Edgar Filing: M&T BANK CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

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

Commission File Number 1-9861

M&T BANK CORPORATION

(Exact name of registrant as specified in its charter)


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

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

(716) 842-5445

(Registrant’s telephone number, including area code)

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

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

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

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

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 22, 2016: 158,999,014 shares.

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2016


Table of Contents of Information Required in Report			Page

Part I. FINANCIAL INFORMATION

	Item 1.	Financial Statements.

		CONSOLIDATED BALANCE SHEET - March 31, 2016 and December 31, 2015		3

		CONSOLIDATED STATEMENT OF INCOME - Three months ended March 31, 2016 and 2015		4

		CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - Three months ended March 31, 2016 and 2015		5

		CONSOLIDATED STATEMENT OF CASH FLOWS - Three months ended March 31, 2016 and 2015		6

		CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - Three months ended March 31, 2016 and 2015		7

		NOTES TO FINANCIAL STATEMENTS		8

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		93

	Item 4.	Controls and Procedures.		93

Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings.		93

	Item 1A.	Risk Factors.		94

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		95

	Item 3.	Defaults Upon Senior Securities.		95

	Item 4.	Mine Safety Disclosures.		95

	Item 5.	Other Information.		95

	Item 6.	Exhibits.		96

SIGNATURES				97

EXHIBIT INDEX				97

- 2 -

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)


Dollars in thousands, except per share		March 31, 2016			December 31, 2015

Assets	Cash and due from banks	$	1,178,175			1,368,040
	Interest-bearing deposits at banks		9,545,181			7,594,350
	Trading account		467,987			273,783
	Investment securities (includes pledged securities that can be sold or repledged of $2,133,492 at March 31, 2016; $2,136,712 at December 31, 2015)
	Available for sale (cost: $11,937,326 at March 31, 2016; $12,138,636 at December 31, 2015)		12,200,647			12,242,671
	Held to maturity (fair value: $2,769,343 at March 31, 2016; $2,864,147 at December 31, 2015)		2,730,611			2,859,709
	Other (fair value: $536,062 at March 31, 2016; $554,059 at December 31, 2015)		536,062			554,059

	Total investment securities		15,467,320			15,656,439

	Loans and leases		88,104,830			87,719,234
	Unearned discount		(232,364	)		(229,735	)

	Loans and leases, net of unearned discount		87,872,466			87,489,499
	Allowance for credit losses		(962,752	)		(955,992	)

	Loans and leases, net		86,909,714			86,533,507

	Premises and equipment		662,891			666,682
	Goodwill		4,593,112			4,593,112
	Core deposit and other intangible assets		127,949			140,268
	Accrued interest and other assets		5,673,303			5,961,703

	Total assets	$	124,625,632			122,787,884


Liabilities	Noninterest-bearing deposits	$	29,709,218			29,110,635
	Interest-checking deposits		2,848,126			2,939,274
	Savings deposits		48,649,114			46,627,370
	Time deposits		12,841,331			13,110,392
	Deposits at Cayman Islands office		166,787			170,170

	Total deposits		94,214,576			91,957,841

	Federal funds purchased and agreements to repurchase securities		206,709			150,546
	Other short-term borrowings		1,560,117			1,981,636
	Accrued interest and other liabilities		1,948,142			1,870,714
	Long-term borrowings		10,341,035			10,653,858

	Total liabilities		108,270,579			106,614,595

Shareholders’ equity	Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at March 31, 2016 and December 31, 2015; Liquidation preference of $10,000 per share: 50,000 shares at March 31, 2016 and December 31, 2015		1,231,500			1,231,500
	Common stock, $.50 par, 250,000,000 shares authorized, 159,963,737 shares issued at March 31, 2016; 159,563,512 shares issued at December 31, 2015		79,982			79,782
	Common stock issuable, 33,391 shares at March 31, 2016; 36,644 shares at December 31, 2015		2,180			2,364
	Additional paid-in capital		6,683,499			6,680,768
	Retained earnings		8,596,752			8,430,502
	Accumulated other comprehensive income (loss), net		(150,189	)		(251,627	)
	Treasury stock - common, at cost - 841,082 shares at March 31, 2016		(88,671	)		—

	Total shareholders’ equity		16,355,053			16,173,289

	Total liabilities and shareholders’ equity	$	124,625,632			122,787,884

- 3 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)


		Three months ended March 31
In thousands, except per share		2016		2015
Interest income	Loans and leases, including fees	$	863,385		647,179
	Investment securities
	Fully taxable		98,015		85,957
	Exempt from federal taxes		795		1,318
	Deposits at banks		10,337		3,118
	Other		302		515

	Total interest income		972,834		738,087

Interest expense	Interest-checking deposits		414		311
	Savings deposits		15,891		10,219
	Time deposits		24,322		3,740
	Deposits at Cayman Islands office		193		147
	Short-term borrowings		2,162		34
	Long-term borrowings		57,888		64,048

	Total interest expense		100,870		78,499

	Net interest income		871,964		659,588
	Provision for credit losses		49,000		38,000

	Net interest income after provision for credit losses		822,964		621,588

Other income	Mortgage banking revenues		82,063		101,601
	Service charges on deposit accounts		102,405		102,344
	Trust income		111,077		123,734
	Brokerage services income		16,004		15,461
	Trading account and foreign exchange gains		7,458		6,231
	Gain (loss) on bank investment securities		4		(98	)
	Other revenues from operations		101,922		90,930

	Total other income		420,933		440,203

Other expense	Salaries and employee benefits		431,785		389,893
	Equipment and net occupancy		74,178		66,470
	Printing, postage and supplies		11,986		9,590
	Amortization of core deposit and other intangible assets		12,319		6,793
	FDIC assessments		25,225		10,660
	Other costs of operations		220,602		202,969

	Total other expense		776,095		686,375

	Income before taxes		467,802		375,416
	Income taxes		169,274		133,803

	Net income	$	298,528		241,613


	Net income available to common shareholders
	Basic	$	275,744		218,830
	Diluted		275,748		218,837
	Net income per common share
	Basic	$	1.74		1.66
	Diluted		1.73		1.65
	Cash dividends per common share	$	.70		.70
	Average common shares outstanding
	Basic		158,734		132,049
	Diluted		159,181		132,769

- 4 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended March 31
In thousands	2016			2015

Net income	$	298,528		$	241,613
Other comprehensive income, net of tax and reclassification adjustments:
Net unrealized gains on investment securities		97,194			25,339
Cash flow hedges adjustments		(24	)		871
Foreign currency translation adjustment		(53	)		(2,384	)
Defined benefit plans liability adjustments		4,321			4,677

Total other comprehensive income		101,438			28,503

Total comprehensive income	$	399,966		$	270,116

- 5 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)


		Three months ended March 31
In thousands		2016			2015
Cash flows from operating activities	Net income	$	298,528			241,613
	Adjustments to reconcile net income to net cash provided by operating activities
	Provision for credit losses		49,000			38,000
	Depreciation and amortization of premises and equipment		27,141			24,178
	Amortization of capitalized servicing rights		12,249			12,199
	Amortization of core deposit and other intangible assets		12,319			6,793
	Provision for deferred income taxes		50,075			37,052
	Asset write-downs		8,940			2,379
	Net gain on sales of assets		(5,399	)		(1,066	)
	Net change in accrued interest receivable, payable		(16,530	)		(2,200	)
	Net change in other accrued income and expense		70,766			(80,084	)
	Net change in loans originated for sale		211			197,708
	Net change in trading account assets and liabilities		(59,080	)		(18,206	)

	Net cash provided by operating activities		448,220			458,366

Cash flows from investing activities	Proceeds from sales of investment securities
	Available for sale		518			693
	Other		18,121			132
	Proceeds from maturities of investment securities
	Available for sale		511,549			369,649
	Held to maturity		132,636			148,708
	Purchases of investment securities
	Available for sale		(311,302	)		(1,871,491	)
	Held to maturity		(5,343	)		(7,442	)
	Other		(124	)		(348	)
	Net increase in loans and leases		(439,712	)		(666,220	)
	Net (increase) decrease in interest-bearing deposits at banks		(1,950,831	)		179,376
	Capital expenditures, net		(16,307	)		(9,598	)
	Net decrease in loan servicing advances		37,600			76,145
	Other, net		7,920			(21,940	)

	Net cash used by investing activities		(2,015,275	)		(1,802,336	)

Cash flows from financing activities	Net increase (decrease) in deposits		2,264,623			(4,543	)
	Net increase (decrease) in short-term borrowings		(343,838	)		819
	Proceeds from long-term borrowings		—			1,500,000
	Payments on long-term borrowings		(317,187	)		(1,797	)
	Purchases of treasury stock		(100,000	)		—
	Dividends paid - common		(112,000	)		(93,631	)
	Dividends paid - preferred		(17,368	)		(17,368	)
	Other, net		2,960			(46,014	)

	Net cash provided by financing activities		1,377,190			1,337,466

	Net decrease in cash and cash equivalents		(189,865	)		(6,504	)
	Cash and cash equivalents at beginning of period		1,368,040			1,373,357

	Cash and cash equivalents at end of period	$	1,178,175			1,366,853

Supplemental disclosure of cash flow information	Interest received during the period	$	968,223			726,475
	Interest paid during the period		146,568			75,776
	Income taxes paid (refunded) during the period		(86,146	)		88,578

Supplemental schedule of noncash investing and financing activities	Real estate acquired in settlement of loans	$	33,737			10,846
	Securitization of residential mortgage loans allocated to
	Available-for-sale investment securities		8,452			12,920
	Capitalized servicing rights		92			143

- 6 -

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


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

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

2016
Balance - January 1, 2016	$	1,231,500		79,782		2,364			6,680,768			8,430,502			(251,627	)		—			16,173,289
Total comprehensive income		—		—		—			—			298,528			101,438			—			399,966
Preferred stock cash dividends		—		—		—			—			(20,318	)		—			—			(20,318	)
Purchases of treasury stock		—		—		—			—			—			—			(100,000	)		(100,000	)
Stock-based compensation plans:
Compensation expense, net		—		178		—			(978	)		—			—			745			(55	)
Exercises of stock options, net		—		18		—			2,335			—			—			265			2,618
Stock purchase plan		—		—		—			275			—			—			10,319			10,594
Directors’ stock plan		—		2		—			471			—			—			—			473
Deferred compensation plans, net, including dividend equivalents		—		2		(184	)		234			(23	)		—			—			29
Other		—		—		—			394			—			—			—			394
Common stock cash dividends - $.70 per share		—		—		—			—			(111,937	)		—			—			(111,937	)

Balance - March 31, 2016	$	1,231,500		79,982		2,180			6,683,499			8,596,752			(150,189	)		(88,671	)		16,355,053

- 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 Form 10-K for the year ended December 31, 2015 (“2015 Annual Report”). In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

2.	Acquisition

On November 1, 2015, M&T completed the acquisition of Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey. On that date, Hudson City Savings Bank, the banking subsidiary of Hudson City, was merged into M&T Bank, a wholly owned banking subsidiary of M&T. Hudson City Savings Bank operated 135 banking offices in New Jersey, Connecticut and New York at the date of acquisition. The results of operations acquired in the Hudson City transaction have been included in the Company’s financial results since November 1, 2015. After application of the election, allocation and proration procedures contained in the merger agreement with Hudson City, M&T paid $2.1 billion in cash and issued 25,953,950 shares of M&T common stock in exchange for Hudson City shares outstanding at the time of the acquisition. The purchase price was approximately $5.2 billion based on the cash paid to Hudson City shareholders, the fair value of M&T stock exchanged and the estimated fair value of Hudson City stock awards converted into M&T stock awards. The acquisition of Hudson City expanded the Company’s presence in New Jersey, Connecticut and New York, and management expects that the Company will benefit from greater geographic diversity and the advantages of scale associated with a larger company.

The Hudson City transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. The consideration paid for Hudson City’s common equity and the amounts of identifiable assets acquired and liabilities assumed as of the acquisition date were as follows:


	(in thousands)
Identifiable assets:
Cash and due from banks	$	131,688
Interest-bearing deposits at banks		7,568,934
Investment securities		7,929,014
Loans		19,015,013
Goodwill		1,079,787
Core deposit intangible		131,665
Other assets		843,219

Total identifiable assets		36,699,320


Liabilities:
Deposits		17,879,589
Borrowings		13,211,598
Other liabilities		405,025

Total liabilities		31,496,212

Total consideration	$	5,203,108


Cash paid	$	2,064,284
Common stock issued (25,953,950 shares)		3,110,581
Common stock awards converted		28,243

Total consideration	$	5,203,108

- 8 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

2.	Acquisitions, continued

In early November 2015, the Company sold $5.8 billion of investment securities obtained in the acquisition and repaid $10.6 billion of borrowings assumed in the transaction. In connection with the acquisition, the Company recorded approximately $1.1 billion of goodwill and $132 million of core deposit intangible. The core deposit intangible asset is being amortized over a period of 7 years using an accelerated method.

The following table presents certain pro forma information as if Hudson City had been included in the Company’s results of operations in the first quarter of 2015. These results combine the historical results of Hudson City into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place as indicated. In particular, no adjustments have been made to eliminate the impact of gains on securities transactions of $7 million during the three months ended March 31, 2015 that may not have been recognized had the investment securities been recorded at fair value. Additionally, the Company expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts that follow.


	Pro forma Three months ended March 31, 2015
	(in thousands)

Total revenues(a)	$	1,253,445
Net income		285,237

(a)

Represents net interest income plus other income.

In connection with the Hudson City acquisition, the Company incurred merger-related expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with preparing for systems conversions and/or integration of operations; costs related to termination of existing contractual arrangements for various services; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; severance (for former Hudson City employees); travel costs; and other costs of completing the transaction and commencing operations in new markets and offices. The Company expects that there will be additional merger-related expenses in 2016.

- 9 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

2.	Acquisitions, continued

A summary of merger-related expenses included in the consolidated statement of income follows:


	Three months ended March 31, 2016
	(in thousands)

Salaries and employee benefits	$	5,274
Equipment and net occupancy		939
Printing, postage and supplies		937
Other cost of operations		16,012

Total	$	23,162

There were no merger-related expenses during the first quarter of 2015.

3.	Investment securities

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


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
March 31, 2016
Investment securities available for sale:
U.S. Treasury and federal agencies	$	201,002		1,197		7	$	202,192
Obligations of states and political subdivisions		5,356		138		46		5,448
Mortgage-backed securities:
Government issued or guaranteed		11,490,181		265,879		5,998		11,750,062
Privately issued		65		2		2		65
Collateralized debt obligations		28,483		18,170		1,613		45,040
Other debt securities		136,968		1,407		25,667		112,708
Equity securities		75,271		10,225		364		85,132

		11,937,326		297,018		33,697		12,200,647


Investment securities held to maturity:
Obligations of states and political subdivisions		103,408		886		332		103,962
Mortgage-backed securities:
Government issued or guaranteed		2,445,563		78,448		2,070		2,521,941
Privately issued		175,467		1,848		40,048		137,267
Other debt securities		6,173		—		—		6,173

		2,730,611		81,182		42,450		2,769,343

Other securities		536,062		—		—		536,062

Total	$	15,203,999		378,200		76,147	$	15,506,052

- 10 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
	(in thousands)
December 31, 2015
Investment securities available for sale:
U.S. Treasury and federal agencies	$	299,890		294		187	$	299,997
Obligations of states and political subdivisions		5,924		146		42		6,028
Mortgage-backed securities:
Government issued or guaranteed		11,592,959		142,370		48,701		11,686,628
Privately issued		74		2		2		74
Collateralized debt obligations		28,438		20,143		1,188		47,393
Other debt securities		137,556		1,514		20,190		118,880
Equity securities		73,795		10,230		354		83,671

		12,138,636		174,699		70,664		12,242,671

Investment securities held to maturity:
Obligations of states and political subdivisions		118,431		1,003		421		119,013
Mortgage-backed securities:
Government issued or guaranteed		2,553,612		50,936		7,817		2,596,731
Privately issued		181,091		2,104		41,367		141,828
Other debt securities		6,575		—		—		6,575

		2,859,709		54,043		49,605		2,864,147

Other securities		554,059		—		—		554,059

Total	$	15,552,404		228,742		120,269	$	15,660,877

There were no significant gross realized gains or losses from sales of investment securities for the quarters ended March 31, 2016 and 2015.

At March 31, 2016, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows:


	Amortized cost		Estimated fair value
	(in thousands)
Debt securities available for sale:
Due in one year or less	$	7,504		7,551
Due after one year through five years		201,714		203,128
Due after five years through ten years		2,728		2,926
Due after ten years		159,863		151,783

		371,809		365,388
Mortgage-backed securities available for sale		11,490,246		11,750,127

	$	11,862,055		12,115,515


Debt securities held to maturity:
Due in one year or less	$	32,387		32,542
Due after one year through five years		64,484		64,760
Due after five years through ten years		6,537		6,660
Due after ten years		6,173		6,173

		109,581		110,135
Mortgage-backed securities held to maturity		2,621,030		2,659,208

	$	2,730,611		2,769,343

- 11 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

A summary of investment securities that as of March 31, 2016 and December 31, 2015 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows:


	Less than 12 months					12 months or more
	Fair value		Unrealized losses			Fair value		Unrealized losses
			(in thousands)
March 31, 2016
Investment securities available for sale:
U.S. Treasury and federal agencies	$	4,051		(7	)		—		—
Obligations of states and political subdivisions		—		—			1,706		(46	)
Mortgage-backed securities:
Government issued or guaranteed		337,672		(1,959	)		1,233,329		(4,039	)
Privately issued		—		—			34		(2	)
Collateralized debt obligations		10,326		(527	)		1,858		(1,086	)
Other debt securities		9,825		(1,203	)		88,715		(24,464	)
Equity securities		2,115		(210	)		146		(154	)

		363,989		(3,906	)		1,325,788		(29,791	)


Investment securities held to maturity:
Obligations of states and political subdivisions		28,707		(215	)		8,813		(117	)
Mortgage-backed securities:
Government issued or guaranteed		812		(12	)		232,432		(2,058	)
Privately issued		—		—			105,355		(40,048	)

		29,519		(227	)		346,600		(42,223	)

Total	$	393,508		(4,133	)		1,672,388		(72,014	)


December 31, 2015
Investment securities available for sale:
U.S. Treasury and federal agencies	$	147,508		(187	)		—		—
Obligations of states and political subdivisions		865		(2	)		1,335		(40	)
Mortgage-backed securities:
Government issued or guaranteed		4,061,899		(48,534	)		7,216		(167	)
Privately issued		—		—			43		(2	)
Collateralized debt obligations		5,711		(335	)		2,063		(853	)
Other debt securities		12,935		(462	)		93,344		(19,728	)
Equity securities		18,073		(207	)		153		(147	)

		4,246,991		(49,727	)		104,154		(20,937	)


Investment securities held to maturity:
Obligations of states and political subdivisions		42,913		(335	)		5,853		(86	)
Mortgage-backed securities:
Government issued or guaranteed		459,983		(1,801	)		228,867		(6,016	)
Privately issued		—		—			112,155		(41,367	)

		502,896		(2,136	)		346,875		(47,469	)

Total	$	4,749,887		(51,863	)		451,029		(68,406	)

- 12 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

3.	Investment securities, continued

The Company owned 538 individual investment securities with aggregate gross unrealized losses of $76 million at March 31, 2016. Based on a review of each of the securities in the investment securities portfolio at March 31, 2016, the Company concluded that it expected to recover the amortized cost basis of its investment. As of March 31, 2016, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At March 31, 2016, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $536 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 loans acquired at a discount that were recorded at fair value at the acquisition date that is included in the consolidated balance sheet were as follows:


	March 31, 2016		December 31, 2015
	(in thousands)

Outstanding principal balance	$	2,918,333		3,122,935
Carrying amount:
Commercial, financial, leasing, etc.		71,577		78,847
Commercial real estate		588,983		644,284
Residential real estate		964,893		1,016,129
Consumer		681,535		725,807

	$	2,306,988		2,465,067

Purchased impaired loans included in the table above totaled $716 million at March 31, 2016 and $768 million at December 31, 2015, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for loans acquired at a discount for the three-month periods ended March 31, 2016 and 2015 follows:


	Three months ended March 31, 2016
	Purchased impaired			Other acquired			Total
	(in thousands)

Balance at beginning of period	$	184,618			296,434			481,052
Interest income		(14,062	)		(37,862	)		(51,924	)
Reclassifications from nonaccretable balance, net		629			5,664			6,293
Other (a)		—			4,781			4,781

Balance at end of period	$	171,185			269,017			440,202

- 13 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


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

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

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

(a)

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

A summary of current, past due and nonaccrual loans as of March 31, 2016 and December 31, 2015 were as follows:


	Current		30-89 Days past due		Accruing loans past due 90 days or more(a)		Accruing loans acquired at a discount past due 90 days or more(b)		Purchased impaired(c)		Nonaccrual		Total
March 31, 2016					(in thousands)
Commercial, financial, leasing, etc.	$	20,911,645		30,495		2,358		524		1,765		279,790		21,226,577
Real estate:
Commercial		23,740,729		149,108		41,776		6,818		39,840		171,256		24,149,527
Residential builder and developer		1,747,261		15,304		195		3,493		23,516		32,458		1,822,227
Other commercial construction		3,663,835		28,336		9,068		280		19,239		20,781		3,741,539
Residential		19,747,097		500,241		278,640		15,790		463,871		186,452		21,192,091
Residential-limited documentation		3,757,924		107,679		275		—		165,404		76,265		4,107,547
Consumer:
Home equity lines and loans		5,720,342		40,054		—		15,898		2,239		78,722		5,857,255
Automobile		2,580,241		33,439		—		2		—		14,817		2,628,499
Other		3,083,495		24,739		3,858		18,962		—		16,150		3,147,204

Total	$	84,952,569		929,395		336,170		61,767		715,874		876,691		87,872,466

- 14 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Current		30-89 Days past due		Accruing loans past due 90 days or more(a)		Accruing loans acquired at a discount past due 90 days or more(b)		Purchased impaired(c)		Nonaccrual		Total
December 31, 2015					(in thousands)
Commercial, financial, leasing, etc.	$	20,122,648		52,868		2,310		693		1,902		241,917		20,422,338
Real estate:
Commercial		23,645,354		172,439		12,963		8,790		46,790		179,606		24,065,942
Residential builder and developer		1,507,856		7,969		5,760		6,925		28,734		28,429		1,585,673
Other commercial construction		3,428,939		65,932		7,936		2,001		24,525		16,363		3,545,696
Residential		20,507,551		560,312		284,451		16,079		488,599		153,281		22,010,273
Residential-limited documentation		3,885,073		137,289		—		—		175,518		61,950		4,259,830
Consumer:
Home equity lines and loans		5,805,222		45,604		—		15,222		2,261		84,467		5,952,776
Automobile		2,446,473		56,181		—		6		—		16,597		2,519,257
Other		3,051,435		36,702		4,021		18,757		—		16,799		3,127,714

Total	$	84,400,551		1,135,296		317,441		68,473		768,329		799,409		87,489,499

(a)

Excludes loans acquired at a discount.

(b)

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

(c)

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

One-to-four family residential mortgage loans held for sale were $269 million and $353 million at March 31, 2016 and December 31, 2015, respectively. Commercial mortgage loans held for sale were $128 million at March 31, 2016 and $39 million at December 31, 2015.

Changes in the allowance for credit losses for the three months ended March 31, 2016 were as follows:


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

Beginning balance	$	300,404			326,831			72,238			178,320			78,199			955,992
Provision for credit losses		24,364			4,013			1,218			19,893			(488	)		49,000
Net charge-offs
Charge-offs		(6,149	)		(1,272	)		(6,972	)		(44,319	)		—			(58,712	)
Recoveries		5,247			2,413			1,887			6,925			—			16,472

Net charge-offs		(902	)		1,141			(5,085	)		(37,394	)		—			(42,240	)

Ending balance	$	323,866			331,985			68,371			160,819			77,711			962,752

- 15 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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


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

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

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

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

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

In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan-by-loan analysis of larger balance commercial loans and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also monitored by the Company’s loan review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes at any time. Except for consumer and residential real estate loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the

- 16 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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

The following tables provide information with respect to loans and leases that were considered impaired as of March 31, 2016 and December 31, 2015 and for the three month periods ended March 31, 2016 and 2015.


	March 31, 2016						December 31, 2015
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(in thousands)
With an allowance recorded:
Commercial, financial, leasing, etc.	$	204,786		223,269		58,714		179,037		195,821		44,752
Real estate:
Commercial		86,612		97,912		19,600		85,974		95,855		18,764
Residential builder and developer		6,581		8,296		839		3,316		5,101		196
Other commercial construction		2,358		2,678		397		3,548		3,843		348
Residential		77,579		95,679		4,348		79,558		96,751		4,727
Residential-limited documentation		87,791		101,841		7,000		90,356		104,251		8,000
Consumer:
Home equity lines and loans		27,544		28,540		3,904		25,220		26,195		3,777
Automobile		21,289		21,289		4,867		22,525		22,525		4,709
Other		17,876		17,876		4,844		17,620		17,620		4,820

		532,416		597,380		104,513		507,154		567,962		90,093

With no related allowance recorded:
Commercial, financial, leasing, etc.		105,342		126,130		—		93,190		110,735		—
Real estate:
Commercial		92,733		106,710		—		101,340		116,230		—
Residential builder and developer		28,938		49,177		—		27,651		47,246		—
Other commercial construction		18,811		37,498		—		13,221		31,477		—
Residential		17,574		28,336		—		19,621		30,940		—
Residential-limited documentation		17,362		29,544		—		18,414		31,113		—

		280,760		377,395		—		273,437		367,741		—


Total:
Commercial, financial, leasing, etc.		310,128		349,399		58,714		272,227		306,556		44,752
Real estate:
Commercial		179,345		204,622		19,600		187,314		212,085		18,764
Residential builder and developer		35,519		57,473		839		30,967		52,347		196
Other commercial construction		21,169		40,176		397		16,769		35,320		348
Residential		95,153		124,015		4,348		99,179		127,691		4,727
Residential-limited documentation		105,153		131,385		7,000		108,770		135,364		8,000
Consumer:
Home equity lines and loans		27,544		28,540		3,904		25,220		26,195		3,777
Automobile		21,289		21,289		4,867		22,525		22,525		4,709
Other		17,876		17,876		4,844		17,620		17,620		4,820

Total	$	813,176		974,775		104,513		780,591		935,703		90,093

- 17 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


	Three months ended March 31, 2016						Three months ended March 31, 2015
			Interest income recognized						Interest income recognized
	Average recorded investment		Total		Cash basis		Average recorded investment		Total		Cash basis
	(in thousands)
Commercial, financial, leasing, etc.	$	296,584		611		611		214,618		604		604
Real estate:
Commercial		182,454		1,474		1,474		153,070		1,102		1,102
Residential builder and developer		33,750		42		42		73,151		63		63
Other commercial construction		16,868		38		38		25,540		55		55
Residential		96,788		1,372		882		104,490		1,446		910
Residential-limited documentation		107,473		1,472		630		125,654		1,610		647
Consumer:
Home equity lines and loans		26,019		246		85		19,683		201		48
Automobile		21,962		339		36		29,013		450		54
Other		17,717		178		27		18,861		174		33

Total	$	799,615		5,772		3,825		764,080		5,705		3,516

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.

- 18 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


			Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential Builder and Developer		Other Commercial Construction
	(in thousands)
March 31, 2016
Pass	$	20,155,277		23,138,987		1,700,088		3,631,947
Criticized accrual		791,510		839,284		89,681		88,811
Criticized nonaccrual		279,790		171,256		32,458		20,781

Total	$	21,226,577		24,149,527		1,822,227		3,741,539


December 31, 2015
Pass	$	19,442,183		23,098,856		1,497,465		3,432,679
Criticized accrual		738,238		787,480		59,779		96,654
Criticized nonaccrual		241,917		179,606		28,429		16,363

Total	$	20,422,338		24,065,942		1,585,673		3,545,696

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 $52 million and $24 million, respectively, at March 31, 2016 and $55 million and $21 million, respectively, at December 31, 2015. 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 $32 million, respectively, at March 31, 2016 and $20 million and $28 million, respectively, at December 31, 2015.

The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors

- 19 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

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


	Commercial, Financial, Leasing, etc.		Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
March 31, 2016
Individually evaluated for impairment	$	58,714		20,611		11,348		13,615	$	104,288
Collectively evaluated for impairment		264,652		308,897		55,970		145,841		775,360
Purchased impaired		500		2,477		1,053		1,363		5,393

Allocated	$	323,866		331,985		68,371		160,819		885,041

Unallocated										77,711


Total									$	962,752


December 31, 2015
Individually evaluated for impairment	$	44,752		19,175		12,727		13,306	$	89,960
Collectively evaluated for impairment		255,615		307,000		57,624		163,511		783,750
Purchased impaired		37		656		1,887		1,503		4,083

Allocated	$	300,404		326,831		72,238		178,320		877,793

Unallocated										78,199


Total									$	955,992

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


	Commercial, Financial, Leasing, etc.		Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential		Consumer		Total
	(in thousands)
March 31, 2016
Individually evaluated for impairment	$	310,128		235,039		200,306		66,709	$	812,182
Collectively evaluated for impairment		20,914,684		29,395,659		24,470,057		11,564,010		86,344,410
Purchased impaired		1,765		82,595		629,275		2,239		715,874


Total	$	21,226,577		29,713,293		25,299,638		11,632,958	$	87,872,466


December 31, 2015
Individually evaluated for impairment	$	272,227		234,132		207,949		65,365	$	779,673
Collectively evaluated for impairment		20,148,209		28,863,130		25,398,037		11,532,121		85,941,497
Purchased impaired		1,902		100,049		664,117		2,261		768,329


Total	$	20,422,338		29,197,311		26,270,103		11,599,747	$	87,489,499

- 20 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

During the normal course of business, the Company modifies loans to maximize recovery efforts. If the borrower is experiencing financial difficulty and a concession is granted, the Company considers such modifications as troubled debt restructurings and classifies those loans as either nonaccrual loans or renegotiated loans. The types of concessions that the Company grants typically include principal deferrals and interest rate concessions, but may also include other types of concessions.

The tables below summarize the Company’s loan modification activities that were considered troubled debt restructurings for the three months ended March 31, 2016 and 2015:


			Recorded investment				Financial effects of modification
Three months ended March 31, 2016	Number		Pre- modification		Post- modification		Recorded investment (a)			Interest (b)
			(dollars in thousands)
Commercial, financial, leasing, etc.
Principal deferral		24	$	11,571	$	12,721	$	1,150		$	—
Combination of concession types		7		6,157		5,952		(205	)		—
Real estate:
Commercial
Principal deferral		16		3,483		3,448		(35	)		—
Combination of concession types		5		3,933		3,924		(9	)		(35	)
Residential
Principal deferral		17		1,981		2,191		210			—
Combination of concession types		10		2,321		2,369		48			—
Residential-limited documentation
Principal deferral		1		125		138		13			—
Combination of concession types		5		1,312		1,379		67			(339	)
Consumer:
Home equity lines and loans
Principal deferral		3		335		335		—			—
Combination of concession types		23		2,496		2,496		—			(283	)
Automobile
Principal deferral		48		521		521		—			—
Other		16		38		38		—			—
Combination of concession types		8		85		85		—			(3	)
Other
Principal deferral		26		374		374		—			—
Other		2		25		25		—			—
Combination of concession types		8		147		147		—			(27	)

Total		219	$	34,904	$	36,143	$	1,239		$	(687	)

(a)

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

(b)

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

- 21 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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


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

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

(a)

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

(b)

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

Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2016 and 2015 and for which there was a subsequent payment default during the three-month periods ended March 31, 2016 and 2015, respectively, were not material.

The amount of foreclosed residential real estate property held by the Company was $169 million and $172 million at March 31, 2016 and December 31, 2015, respectively. There were $309 million and $315 million at March 31, 2016 and December 31, 2015, respectively, of loans secured by residential real estate that were in the process of foreclosure.

- 22 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

5.	Borrowings

M&T had $515 million of fixed and variable rate junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2016 that are held by various trusts that were issued in connection with the issuance by those trusts of preferred capital securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from the issuances of the Capital Securities and the Common Securities were used by the trusts to purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are wholly owned by M&T and are the only class of each trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding trust. Under the Federal Reserve Board’s risk-based capital guidelines, beginning in 2016 none of the securities are includable in M&T’s Tier 1 regulatory capital, but do qualify for inclusion in Tier 2 regulatory capital.

Holders of the Capital Securities receive preferential cumulative cash distributions unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures as allowed by the terms of each such debenture, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. In general, the agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T.

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

Also included in long-term borrowings are agreements to repurchase securities of $1.9 billion at each of March 31, 2016 and December 31, 2015. The agreements reflect various repurchase dates through 2020, however, the contractual maturities of the underlying investment securities extend beyond such repurchase dates. The agreements are subject to legally enforceable master netting arrangements, however, the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $2.1 billion and $2.0 billion at March 31, 2016 and December 31, 2015, respectively.

- 23 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

6.	Shareholders’ equity

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

Issued and outstanding preferred stock of M&T as of March 31, 2016 and December 31, 2015 is presented below:


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

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

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

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

(a)

Dividends, if declared, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 719,175 at March 31, 2016 and December 31, 2015, respectively.

(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 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 March 31, 2016 and December 31, 2015. The obligation under that warrant was assumed by M&T in an acquisition.

- 24 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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 pension expense for defined benefit plans consisted of the following:


	Pension benefits						Other postretirement benefits
	Three months ended March 31
	2016			2015			2016			2015
	(in thousands)

Service cost	$	6,382			6,000			458			200
Interest cost on projected benefit obligation		20,883			17,775			1,205			650
Expected return on plan assets		(27,814	)		(23,575	)		—			—
Amortization of prior service credit		(825	)		(1,525	)		(350	)		(350	)
Amortization of net actuarial loss		8,300			11,175			—			25


Net periodic benefit cost	$	6,926			9,850			1,313			525

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $17,690,000 and $16,750,000 for the three months ended March 31, 2016 and 2015, respectively.

- 25 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8.	Earnings per common share

The computations of basic earnings per common share follow:


	Three months ended March 31
	2016			2015
	(in thousands, except per share)
Income available to common shareholders:

Net income	$	298,528			241,613
Less: Preferred stock dividends (a)		(20,318	)		(20,318	)

Net income available to common equity		278,210			221,295
Less: Income attributable to unvested stock-based compensation awards		(2,466	)		(2,465	)


Net income available to common shareholders	$	275,744			218,830

Weighted-average shares outstanding:

Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards		160,220			133,542
Less: Unvested stock-based compensation awards		(1,486	)		(1,493	)


Weighted-average shares outstanding		158,734			132,049

Basic earnings per common share	$	1.74			1.66

(a)

Including impact of not as yet declared cumulative dividends.

- 26 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8.	Earnings per common share, continued

The computations of diluted earnings per common share follow:


	Three months ended March 31
	2016			2015
	(in thousands, except per share)

Net income available to common equity	$	278,210			221,295
Less: Income attributable to unvested stock-based compensation awards		(2,462	)		(2,458	)


Net income available to common shareholders	$	275,748			218,837

Adjusted weighted-average shares outstanding:

Common and unvested stock-based compensation awards		160,220			133,542
Less: Unvested stock-based compensation awards		(1,486	)		(1,493	)
Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock		447			720


Adjusted weighted-average shares outstanding		159,181			132,769

Diluted earnings per common share	$	1.73			1.65

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

Stock-based compensation awards and warrants to purchase common stock of M&T representing approximately 2.8 million and 2.7 million common shares during the three-month periods ended March 31, 2016 and 2015, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

- 27 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9.	Comprehensive income

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


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

Balance - January 1, 2016	$	16,359			62,849			(489,660	)		(4,093	)	$	(414,545	)		162,918		$	(251,627	)

Other comprehensive income before reclassifications:
Unrealized holding gains (losses), net		(370	)		159,660			—			—			159,290			(62,680	)		96,610
Foreign currency translation adjustment		—			—			—			(83	)		(83	)		30			(53	)

Total other comprehensive income (loss) before reclassifications		(370	)		159,660			—			(83	)		159,207			(62,650	)		96,557


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

Accretion of unrealized holding losses on held-to-maturity (“HTM”) securities		—			968			—			—			968	(b)		(381	)		587
Gains realized in net income		—			(4	)		—			—			(4	)(c)		1			(3	)
Accretion of net gain on terminated cash flow hedges		—			—			—			(39	)		(39	)(d)		15			(24	)
Amortization of prior service credit		—			—			(1,175	)		—			(1,175	)(e)		462			(713	)
Amortization of actuarial losses		—			—			8,300			—			8,300	(e)		(3,266	)		5,034

Total reclassifications		—			964			7,125			(39	)		8,050			(3,169	)		4,881


Total gain (loss) during the period		(370	)		160,624			7,125			(122	)		167,257			(65,819	)		101,438


Balance - March 31, 2016	$	15,989			223,473			(482,535	)		(4,215	)	$	(247,288	)		97,099		$	(150,189	)

- 28 -

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

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

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


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

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

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


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


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

(a)

Other-than-temporary impairment

(b)

Included in interest income

(c)

Included in gain (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 plans
	With OTTI			All other		Defined benefit plans			Other			Total
	(in thousands)

Balance - December 31, 2015	$	9,921			38,166		(296,979	)		(2,735	)	$	(251,627	)

Net gain (loss) during period		(224	)		97,418		4,321			(77	)		101,438


Balance - March 31, 2016	$	9,697			135,584		(292,658	)		(2,812	)	$	(150,189	)

- 29 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments

As part of managing interest rate risk, the Company enters into interest rate swap agreements to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant as of March 31, 2016.

The net effect of interest rate swap agreements was to increase net interest income by $10 million and $11 million for the three-month periods ended March 31, 2016 and 2015, respectively.

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


					Weighted-
	Notional		Average		average rate
	amount		maturity		Fixed			Variable
	(in thousands)		(in years)
March 31, 2016
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		1.4		4.42	%		1.59	%


December 31, 2015
Fair value hedges:
Fixed rate long-term borrowings (a)	$	1,400,000		1.7		4.42	%		1.39	%

(a)

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

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

Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $18.9 billion and $18.4 billion at March 31, 2016 and December 31, 2015, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $2.8 billion and $1.6 billion at March 31, 2016 and December 31, 2015, respectively.

- 30 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued

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


	Asset derivatives				Liability derivatives
	Fair value				Fair value
	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
	(in thousands)
Derivatives designated and qualifying as hedging instruments
Fair value hedges:
Interest rate swap agreements (a)	$	41,259		43,892	$	—		—
Commitments to sell real estate loans (a)		412		1,844		3,243		656

		41,671		45,736		3,243		656

Derivatives not designated and qualifying as hedging instruments
Mortgage-related commitments to originate real estate loans for sale (a)		16,929		10,282		44		403
Commitments to sell real estate loans (a)		428		533		2,413		846
Trading:
Interest rate contracts (b)		329,739		203,517		278,981		153,723
Foreign exchange and other option and futures contracts (b)		17,807		8,569		16,888		7,022

		364,903		222,901		298,326		161,994


Total derivatives	$	406,574		268,637	$	301,569		162,650

(a)

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

(b)

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

- 31 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued


	Amount of gain (loss) recognized
	Three months ended March 31, 2016					Three months ended March 31, 2015
	Derivative			Hedged item		Derivative			Hedged item
	(in thousands)
Derivatives in fair value hedging relationships

Interest rate swap agreements:
Fixed rate long-term borrowings (a)	$	(2,633	)		1,870	$	(396	)		161


Derivatives not designated as hedging instruments

Trading:
Interest rate contracts (b)	$	974				$	660
Foreign exchange and other option and futures contracts (b)		1,212					2,789


Total	$	2,186				$	3,449

(a)

Reported as other revenues from operations.

(b)

Reported as trading account and foreign exchange gains.

The Company 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 $22 million and $18 million at March 31, 2016 and December 31, 2015, 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 $98 million and $59 million at March 31, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $95 million and $55 million at March 31, 2016 and December 31, 2015, respectively. The Company was required to post collateral relating to those positions of $84 million and $52 million, at March 31, 2016 and December 31, 2015, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt rating were to fall below specified ratings,

- 32 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10.

Derivative financial instruments, continued

the counterparties 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 March 31, 2016 was $19 million, for which the Company had posted collateral of $13 million in the normal course of business. If the credit risk-related contingent features had been triggered on March 31, 2016, the maximum amount of additional collateral the Company would have been required to post with 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 $24 million and $23 million at March 31, 2016 and December 31, 2015, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $21 million and $19 million at March 31, 2016 and December 31, 2015, respectively. Counterparties posted collateral relating to those positions of $21 million and $22 million at March 31, 2016 and December 31, 2015, 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 cleared through clearinghouses at March 31, 2016 was a net liability position of $156 million and at December 31, 2015 was a net liability position of $50 million. Collateral posted with clearinghouses was $204 million and $99 million at March 31, 2016 and December 31, 2015, respectively.

11.

Variable interest entities and asset securitizations

In accordance with GAAP, at December 31, 2015 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 had included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. In the first quarter of 2016, the securitization trust was terminated as the Company exercised its right to purchase the underlying mortgage loans pursuant to the clean-up call provisions of the trust. At December 31, 2015, the carrying value of the loans in the securitization trust was $81 million. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to the Company at December 31, 2015 was $13 million.

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 each of March 31, 2016 and December 31, 2015, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet and recognized $24 million in other assets for its “investment” in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 5.

- 33 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

11.

Variable interest entities and asset securitizations, continued

The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.1 billion at each of March 31, 2016 and December 31, 2015. 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 $290 million, including $80 million of unfunded commitments, at March 31, 2016 and $295 million, including $78 million of unfunded commitments, at December 31, 2015. Contingent commitments to provide additional capital contributions to these partnerships were not material at March 31, 2016. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as a limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements. 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 $11 million and $10 million of its investments in qualified affordable housing projects to income tax expense during the three-month periods ended March 31, 2016 and 2015, respectively, and recognized $14 million of tax credits and other tax benefits during each of those respective periods.

The Company serves as investment advisor for certain registered money-market funds. The Company has no explicit arrangement to provide support to those funds, but may waive portions of its management fees. Such waivers were not material during the three months ended March 31, 2016 and 2015.

12.

Fair value measurements

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections at March 31, 2016.

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.

- 34 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

•

Level 3 – Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

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

Trading account assets and liabilities

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

Investment securities available for sale

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

Included in collateralized debt obligations are securities backed by trust preferred securities issued by financial institutions and other entities. The Company could not obtain pricing indications for many of these securities from its two primary independent pricing sources. The Company, therefore, performed internal modeling to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at March 31, 2016 and December 31, 2015. 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 March 31, 2016, 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 $45 million, respectively, and at December 31, 2015 were $28 million and $47 million, respectively. Privately issued mortgage-backed securities and securities backed by trust preferred securities issued by financial institutions and other entities constituted all of the available-for-sale investment securities classified as Level 3 valuations.

- 35 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

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

Real estate loans held for sale

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

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

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

Interest rate swap agreements used for interest rate risk management

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

- 36 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

The following tables present assets and liabilities at March 31, 2016 and December 31, 2015 measured at estimated fair value on a recurring basis:


	Fair value measurements at March 31, 2016		Level 1(a)		Level 2(a)		Level 3
	(in thousands)

Trading account assets	$	467,987		69,689		398,298		—
Investment securities available for sale:
U.S. Treasury and federal agencies		202,192		—		202,192		—
Obligations of states and political subdivisions		5,448		—		5,448		—
Mortgage-backed securities:
Government issued or guaranteed		11,750,062		—		11,750,062		—
Privately issued		65		—		—		65
Collateralized debt obligations		45,040		—		—		45,040
Other debt securities		112,708		—		112,708		—
Equity securities		85,132		67,150		17,982		—

		12,200,647		67,150		12,088,392		45,105


Real estate loans held for sale		396,764		—		396,764		—
Other assets (b)		59,028		—		42,099		16,929

Total assets	$	13,124,426		136,839		12,925,553		62,034


Trading account liabilities	$	295,869		—		295,869		—
Other liabilities (b)		5,700		—		5,656		44

Total liabilities	$	301,569		—		301,525		44

- 37 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued


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

Trading account assets	$	273,783		56,763		217,020		—
Investment securities available for sale:
U.S. Treasury and federal agencies		299,997		—		299,997		—
Obligations of states and political subdivisions		6,028		—		6,028		—
Mortgage-backed securities:
Government issued or guaranteed		11,686,628		—		11,686,628		—
Privately issued		74		—		—		74
Collateralized debt obligations		47,393		—		—		47,393
Other debt securities		118,880		—		118,880		—
Equity securities		83,671		65,178		18,493		—

		12,242,671		65,178		12,130,026		47,467


Real estate loans held for sale		392,036		—		392,036		—
Other assets (b)		56,551		—		46,269		10,282

Total assets	$	12,965,041		121,941		12,785,351		57,749


Trading account liabilities	$	160,745		—		160,745		—
Other liabilities (b)		1,905		—		1,502		403

Total liabilities	$	162,650		—		162,247		403

(a)

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2016 and the year ended December 31, 2015.

(b)

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

- 38 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2016 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, 2016	$	74		$	47,393		$	9,879

Total gains (losses) realized/unrealized:
Included in earnings		—			—			23,898	(b)
Included in other comprehensive income		—			(2,148	)(c)		—
Settlements		(9	)		(205	)		—
Transfers in and/or out of Level 3 (a)		—			—			(16,892	)(d)


Balance – March 31, 2016	$	65		$	45,040		$	16,885


Changes in unrealized gains included in earnings related to assets still held at March 31, 2016	$	—		$	—		$	14,539	(b)

- 39 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

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


	Investment securities available for sale
	Privately issued mortgage-backed securities			Collateralized debt obligations			Other assets and other liabilities
	(in thousands)
Balance – January 1, 2015	$	103		$	50,316		$	17,347

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


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


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

(a)

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

(b)

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

(c)

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

(d)

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

- 40 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

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

Loans

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 10% to 90% at March 31, 2016. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Automobile collateral is typically valued by reference to independent pricing sources based on recent sales transactions of similar vehicles, and the related non-recurring fair value measurement adjustments have been classified as Level 2. Collateral values for other consumer installment loans are generally estimated based on historical recovery rates for similar types of loans. As these recovery rates are not readily observable by market participants, such valuation adjustments have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $226 million at March 31, 2016 ($127 million and $99 million of which were classified as Level 2 and Level 3, respectively), $210 million at December 31, 2015 ($106 million and $104 million of which were classified as Level 2 and Level 3, respectively) and $101 million at March 31, 2015 ($67 million and $34 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized for partial charge-offs of loans and loan impairment reserves on loans held by the Company on March 31, 2016 and 2015 were decreases of $27 million and $8 million for the three-month periods ended March 31, 2016 and 2015, respectively.

Assets taken in foreclosure of defaulted loans

Assets taken in foreclosure of defaulted loans are primarily comprised of commercial and residential real property and are generally measured at the lower of cost or fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2. Assets taken in foreclosure of defaulted loans subject to nonrecurring fair value measurement were $62 million and $11 million at March 31, 2016 and March 31, 2015, respectively. Changes in fair value recognized for those foreclosed assets held by the Company were not material during the three-month periods ended March 31, 2016 and 2015.

- 41 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

Significant unobservable inputs to Level 3 measurements

The following tables present quantitative information about significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at March 31, 2016 and December 31, 2015:


	Fair value at March 31, 2016		Valuation technique	Unobservable input/assumptions	Range (weighted- average)
	(in thousands)
Recurring fair value measurements

Privately issued mortgage–backed securities	$	65	Two independent pricing quotes	—	—

Collateralized debt obligations		45,040	Discounted cash flow	Probability of default	10%-56% (31%)
				Loss severity	100%

Net other assets (liabilities) (a)		16,885	Discounted cash flow	Commitment expirations	0%-66% (31%)

	Fair value at December 31, 2015		Valuation technique	Unobservable input/assumptions	Range (weighted- average)
	(in thousands)
Recurring fair value measurements

Privately issued mortgage–backed securities	$	74	Two independent pricing quotes	—	—

Collateralized debt obligations		47,393	Discounted cash flow	Probability of default	10%-56% (31%)
				Loss severity	100%

Net other assets (liabilities) (a)		9,879	Discounted cash flow	Commitment expirations	0%-60% (39%)

(a)

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

Sensitivity of fair value measurements to changes in unobservable inputs

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

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

- 42 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued

Disclosures of fair value of financial instruments

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


	March 31, 2016
	Carrying amount			Estimated fair value			Level 1		Level 2			Level 3
				(in thousands)
Financial assets:
Cash and cash equivalents	$	1,178,175		$	1,178,175		$	1,112,933	$	65,242		$	—
Interest-bearing deposits at banks		9,545,181			9,545,181			—		9,545,181			—
Trading account assets		467,987			467,987			69,689		398,298			—
Investment securities		15,467,320			15,506,052			67,150		15,256,530			182,372
Loans and leases:
Commercial loans and leases		21,226,577			20,875,827			—		—			20,875,827
Commercial real estate loans		29,713,293			29,569,740			—		127,736			29,442,004
Residential real estate loans		25,299,638			25,386,240			—		4,590,667			20,795,573
Consumer loans		11,632,958			11,553,135			—		—			11,553,135
Allowance for credit losses		(962,752	)		—			—		—			—

Loans and leases, net		86,909,714			87,384,942			—		4,718,403			82,666,539
Accrued interest receivable		318,486			318,486			—		318,486			—

Financial liabilities:
Noninterest-bearing deposits	$	(29,709,218	)	$	(29,709,218	)		—	$	(29,709,218	)		—
Savings and interest-checking deposits		(51,497,240	)		(51,497,240	)		—		(51,497,240	)		—
Time deposits		(12,841,331	)		(12,879,619	)		—		(12,879,619	)		—
Deposits at Cayman Islands office		(166,787	)		(166,787	)		—		(166,787	)		—
Short-term borrowings		(1,766,826	)		(1,766,826	)		—		(1,766,826	)		—
Long-term borrowings		(10,341,035	)		(10,338,217	)		—		(10,338,217	)		—
Accrued interest payable		(80,605	)		(80,605	)		—		(80,605	)		—
Trading account liabilities		(295,869	)		(295,869	)		—		(295,869	)		—

Other financial instruments:
Commitments to originate real estate loans for sale	$	16,885		$	16,885			—	$	—		$	16,885
Commitments to sell real estate loans		(4,816	)		(4,816	)		—		(4,816	)		—
Other credit-related commitments		(118,521	)		(118,521	)		—		—			(118,521	)
Interest rate swap agreements used for interest rate risk management		41,259			41,259			—		41,259			—

- 43 -

NOTES TO FINANCIAL STATEMENTS, CONTINUED

12.

Fair value measurements, continued


	December 31, 2015
	Carrying amount			Estimated fair value			Level 1		Level 2			Level 3
				(in thousands)
Financial assets:
Cash and cash equivalents	$	1,368,040		$	1,368,040		$	1,276,678	$	91,362		$	—
Interest-bearing deposits at banks		7,594,350			7,594,350			—		7,594,350			—
Trading account assets		273,783			273,783			56,763		217,020			—
Investment securities		15,656,439			15,660,877			65,178		15,406,404			189,295
Loans and leases:
Commercial loans and leases		20,422,338			20,146,201			—		—			20,146,201
Commercial real estate loans		29,197,311			29,044,244			—		38,774			29,005,470
Residential real estate loans		26,270,103			26,267,771			—		4,727,816			21,539,955
Consumer loans		11,599,747			11,550,270			—		—			11,550,270
Allowance for credit losses		(955,992	)		—			—		—			—

Loans and leases, net		86,533,507			87,008,486			—		4,766,590			82,241,896
Accrued interest receivable		306,496			306,496			—		306,496			—

Financial liabilities:
Noninterest-bearing deposits	$	(29,110,635	)	$	(29,110,635	)		—	$	(29,110,635	)		—
Savings and interest-checking deposits		(49,566,644	)		(49,566,644	)		—		(49,566,644	)		—
Time deposits		(13,110,392	)		(13,135,042	)		—		(13,135,042	)		—
Deposits at Cayman Islands office		(170,170	)		(170,170	)		—		(170,170	)		—
Short-term borrowings		(2,132,182	)