—		35,815

Net charge-offs		(34,057	)		(8,607	)		(6,343	)		(48,757	)		—		(97,764	)

Ending balance	$	286,667			313,089			54,996			202,314			76,732	$	933,798

-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 nine months ended September 30, 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		40,527			(4,067	)		(916	)		54,632			824		91,000
Net charge-offs
Charge-offs		(44,872	)		(7,966	)		(17,124	)		(62,407	)		—		(132,369	)
Recoveries		17,514			5,956			6,906			12,950			—		43,326

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

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

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 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 loans 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 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

-15-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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.

Information with respect to loans and leases that were considered impaired follows.


	September 30, 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.	$	144,051		166,877		35,195		132,340		165,146		31,779
Real estate:
Commercial		105,561		122,369		18,932		83,955		96,209		14,121
Residential builder and developer		6,544		10,276		788		17,632		22,044		805
Other commercial construction		2,445		3,991		391		5,480		6,484		900
Residential		83,349		101,367		4,775		88,970		107,343		4,296
Residential Alt-A		93,168		107,075		8,500		101,137		114,565		11,000
Consumer:
Home equity lines and loans		23,257		24,239		3,541		19,771		20,806		6,213
Automobile		23,985		23,985		5,118		30,317		30,317		8,070
Other		18,870		18,870		5,486		18,973		18,973		5,459

		501,230		579,049		82,726		498,575		581,887		82,643

With no related allowance recorded:
Commercial, financial, leasing, etc.		111,023		133,100		—		73,978		81,493		—
Real estate:
Commercial		77,147		84,677		—		66,777		78,943		—
Residential builder and developer		42,800		68,906		—		58,820		96,722		—
Other commercial construction		10,307		28,480		—		20,738		41,035		—
Residential		16,232		26,626		—		16,815		26,750		—
Residential Alt-A		20,891		35,836		—		26,752		46,964		—

		278,400		377,625		—		263,880		371,907		—

Total:
Commercial, financial, leasing, etc.		255,074		299,977		35,195		206,318		246,639		31,779
Real estate:
Commercial		182,708		207,046		18,932		150,732		175,152		14,121
Residential builder and developer		49,344		79,182		788		76,452		118,766		805
Other commercial construction		12,752		32,471		391		26,218		47,519		900
Residential		99,581		127,993		4,775		105,785		134,093		4,296
Residential Alt-A		114,059		142,911		8,500		127,889		161,529		11,000
Consumer:
Home equity lines and loans		23,257		24,239		3,541		19,771		20,806		6,213
Automobile		23,985		23,985		5,118		30,317		30,317		8,070
Other		18,870		18,870		5,486		18,973		18,973		5,459

Total	$	779,630		956,674		82,726		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 September 30, 2015						Three months ended September 30, 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.	$	242,157		1,017		1,017		228,749		611		611
Real estate:
Commercial		179,327		2,327		2,327		189,952		821		821
Residential builder and developer		53,009		81		81		90,493		18		18
Other commercial construction		17,236		1,943		1,943		58,500		251		251
Residential		99,939		1,835		1,316		104,516		1,328		776
Residential Alt-A		116,191		1,539		618		131,574		1,643		681
Consumer:
Home equity lines and loans		21,952		231		66		19,268		219		81
Automobile		24,429		391		39		33,666		528		67
Other		19,238		188		23		18,677		177		44

Total	$	773,478		9,552		7,430		875,395		5,596		3,350


	Nine months ended September 30, 2015						Nine months ended September 30, 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.	$	226,243		2,123		2,123		171,227		1,379		1,379
Real estate:
Commercial		161,834		4,433		4,433		194,337		2,616		2,616
Residential builder and developer		64,165		275		275		94,453		131		131
Other commercial construction		22,130		2,166		2,166		74,531		1,694		1,694
Residential		101,997		4,639		3,011		132,606		7,784		6,146
Residential Alt-A		120,710		4,799		1,962		135,374		5,002		1,900
Consumer:
Home equity lines and loans		20,619		656		179		17,902		540		182
Automobile		26,521		1,257		136		36,560		1,742		228
Other		19,053		547		86		18,229		517		145

Total	$	763,272		20,895		14,371		875,219		21,405		14,421

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. 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 $59 million and $20 million, respectively, at September 30, 2015 and $63 million and $18 million,

-17-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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 $20 million and $28 million, respectively, at September 30, 2015 and $27 million and $28 million, respectively, at December 31, 2014.

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.


			Real Estate
	Commercial,				Residential		Other
	Financial,				Builder and		Commercial
	Leasing, etc.		Commercial		Developer		Construction
	(in thousands)
September 30, 2015
Pass	$	19,223,102		22,479,501		1,507,057		3,447,841
Criticized accrual		785,660		895,603		61,143		94,567
Criticized nonaccrual		224,415		176,491		46,022		12,312

Total	$	20,233,177		23,551,595		1,614,222		3,554,720

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

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

-18-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

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


	Commercial, Financial,		Real Estate
	Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
September 30, 2015
Individually evaluated for impairment	$	35,195		19,743		13,275		14,145	$	82,358
Collectively evaluated for impairment		250,271		292,214		39,804		186,706		768,995
Purchased impaired		1,201		1,132		1,917		1,463		5,713

Allocated	$	286,667		313,089		54,996		202,314		857,066

Unallocated										76,732

Total									$	933,798

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

-19-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


	Commercial, Financial,		Real Estate
	Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
September 30, 2015
Individually evaluated for impairment	$	255,074		243,743		213,640		66,112	$	778,569
Collectively evaluated for impairment		19,973,458		28,348,685		7,983,030		11,307,085		67,612,258
Purchased impaired		4,645		128,109		14,392		2,275		149,421

Total	$	20,233,177		28,720,537		8,211,062		11,375,472	$	68,540,248

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

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.

-20-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended September 30, 2015 and 2014:


			Recorded investment				Financial effects of modification
Three months ended September 30, 2015	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		36	$	7,893	$	7,419	$	(474	)	$	—
Combination of concession types		1		31		31		—			(6	)
Real estate:
Commercial
Principal deferral		15		4,230		4,208		(22	)		—
Combination of concession types		1		1,156		1,169		13			(54	)
Other commercial construction
Principal deferral		3		296		390		94			—
Residential
Principal deferral		31		3,540		3,743		203			—
Other		1		267		267		—			—
Combination of concession types		10		1,296		1,380		84			(178	)
Residential Alt-A
Principal deferral		1		265		276		11			—
Combination of concession types		4		605		662		57			(91	)
Consumer:
Home equity lines and loans
Principal deferral		4		727		727		—			—
Combination of concession types		22		2,003		2,003		—			(199	)
Automobile
Principal deferral		35		316		316		—			—
Other		15		93		93		—			—
Combination of concession types		25		471		471		—			(17	)
Other
Principal deferral		24		352		352		—			—
Other		5		33		33		—			—
Combination of concession types		12		117		117		—			(12	)

Total		245	$	23,691	$	23,657	$	(34	)	$	(557	)

(a)

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

(b)

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

-21-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


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

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

(a)

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

(b)

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

-22-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the nine months ended September 30, 2015 and 2014:


			Recorded investment				Financial effects of modification
Nine months ended September 30, 2015	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
	(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		87	$	25,483	$	24,331	$	(1,152	)	$	—
Interest rate reduction		1		99		99		—			(19	)
Other		2		8,991		8,883		(108	)		—
Combination of concession types		6		25,075		24,884		(191	)		(245	)
Real estate:
Commercial
Principal deferral		37		47,005		45,569		(1,436	)		—
Combination of concession types		6		3,238		3,242		4			(159	)
Residential builder and developer
Principal deferral		2		10,650		10,598		(52	)		—
Other commercial construction
Principal deferral		3		296		390		94			—
Residential
Principal deferral		50		4,954		5,239		285			—
Other		1		267		267		—			—
Combination of concession types		22		2,551		2,795		244			(356	)
Residential Alt-A
Principal deferral		2		426		437		11			—
Combination of concession types		7		1,239		1,298		59			(121	)
Consumer:
Home equity lines and loans
Principal deferral		6		1,946		1,946		—			—
Combination of concession types		41		3,555		3,555		—			(424	)
Automobile
Principal deferral		133		1,234		1,234		—			—
Interest rate reduction		7		137		137		—			(10	)
Other		38		134		134		—			—
Combination of concession types		42		693		693		—			(28	)
Other
Principal deferral		73		1,418		1,418		—			—
Other		12		113		113		—			—
Combination of concession types		35		384		384		—			(44	)

Total		613	$	139,888	$	137,646	$	(2,242	)	$	(1,406	)

(a)

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

(b)

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

-23-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


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

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

(a)

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

(b)

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended September 30, 2015 and 2014 and for which there was a subsequent payment default during the nine-month periods ended September 30, 2015 and 2014, respectively, were not material.

-24-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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 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 $43 million and $44 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, there were $151 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 $513 million of fixed and floating rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at September 30, 2015 which are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust.

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.

-25-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

5. Borrowings, continued

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.

Also included in long-term borrowings are agreements to repurchase securities of $1.4 billion at each of September 30, 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 September 30, 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 September 30, 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 September 30, 2015 and 721,490 at December 31, 2014.

-26-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6. Shareholders’ equity, continued

(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 capital, M&T may redeem all of the shares within 90 days following that occurrence.

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


	Pension benefits						Other postretirement benefits
	Three months ended September 30
	2015			2014			2015			2014
	(in thousands)
Service cost	$	5,916			5,130			188			151
Interest cost on projected benefit obligation		17,754			17,290			651			695
Expected return on plan assets		(23,527	)		(22,892	)		—			—
Amortization of prior service credit		(1,501	)		(1,638	)		(340	)		(340	)
Amortization of net actuarial loss		11,207			3,624			26			—

Net periodic benefit cost	$	9,849			1,514			525			506


	Pension benefits						Other postretirement benefits
	Nine months ended September 30
	2015			2014			2015			2014
	(in thousands)
Service cost	$	17,748			15,390			562			453
Interest cost on projected benefit obligation		53,261			51,871			1,953			2,084
Expected return on plan assets		(70,578	)		(68,676	)		—			—
Amortization of prior service credit		(4,504	)		(4,914	)		(1,019	)		(1,019	)
Amortization of net actuarial loss		33,619			10,871			79			—

Net periodic benefit cost	$	29,546			4,542			1,575			1,518

-27-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

7. Pension plans and other postretirement benefits, continued

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $14,281,000 and $13,558,000 for the three months ended September 30, 2015 and 2014, respectively, and $44,377,000 and $41,963,000 for the nine months ended September 30, 2015 and 2014, respectively.

8. Earnings per common share

The computations of basic earnings per common share follow:


	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
	(in thousands, except per share)
Income available to common shareholders:
Net income	$	280,401			275,344		$	808,702			788,697
Less: Preferred stock dividends (a)		(20,318	)		(20,443	)		(60,953	)		(55,560	)

Net income available to common equity		260,083			254,901			747,749			733,137
Less: Income attributable to unvested stock-based compensation awards		(2,746	)		(2,996	)		(8,122	)		(8,830	)

Net income available to common shareholders	$	257,337			251,905		$	739,627			724,307
Weighted-average shares outstanding:
Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards		134,049			132,832			133,805			132,372
Less: Unvested stock-based compensation awards		(1,419	)		(1,567	)		(1,458	)		(1,590	)

Weighted-average shares outstanding		132,630			131,265			132,347			130,782
Basic earnings per common share	$	1.94			1.92		$	5.59			5.54

(a)

Including impact of not as yet declared cumulative dividends.

-28-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8. Earnings per common share, continued

The computations of diluted earnings per common share follow:


	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
	(in thousands, except per share)
Net income available to common equity	$	260,083			254,901		$	747,749			733,137
Less: Income attributable to unvested stock-based compensation awards		(2,737	)		(2,984	)		(8,093	)		(8,793	)

Net income available to common shareholders	$	257,346			251,917		$	739,656			724,344
Adjusted weighted-average shares outstanding:
Common and unvested stock-based compensation awards		134,049			132,832			133,805			132,372
Less: Unvested stock-based compensation awards		(1,419	)		(1,567	)		(1,458	)		(1,590	)
Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock		746			863			742			916

Adjusted weighted-average shares outstanding		133,376			132,128			133,089			131,698
Diluted earnings per common share	$	1.93			1.91		$	5.56			5.50

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

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 1.5 million and 1.7 million common shares during the three-month periods ended September 30, 2015 and 2014, respectively, and 1.9 million and 2.1 million common shares during the nine-month periods ended September 30, 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.

-29-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9. Comprehensive income

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


	Investment Securities
	With OTTI (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 (losses), net		9,699		(11,139	)		—			—			(1,440	)		952			(488	)
Foreign currency translation adjustment		—		—			—			(735	)		(735	)		214			(521	)
Gains on cash flow hedges		—		—			—			1,453			1,453			(568	)		885

Total other comprehensive income before reclassifications		9,699		(11,139	)		—			718			(722	)		598			(124	)

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:
Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities		—		2,417			—			—			2,417	(b)		(944	)		1,473
Losses realized in net income		—		108			—			—			108	(c)		(40	)		68
Accretion of net gain on terminated cash flow hedges		—		—			—			(102	)		(102	)(d)		40			(62	)
Amortization of prior service credit		—		—			(5,523	)		—			(5,523	)(e)		2,359			(3,164	)
Amortization of actuarial losses		—		—			33,698			—			33,698	(e)		(14,368	)		19,330

Total reclassifications		—		2,525			28,175			(102	)		30,598			(12,953	)		17,645

Total gain (loss) during the period		9,699		(8,614	)		28,175			616			29,876			(12,355	)		17,521

Balance – September 30, 2015	$	17,137		193,214			(474,852	)		(3,466	)	$	(267,967	)		104,494		$	(163,473	)

-30-

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		12,038		109,263		—			—			121,301			(47,615	)		73,686
Foreign currency translation adjustment		—		—		—			(2,314	)		(2,314	)		810			(1,504	)
Unrealized losses on cash flow hedges		—		—		—			(162	)		(162	)		64			(98	)

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

Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income:
Accretion of unrealized holding losses on HTM securities		1		2,539		—			—			2,540	(b)		(997	)		1,543
Amortization of prior service credit		—		—		(5,933	)		—			(5,933	)(e)		2,328			(3,605	)
Amortization of actuarial losses		—		—		10,871			—			10,871	(e)		(4,267	)		6,604

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

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

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

(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 expense

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		5,926		(4,873	)		16,166			302			17,521

Balance – September 30, 2015	$	10,444		117,810			(289,423	)		(2,304	)	$	(163,473	)

-31-

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 September 30, 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 September 30, 2015 and 2014 and $33 million and $34 million for the nine-month periods ended September 30, 2015 and 2014, respectively.

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


	Notional amount		Average maturity		Weighted- average rate
	Notional amount		Average maturity		Fixed			Variable
	(in thousands)		(in years)
September 30, 2015
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		1.9		4.42	%		1.29	%

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 $17.6 billion at each of September 30, 2015 and December 31, 2014. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $1.6 billion and $1.3 billion at September 30, 2015 and December 31, 2014, respectively.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued

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


	Asset derivatives				Liability derivatives
	Fair value				Fair value
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	60,782		73,251	$	—		—
Commitments to sell real estate loans (a)		899		728		5,142		4,217

		61,681		73,979		5,142		4,217
Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		17,832		17,396		185		49
Commitments to sell real estate loans (a)		26		754		4,162		4,330
Trading:
Interest rate contracts (b)		268,332		215,614		221,626		173,513
Foreign exchange and other option and futures contracts (b)		13,404		31,112		11,380		29,950

		299,594		264,876		237,353		207,842

Total derivatives	$	361,275		338,855	$	242,495		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.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued


	Amount of gain (loss) recognized
	Three months ended September 30, 2015					Three months ended September 30, 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)	$	(2,719	)		2,382	$	(16,792	)		16,380

Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	4,120				$	132
Foreign exchange and other option and futures contracts (b)		2,441					(781	)

Total	$	6,561				$	(649	)


	Amount of gain (loss) recognized
	Nine months ended September 30, 2015					Nine months ended September 30, 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)	$	(12,469	)		11,495	$	(26,627	)		25,658

Derivatives not designated as hedging instruments
Trading:
Interest rate contracts (b)	$	6,552				$	1,214
Foreign exchange and other option and futures contracts (b)		1,563					(6,597	)

Total	$	8,115				$	(5,383	)

(a)

Reported as other revenues from operations.

(b)

Reported as trading account and foreign exchange gains.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued

In addition, the Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $23 million and $28 million at September 30, 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 $96 million and $161 million at September 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $91 million and $103 million at September 30, 2015 and December 31, 2014, respectively. The Company was required to post collateral relating to those positions of $81 million and $90 million at September 30, 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 posting requirements. If the Company’s debt rating were to fall below specified ratings, the counterparties to the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on September 30, 2015 was $17 million, for which the Company had posted collateral of $11 million in the normal course of business. If the credit-risk-related contingent features had been triggered on September 30, 2015, the maximum amount of additional collateral the Company would have been required to post to counterparties was $6 million.

The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $40 million and $104 million at September 30, 2015 and December 31, 2014, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $35 million and $46 million at September 30, 2015 and December 31, 2014, respectively. Counterparties posted collateral relating to those positions of $35 million and $46 million at September 30, 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 financial instruments

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. Derivative financial instruments, continued

cleared through clearinghouses was a net liability position of $96 million and $35 million at September 30, 2015 and December 31, 2014, respectively. Collateral posted with clearinghouses was $143 million and $61 million at September 30, 2015 and December 31, 2014, respectively.

11. Variable interest entities and asset securitizations

During the three and nine months ended September 30, 2015, the Company securitized approximately $15 million and $51 million, respectively, 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 and nine months ended September 30, 2014, the Company securitized $35 million and $110 million, respectively, 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 September 30, 2015 and December 31, 2014, the carrying values of the loans in the securitization trust were $84 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 September 30, 2015 and December 31, 2014 was $13 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 September 30, 2015 is limited to realizing the carrying value of the loans less the amount of the mortgage-backed securities held by the third parties.

As described in note 5, M&T has issued junior subordinated debentures payable to various trusts that have issued Capital Securities. M&T owns the common securities of those trust entities. The Company is not considered to be the primary beneficiary of those entities and, accordingly, the trusts are not included in the Company’s consolidated financial statements. At September 30, 2015 and December 31, 2014, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet and recognized $24 million and $34 million, respectively, in other assets for its “investment” in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 5.

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.2 billion at September 30, 2015 and December 31, 2014, respectively. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Company’s maximum exposure to loss of its investments in such partnerships was $301 million, including $85 million of unfunded commitments, at September 30, 2015 and $243 million, including $56

-36-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

11. Variable interest entities and asset securitizations, continued

million of unfunded commitments, at December 31, 2014. Contingent commitments to provide additional capital contributions to these partnerships were not material at September 30, 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 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 $31 million of its investments in qualified affordable housing projects to income tax expense during the three months and nine months ended September 30, 2015, respectively, and recognized $15 million and $44 million of tax credits and other tax benefits during those respective periods. Similarly, for the three months and nine months ended September 30, 2014, the Company amortized $14 million and $39 million, respectively, of its investments in qualified affordable housing projects to income tax expense, and recognized $18 million and $53 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 September 30, 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.

•

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

-37-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

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 September 30, 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 4% 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 significant unobservable inputs to Level 3 measurements. At September 30, 2015, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $28 million and $50 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 all of the available-for-sale investment securities classified as Level 3 valuations.

The Company ensures an appropriate control framework is in place over the valuation processes and techniques used for significant Level 3 fair value measurements. Internal pricing models used for significant valuation measurements have generally been subjected to validation procedures including testing of mathematical constructs, review of valuation methodology and significant assumptions used.

Real estate loans held for sale

The Company utilizes commitments to sell real estate loans to hedge the exposure to changes in fair value of real estate loans held for sale. The carrying value of hedged real estate loans held for sale includes changes in

-38-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

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

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.

-39-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

The following tables present assets and liabilities at September 30, 2015 and December 31, 2014 measured at estimated fair value on a recurring basis:


	Fair value measurements at September 30, 2015		Level 1 (a)		Level 2 (a)		Level 3
	(in thousands)
Trading account assets	$	340,710		48,006		292,704		—
Investment securities available for sale:
U.S. Treasury and federal agencies		199,394		—		199,394		—
Obligations of states and political subdivisions		6,296		—		6,296		—
Mortgage-backed securities:
Government issued or guaranteed		10,714,048		—		10,714,048		—
Privately issued		82		—		—		82
Collateralized debt obligations		49,876		—		—		49,876
Other debt securities		120,468		—		120,468		—
Equity securities		69,345		40,370		28,975		—

		11,159,509		40,370		11,069,181		49,958

Real estate loans held for sale		493,453		—		493,453		—
Other assets (b)		79,539		—		61,707		17,832

Total assets	$	12,073,211		88,376		11,917,045		67,790

Trading account liabilities	$	233,006		—		233,006		—
Other liabilities (b)		9,489		—		9,304		185

Total liabilities	$	242,495		—		242,310		185


	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

-40-

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12. Fair value measurements, continued

(a)

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 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).

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended September 30, 2015 were as follows:


	Investment securities available for sale
	Privately issued mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)
Balance – June 30, 2015	$	88		$	50,483		$	11,206
Total gains (losses) realized/unrealized:
Included in earnings		—			—			21,709	(a)
Included in other comprehensive income		—			(472	)(d)		—
Settlements		(6	)		(135	)		—
Transfers in and/or out of Level 3 (b)		—			—			(15,268	)(c)

Balance – September 30, 2015	$	82		$	49,876		$	17,647

Changes in unrealized gains included in earnings related to assets still held at September 30, 2015	$	—		$	—		$	15,488	(a)

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended September 30, 2014 were as follows:


	Investment securities available for sale
	Privately issued mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)
Balance – June 30, 2014	$	119		$	56,200		$	22,023
Total gains (losses) realized/unrealized:
Included in earnings		—			—			9,657	(a)
Included in other comprehensive income		—			2,201	(d)		—
Settlements		(7	)		(3,593	)		—
Transfers in and/or out of Level 3 (b)		—			—			(15,188	)(c)

Balance – September 30, 2014	$	112		$	54,808		$	16,492

Changes in unrealized gains included in earnings related to assets still held at September 30, 2014	$	—		$	—		$	12,421	(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 nine months ended September 30, 2015 were as follows:


	Investment securities available for sale
	Privately issued mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)
Balance – January 1, 2015	$	103		$	50,316		$	17,347
Total gains (losses) realized/unrealized:
Included in earnings		—			—			67,611	(a)
Included in other comprehensive income		—			5,153	(d)		—
Settlements		(21	)		(5,593	)		—
Transfers in and/or out of Level 3 (b)		—			—			(67,311	)(c)

Balance – September 30, 2015	$	82		$	49,876		$	17,647

Changes in unrealized gains included in earnings related to assets still held at September 30, 2015	$	—		$	—		$	15,965	(a)

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the nine months ended September 30, 2014 were as follows:


	Investment securities available for sale
	Privately issued mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)
Balance – January 1, 2014	$	1,850		$	63,083		$	3,941
Total gains (losses) realized/unrealized:
Included in earnings		—			—			63,557	(a)
Included in other comprehensive income		272	(d)		11,333	(d)		—
Settlements		(2,010	)		(19,60