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M&T Bank 10-Q 2011 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2011
or
Commission File Number 1-9861
M&T BANK CORPORATION
(Exact name of registrant as specified in its charter)
(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. þ Yes o 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). þ Yes o 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). o Yes þ No
Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the
close of business on April 22, 2011: 120,789,167 shares.
M&T BANK CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 31, 2011
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
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M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
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M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
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NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the
Company”) were compiled in accordance with generally accepted accounting principles (“GAAP”) using
the accounting policies set forth in note 1 of Notes to Financial Statements included in the 2010
Annual Report. In the opinion of management, all adjustments necessary for a fair presentation
have been made and were all of a normal recurring nature.
2. Acquisitions
On November 5, 2010, M&T Bank, M&T’s principal banking subsidiary, entered into a purchase and
assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the
deposits, except certain brokered deposits, and acquire certain assets of K Bank, based in
Randallstown, Maryland. As part of the transaction, M&T Bank entered into a loss-share arrangement
with the FDIC whereby M&T Bank will be reimbursed by the FDIC for most losses it incurs on the
acquired loan portfolio. The transaction was accounted for using the acquisition method of
accounting and, accordingly, assets acquired and liabilities assumed were recorded at estimated
fair value on the acquisition date. Assets acquired in the transaction totaled approximately $556
million, including $154 million of loans and $186 million in cash, and liabilities assumed
aggregated $528 million, including $491 million of deposits. In accordance with GAAP, M&T Bank
recorded an after-tax gain on the transaction of $17 million ($28 million before taxes). The gain
reflects the amount of financial support and indemnification against loan losses that M&T Bank
obtained from the FDIC. There was no goodwill or other intangible assets recorded in connection
with this transaction. The operations obtained in the K Bank acquisition transaction did not have a
material impact on the Company’s consolidated financial position or results of operations.
On November 1, 2010, M&T announced that it had entered into a definitive agreement with
Wilmington Trust Corporation (“Wilmington Trust”), headquartered in Wilmington, Delaware, under
which Wilmington Trust will be acquired by M&T. Pursuant to the terms of the agreement, Wilmington
Trust common shareholders will receive .051372 shares of M&T common stock in exchange for each
share of Wilmington Trust common stock in a stock-for-stock transaction valued at $351 million
(with the price based on M&T’s closing price of $74.75 per share as of October 29, 2010), plus the
assumption of $330 million in preferred stock issued by Wilmington Trust as part of the Troubled
Asset Relief Program — Capital Purchase Program of the U.S. Department of Treasury (“U.S.
Treasury”).
At December 31, 2010, Wilmington Trust had approximately $10.9 billion of assets, including
$7.5 billion of loans, $10.1 billion of liabilities, including $9.0 billion of deposits, and $60.1
billion of combined assets under management, including $43.6 billion managed by Wilmington Trust
and $16.5 billion managed by affiliates. At a special
shareholder meeting held on March 22, 2011, Wilmington Trust’s
common shareholders approved the merger transaction. M&T announced on April 26, 2011 that it had received the approval of the Board of Governors of the
Federal Reserve System to acquire Wilmington Trust. Additional regulatory approvals, including those from the
New York State Banking Superintendent and the Delaware Banking Commissioner,
are still pending. Subject to the terms and conditions of the merger agreement, M&T expects to close the merger with
Wilmington Trust promptly after receiving the remaining regulatory approvals and after the 15-day waiting period
associated with the Federal Reserve Board’s approval order has expired.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. Acquisitions, continued
In connection with the K Bank acquisition transaction and the pending Wilmington Trust
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 the
conversion of systems and/or integration of operations; costs related to branch and office
consolidations; initial marketing and promotion expenses designed to introduce M&T Bank to its new
customers; travel costs; and printing, postage, supplies and other costs of completing the
transactions and commencing operations in new markets and offices. There were no merger-related
expenses during the three months ended March 31, 2010. A summary of merger-related expenses
associated with the acquisition transactions included in the consolidated statement of income for
the three months ended March 31, 2011 follows:
3. Investment securities
The amortized cost and estimated fair value of investment securities were as follows:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities, continued
Gross realized gains on investment securities were $39.4 million and $1.2 million for the
quarters ended March 31, 2011 and 2010, respectively. Gross realized losses on investment
securities were $36 thousand and $777 thousand for the quarters ended March 31, 2011 and 2010,
respectively. During the three-month period ended March 31, 2011, the Company sold residential
mortgage-backed securities guaranteed by the Federal National Mortgage Association
(“Fannie Mae”) and the Federal Home Loan Mortgage Corporation
(“Freddie Mac”) having an aggregate amortized cost of approximately $484
million which resulted in a gain of $39 million (pre-tax). The Company recognized $16 million
(pre-tax) and $27 million (pre-tax) of other-than-temporary impairment losses during the quarters
ended March 31, 2011 and 2010, respectively, related to privately issued mortgage-backed
securities. The impairment charges were recognized in light of deterioration of real estate values
and continued high levels of delinquencies and charge-offs of underlying mortgage loans
collateralizing those securities. The other-than-temporary losses represent management’s estimate
of credit losses inherent in the securities considering projected cash flows using assumptions for
delinquency rates, loss severities, and other estimates of future
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities, continued
collateral performance. The following table displays changes in credit losses for debt
securities recognized in earnings for the three months ended March 31, 2011 and March 31, 2010.
At March 31, 2011, the amortized cost and estimated fair value of debt securities by
contractual maturity were as follows:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities, continued
A summary of investment securities that as of March 31, 2011 and December 31, 2010 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:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Investment securities, continued
The Company owned 562 individual investment securities with aggregate gross unrealized
losses of $368 million at March 31, 2011. Approximately $323 million of the unrealized losses
pertain to privately issued mortgage-backed securities with a cost basis of $1.5 billion. The
Company also had $38 million of unrealized losses on trust preferred securities issued by financial
institutions, securities backed by trust preferred securities issued by financial institutions and
other entities, and other debt securities having a cost basis of $161 million. Based on a review
of each of the remaining securities in the investment securities portfolio at March 31, 2011, with
the exception of the aforementioned securities for which other-than-temporary impairment losses
were recognized, the Company concluded that it expected to recover the amortized cost basis of its
investment. As of March 31, 2011, 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 March 31, 2011, the
Company has not identified events or changes in circumstances which may have a significant adverse
effect on the fair value of the $390 million of cost method investment securities.
4. Loans and leases and the allowance for credit losses
Interest income on acquired loans that were recorded at fair value at the acquisition date for the
three months ended March 31, 2011 and 2010 was $41 million and $43 million, respectively. The
outstanding principal balance and the carrying amount of such loans that is included in the
consolidated balance sheet at March 31, 2011 is as follows:
Receivables obtained in acquisitions for which there was specific evidence of credit
deterioration at the acquisition date and for which it was deemed probable that the Company would
be unable to collect all contractually required principal and interest payments were not material.
A summary of current, past due and nonaccrual loans as of March 31, 2011 and December 31, 2010
were as follows:
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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, 2011 were
as follows:
Despite the above allocation, the allowance for credit losses is general in nature and is
available to absorb losses from any portfolio segment. Changes in the allowance for credit losses
for the three months ended March 31, 2010 were as follows:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
In ascertaining the adequacy of the allowance for credit losses, the Company estimates losses
attributable to specific troubled credits identified through both normal and detailed or
intensified credit review processes and also estimates losses inherent in other loans and leases on
a collective basis. For purposes of determining the level of the allowance for credit losses, the
Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the
Company’s loan and lease portfolios are determined through a loan by loan analysis of larger
balance commercial and commercial real estate loans that are in nonaccrual status and by applying
loss factors to groups of loan balances based on loan type and management’s classification of such
loans under the Company’s loan grading system. Measurement of the specific loss components is
typically based on expected future cash flows, collateral values and other factors that may impact
the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes
an extensive loan grading system which is applied to all commercial and commercial real estate
credits. 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 extensively
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, financial condition, 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. 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 impaired loans and leases as
of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and March 31,
2010.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
The following table summarizes the loan grades applied to the various classes of the
Company’s commercial and commercial real estate loans as of March 31, 2011 and December 31, 2010.
In assessing the adequacy of the allowance for credit losses, residential real estate loans
and consumer loans are generally evaluated collectively after considering such factors as payment
performance, collateral values and trends related thereto. 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 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. In
addition, the Company also provides an inherent unallocated portion of the allowance that 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.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Loans and leases and the allowance for credit losses, continued
At March 31, 2011 and December 31, 2010, the allocation of the allowance for credit losses
summarized on the basis of the Company’s impairment methodology was as follows:
The recorded investment in loans and leases summarized on the basis of the Company’s
impairment methodology as of March 31, 2011 and December 31, 2010 was as follows:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. Borrowings
The Company had $1.2 billion of fixed and floating rate junior subordinated deferrable interest
debentures (“Junior Subordinated Debentures”) outstanding at March 31, 2011 that are held by
various trusts and were issued in connection with the issuance by those trusts of preferred capital
securities (“Capital Securities”) and common securities (“Common Securities”). The proceeds from
the issuances of the Capital Securities and the Common Securities were used by the trusts to
purchase the Junior Subordinated Debentures. The Common Securities of each of those trusts are
wholly owned by M&T and are the only class of each trust’s securities possessing general voting
powers. The Capital Securities represent preferred undivided interests in the assets of the
corresponding trust. Under the Federal Reserve Board’s current risk-based capital guidelines, the
Capital Securities are includable in M&T’s Tier 1 capital. However, the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 that was signed into law on July 21, 2010 provides for a
three-year phase-in related to the exclusion of trust preferred capital securities from Tier 1
capital for large financial institutions, including M&T. That phase-in period begins on January 1,
2013.
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 the event of an extended interest period exceeding twenty quarterly
periods for $350 million of Junior Subordinated Debentures due January 31, 2068, M&T must fund the
payment of accrued and unpaid interest through an alternative payment mechanism, which requires M&T
to issue common stock, non-cumulative perpetual preferred stock or warrants to purchase common
stock until M&T has raised an amount of eligible proceeds at least equal to the aggregate amount of
accrued and unpaid deferred interest on the Junior Subordinated Debentures due January 31, 2068.
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 2068) 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. In connection with the issuance of 8.50% Enhanced Trust Preferred
Securities associated with $350 million of Junior Subordinated Debentures maturing in 2068, M&T
entered into a replacement capital covenant that provides that neither M&T nor any of its
subsidiaries will repay, redeem or purchase any of the Junior Subordinated Debentures due January
31, 2068 or the 8.50% Enhanced Trust Preferred Securities prior to January 31, 2048, with certain
limited exceptions, except to the extent that, during the 180 days prior to the date of that
repayment, redemption or purchase, M&T and its subsidiaries have received proceeds from the sale of
qualifying securities that (i) have equity-like characteristics that are the same as, or more
equity-like
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. Borrowings, continued
than, the applicable characteristics of the 8.50% Enhanced Trust Preferred Securities or the Junior
Subordinated Debentures due January 31, 2068, as applicable, at the time of repayment, redemption
or purchase, and (ii) M&T has obtained the prior approval of the Federal Reserve Board, if
required.
6. Shareholders’ equity
M&T is authorized to issue 1,000,000 shares of preferred stock with a $1.00 par value per share.
Preferred shares outstanding rank senior to common shares both as to dividends and liquidation
preference, but have no general voting rights.
Issued and outstanding preferred stock of M&T is presented below:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Shareholders’ equity, continued
As noted by M&T at the time the merger with Wilmington Trust was announced on November 1,
2010, following completion of the merger, M&T expects its capital ratios at the end of the second
quarter of 2011 to be comparable to what they were as of September 30, 2010. Pursuant to its
capital plan, M&T intends to undertake a series of actions during the second quarter of 2011:
7. Pension plans and other postretirement benefits
The Company provides defined benefit pension and other postretirement benefits (including health
care and life insurance benefits) to qualified retired employees. Net periodic benefit cost for
defined benefit plans consisted of the following:
Expense incurred in connection with the Company’s defined contribution pension and retirement
savings plans totaled $10,176,000 and $11,690,000 for the three months ended March 31, 2011 and
2010, respectively.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. Earnings per common share
The computations of basic earnings per common share follow:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. Earnings per common share, continued
The computations of diluted earnings per common share follow:
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. During the first
quarters of 2011 and 2010, the Company 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, warrants to purchase common stock of M&T and preferred stock
convertible into shares of M&T common stock representing approximately 10.5 million and 11.9
million common shares during the three-month periods ended March 31, 2011 and 2010, respectively,
were not included in the computations of diluted earnings per common share because the effect on
those periods would have been antidilutive.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. Comprehensive income
The following table displays the components of other comprehensive income:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. Comprehensive income, continued
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. Comprehensive income, continued
Accumulated other comprehensive income (loss), net consisted of unrealized gains (losses) as
follows:
10. Derivative financial instruments
As part of managing interest rate risk, the Company enters into interest rate swap agreements to
modify the repricing characteristics of certain portions of the Company’s portfolios of earning
assets and interest-bearing liabilities. The Company designates interest rate swap agreements
utilized in the management of interest rate risk as either fair value hedges or cash flow hedges.
Interest rate swap agreements are generally entered into with counterparties that meet established
credit standards and most contain master netting and collateral provisions protecting the at-risk
party. Based on adherence to the Company’s credit standards and the presence of the netting and
collateral provisions, the Company believes that the credit risk inherent in these contracts is not
significant as of March 31, 2011.
The net effect of interest rate swap agreements was to increase net interest income by $10
million and $11 million for the three months ended March 31, 2011 and 2010, 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:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. Derivative financial instruments, continued
The Company utilizes commitments to sell residential and commercial real estate loans to hedge
the exposure to changes in the fair value of real estate loans held for sale. Such commitments
have generally been designated as fair value hedges. The Company also utilizes commitments to sell
real estate loans to offset the exposure to changes in fair value of certain commitments to
originate real estate loans for sale.
Derivative financial instruments used for trading purposes included interest rate contracts,
foreign exchange and other option contracts, foreign exchange forward and spot contracts, and
financial futures. Interest rate contracts entered into for trading purposes had notional values of
$12.3 billion and $12.8 billion at March 31, 2011 and December 31, 2010, respectively. The notional
amounts of foreign currency and other option and futures contracts entered into for trading
purposes aggregated $982 million and $769 million at March 31, 2011 and December 31, 2010,
respectively.
Information about the fair values of derivative instruments in the Company’s
consolidated balance sheet and consolidated statement of income follows:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. Derivative financial instruments, continued
In addition, the Company also has commitments to sell and commitments to originate residential
and commercial real estate loans that are considered derivatives. The Company designates certain
of the commitments to sell real estate loans as fair value hedges of real estate loans held for
sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to
changes in the fair value of certain commitments to originate real estate loans for sale. As a
result of these activities, net unrealized pre-tax gains related to hedged loans held for sale,
commitments to originate loans for sale and commitments to sell loans were approximately $19
million and $17 million at March 31, 2011 and December 31, 2010, 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 aggregate fair value of derivative financial instruments in a net liability position at
March 31, 2011 for which the Company was required to post collateral was $174 million. The fair
value of collateral posted for such instruments was $159 million.
The Company’s credit exposure with respect to the estimated fair value as of March 31, 2011 of
interest rate swap agreements used for managing interest rate risk has been substantially mitigated
through master netting agreements with trading account interest rate contracts with the same
counterparties as well as counterparty postings of $60 million of collateral with the Company.
Trading account interest rate swap agreements entered into with customers are subject to the
Company’s credit standards and often contain collateral provisions.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. Variable interest entities and asset securitizations
In accordance with GAAP, the Company determined that it was the primary beneficiary of a
residential mortgage loan securitization trust considering its role as servicer and its retained
subordinated interests in the trust. As a result, the Company has included the one-to-four family
residential mortgage loans that were included in the trust in its consolidated financial
statements. At March 31, 2011 and December 31, 2010, the carrying values of the loans in the
securitization trust were $236 million and $265 million, respectively. The outstanding principal
amount of mortgage-backed securities issued by the qualified special
purpose trust that was held by parties unrelated to M&T at March 31,
2011 and December 31, 2010 was $37 million and $40 million, respectively. Because the transaction was non-recourse, the Company’s maximum exposure to loss as a result of its
association with the trust at March 31, 2011 is limited to realizing the carrying value of the
loans less the amount of the mortgage-backed securities held by third parties.
As described in note 5, M&T has issued junior subordinated debentures payable to various
trusts that have issued Capital Securities. M&T owns the common securities of those trust entities.
The Company is not considered to be the primary beneficiary of those entities and, accordingly, the
trusts are not included in the Company’s consolidated financial statements. At March 31, 2011 and
December 31, 2010, the Company included the junior subordinated debentures as “long-term
borrowings” in its consolidated balance sheet. The Company has recognized $34 million in other
assets for its “investment” in the common securities of the trusts that will be concomitantly
repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior
subordinated debentures associated with preferred capital securities described in note 5.
The Company has invested as a limited partner in various real estate partnerships that
collectively had total assets of approximately $1.2 billion and $1.1 billion at March 31, 2011 and
December 31, 2010, respectively. Those partnerships generally construct or acquire properties for
which the investing partners are eligible to receive certain federal income tax credits in
accordance with government guidelines. Such investments may also provide tax deductible losses to
the partners. The partnership investments also assist the Company in achieving its community
reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of
the partnerships. However, the tax credits that result from the Company’s investments in such
partnerships are generally subject to recapture should a partnership fail to comply with the
respective government regulations. The Company’s maximum exposure to loss of its investments in
such partnerships was $249 million, including $71 million of unfunded commitments, at March 31,
2011 and $258 million, including $81 million of unfunded commitments, at December 31, 2010. 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. In accordance with the accounting provisions for
variable interest entities, the Company, in its position as limited partner, does not direct the
activities that most significantly impact the economic performance of the partnerships and,
therefore, the partnership entities are not included in the Company’s consolidated financial
statements.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
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, 2011.
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.
When available, the Company attempts to use quoted market prices in active markets to
determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in
active markets are not available, fair value is often determined using model-based techniques
incorporating various assumptions including interest rates, prepayment speeds and credit losses.
Assets and liabilities valued using model-based techniques are classified as either Level 2 or
Level 3, depending on the lowest level classification of an input that is considered significant to
the overall valuation. The following is a description of the valuation methodologies used for the
Company’s assets and liabilities that are measured on a recurring basis at estimated fair value.
Trading account assets and liabilities
Trading account assets and liabilities consist primarily of interest rate swap agreements and
foreign exchange contracts with customers who require such services with offsetting positions with
third parties to minimize the Company’s risk with respect to such transactions. The Company
generally determines the fair value of its derivative trading account assets and liabilities using
externally developed pricing models based on market observable inputs and therefore classifies such
valuations as Level 2. Mutual funds held in connection with deferred compensation arrangements
have been classified as Level 1 valuations. Valuations of investments in municipal and other bonds
can generally be obtained through reference to quoted prices in less active markets for the same or
similar securities or through model-based techniques in which all significant inputs are
observable and, therefore, such valuations have been classified as Level 2.
Investment securities available for sale
The majority of the Company’s available-for-sale investment securities have been valued by
reference to prices for similar securities or through model-based techniques in which all
significant inputs are observable and, therefore, such valuations have been classified as Level 2.
Certain investments in mutual funds and equity securities are actively traded and therefore have
been classified as Level 1 valuations.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
Trading activity in privately issued mortgage-backed securities has been limited. The markets
for such securities were generally characterized by a sharp reduction of non-agency mortgage-backed
securities issuances, a significant reduction in trading volumes and wide bid-ask spreads, all
driven by the lack of market participants. Although estimated prices were generally obtained for
such securities, the Company was significantly restricted in the level of market observable
assumptions used in the valuation of its privately issued mortgage-backed securities portfolio.
Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on
discount rates were difficult to observe at the individual bond level. Because of the inactivity in
the markets and the lack of observable valuation inputs, the Company has classified the valuation
of privately issued mortgage-backed securities as Level 3.
GAAP provides guidance for estimating fair value when the volume and level of trading activity
for an asset or liability have significantly decreased. The Company has concluded that there has
been a significant decline in the volume and level of activity in the market for privately issued
mortgage-backed securities. Therefore, the Company supplemented its determination of fair value
for many of its privately issued mortgage-backed securities by obtaining pricing indications from
two independent sources at March 31, 2011 and December 31, 2010. However, the Company could not
readily ascertain that the basis of such valuations could be ascribed to orderly and observable
trades in the market for privately issued residential mortgage-backed securities. As a result, the
Company also performed internal modeling to estimate the cash flows and fair value of privately
issued residential mortgage-backed securities with an amortized cost basis of $1.4 billion at March
31, 2011 and $1.5 billion at December 31, 2010. The Company’s internal modeling techniques
included discounting estimated bond-specific cash flows using assumptions about cash flows
associated with loans underlying each of the bonds, including estimates about the timing and amount
of credit losses and prepayments. In estimating those cash flows, the Company used assumptions as
to future delinquency, defaults and loss rates; including assumptions for further home price
depreciation. Differences between internal model valuations and external pricing indications were
generally considered to be reflective of the lack of liquidity in the market for privately issued
mortgage-backed securities given the nature of the cash flow modeling performed in the Company’s
assessment of value. To determine the point within the range of potential values that was most
representative of fair value under current market conditions for each of the bonds, the Company
computed values based on judgmentally applied weightings of the internal model valuations and the
indications obtained from the average of the two independent pricing sources. Weightings applied
to internal model valuations generally ranged from zero to 40% depending on bond structure and
collateral type, with prices for bonds in non-senior tranches generally receiving lower weightings
on the internal model results and senior bonds receiving a higher model weighting. At March 31,
2011, weighted-average reliance on internal model pricing for the bonds modeled was 34% with a 66%
average weighting placed on the values provided by the independent sources. The Company concluded
its estimate of fair value for the $1.4 billion of privately issued residential mortgage-backed
securities to approximate $1.3 billion, which implies a weighted-average market yield based on
reasonably likely cash flows of 8.3%. Other valuations of privately issued residential
mortgage-backed securities were determined by reference to independent pricing sources without
adjustment.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
Included in collateralized debt obligations are securities backed by trust preferred
securities issued by financial institutions and other entities. Given the severe disruption in the
credit markets and lack of observable trade information, 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, 2011 and December 31,
2010. The modeling techniques included discounting estimated cash flows using bond-specific
assumptions about defaults, deferrals and prepayments of the trust preferred securities underlying
each bond. The estimation of cash flows included assumptions as to 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. At March 31, 2011, the total
amortized cost and fair value of securities backed by trust preferred securities issued by
financial institutions and other entities was $94 million and $114 million, respectively, and at
December 31, 2010 were $95 million and $111 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 as of March 31, 2011 and December 31, 2010.
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.
Estimated commitment expirations are considered a significant unobservable input, which results in
a Level 3 classification. The Company includes the expected net future cash flows related to the
associated servicing of the loan in the fair value measurement of a derivative loan commitment.
The estimated value ascribed to the expected net future servicing cash flows is also considered a
significant unobservable input contributing to the Level 3 classification of commitments to
originate real
estate loans for sale.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
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 assets and has considered its own credit risk in
the valuation of its interest rate swap liabilities.
The following tables present assets and liabilities at March 31, 2011 and December 31, 2010
measured at estimated fair value on a recurring basis:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring
basis during the three months ended March 31, 2011 were as follows:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring
basis during the three months ended March 31, 2010 were as follows:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
The Company is required, on a nonrecurring basis, to adjust the carrying value of certain
assets or provide valuation allowances related to certain assets using fair value measurements.
The more significant of those assets follow.
Loans
Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company
records nonrecurring adjustments to the carrying value of loans based on fair value measurements
for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also
include certain impairment amounts for collateral-dependent loans when establishing the allowance
for credit losses. Such amounts are generally based on the fair value of the underlying collateral
supporting the loan and, as a result, the carrying value of the loan less the calculated valuation
amount does not necessarily represent the fair value of the loan. Real estate collateral is
typically valued using appraisals or other indications of value based on recent comparable sales of
similar properties or assumptions generally observable in the marketplace and the related
nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless
significant adjustments have been made to the valuation that are not readily observable by market
participants. Estimates of fair value used for other collateral supporting commercial loans
generally are based on assumptions not observable in the marketplace and therefore such valuations
have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $550
million at March 31, 2011 ($267 million and $283 million of which were classified as Level 2 and
Level 3, respectively) and $793 million at March 31, 2010 ($471 million and $322 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,
2011 and 2010 were decreases of $48 million and $58 million for the three-month periods ended March
31, 2011 and 2010, 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 $34 million and $17
million at March 31, 2011 and March 31, 2010, respectively. Changes in fair value recognized for
those foreclosed assets held by the Company at March 31, 2011 were $9 million for the
three months ended March 31, 2011. Changes in fair value recognized for those foreclosed assets
held by the Company at March 31, 2010 were $10 million for the three months ended March
31, 2010.
Disclosures of fair value of financial instruments
With the exception of marketable securities, certain off-balance sheet financial instruments and
one-to-four family residential mortgage loans originated for sale, the Company’s financial
instruments are not readily marketable and market prices do not exist. The Company, in attempting
to comply with the provisions of GAAP that require disclosures of fair value of financial
instruments, has not attempted to market its financial instruments to potential buyers, if any
exist. Since negotiated prices in illiquid markets depend greatly upon the then present motivations
of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from
any estimate of fair value made without the benefit of negotiations. Additionally, changes in
market interest rates can dramatically impact the value of financial instruments in a short period
of time. Additional information about the assumptions and calculations utilized follows.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
The carrying amounts and estimated fair value for financial instrument assets (liabilities)
are presented in the following table:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
The following assumptions, methods and calculations were used in determining the estimated
fair value of financial instruments not measured at fair value in the consolidated balance sheet.
Cash and cash equivalents, interest-bearing deposits at banks, short-term borrowings, accrued
interest receivable and accrued interest payable
Due to the nature of cash and cash equivalents and the near maturity of interest-bearing deposits
at banks, short-term borrowings, accrued interest receivable and accrued interest payable, the
Company estimated that the carrying amount of such instruments approximated estimated fair value.
Investment securities
Estimated fair values of investments in readily marketable securities were generally based on
quoted market prices. Investment securities that were not readily marketable were assigned amounts
based on estimates provided by outside parties or modeling techniques that relied upon discounted
calculations of projected cash flows or, in the case of other investment securities, which include
capital stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York,
at an amount equal to the carrying amount.
Loans and leases
In general, discount rates used to calculate values for loan products were based on the Company’s
pricing at the respective period end. A higher discount rate was assumed with respect to estimated
cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated
credit losses. However, such estimates made by the Company may not be indicative of assumptions and
adjustments that a purchaser of the Company’s loans and leases would seek.
Deposits
Pursuant to GAAP, the estimated fair value ascribed to noninterest-bearing deposits, savings
deposits and NOW accounts must be established at carrying value because of the customers’ ability
to withdraw funds immediately. Time deposit accounts are required to be revalued based upon
prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to
time deposits were based on discounted cash flow calculations using prevailing market interest
rates based on the Company’s pricing at the respective date for deposits with comparable remaining
terms to maturity.
The Company believes that deposit accounts have a value greater than that prescribed by GAAP.
The Company feels, however, that the value associated with these deposits is greatly influenced by
characteristics of the buyer, such as the ability to reduce the costs of servicing the deposits and
deposit attrition which often occurs following an acquisition.
Long-term borrowings
The amounts assigned to long-term borrowings were based on quoted market prices, when available, or
were based on discounted cash flow calculations using prevailing market interest rates for
borrowings of similar terms and credit risk.
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 market
prices for commitments to sell real estate loans to certain government-sponsored entities and other
parties.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. Fair value measurements, continued
Interest rate swap agreements used for interest rate risk management
The estimated fair value of interest rate swap agreements used for interest rate risk management
represents the amount the Company would have expected to receive or pay to terminate such
agreements.
Other commitments and contingencies
As described in note 13, in the normal course of business, various commitments and contingent
liabilities are outstanding, such as loan commitments, credit guarantees and letters of credit. The
Company’s pricing of such financial instruments is based largely on credit quality and
relationship, probability of funding and other requirements. Loan commitments often have fixed
expiration dates and contain termination and other clauses which provide for relief from funding in
the event of significant deterioration in the credit quality of the customer. The rates and terms
of the Company’s loan commitments, credit guarantees and letters of credit are competitive with
other financial institutions operating in markets served by the Company. The Company believes that
the carrying amounts, which are included in other liabilities, are reasonable estimates of the fair
value of these financial instruments.
The Company does not believe that the estimated information presented herein is representative
of the earnings power or value of the Company. The preceding analysis, which is inherently limited
in depicting fair value, also does not consider any value associated with existing customer
relationships nor the ability of the Company to create value through loan origination, deposit
gathering or fee generating activities.
Many of the estimates presented herein are based upon the use of highly subjective information
and assumptions and, accordingly, the results may not be precise. Management believes that fair
value estimates may not be comparable between financial institutions due to the wide range of
permitted valuation techniques and numerous estimates which must be made. Furthermore, because the
disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually
realized or paid upon maturity or settlement of the various financial instruments could be
significantly different.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. Commitments and contingencies
In the normal course of business, various commitments and contingent liabilities are outstanding.
The following table presents the Company’s significant commitments. Certain of these commitments
are not included in the Company’s consolidated balance sheet.
Commitments to extend credit are agreements to lend to customers, generally having fixed
expiration dates or other termination clauses that may require payment of a fee. Standby and
commercial letters of credit are conditional commitments issued to guarantee the performance of a
customer to a third party. Standby letters of credit generally are contingent upon the failure of
the customer to perform according to the terms of the underlying contract with the third party,
whereas commercial letters of credit are issued to facilitate commerce and typically result in the
commitment being funded when the underlying transaction is consummated between the customer and a
third party. The credit risk associated with commitments to extend credit and standby and
commercial letters
of credit is essentially the same as that involved with extending loans to customers and is subject
to normal credit policies. Collateral may be obtained based on management’s assessment of the
customer’s creditworthiness.
Financial guarantees and indemnification contracts are oftentimes similar to standby letters
of credit and include mandatory purchase agreements issued to ensure that customer obligations are
fulfilled, recourse obligations associated with sold loans, and other guarantees of customer
performance or compliance with designated rules and regulations. Included in financial guarantees
and indemnification contracts are loan principal amounts sold with recourse in conjunction with the
Company’s involvement in the Fannie Mae Delegated Underwriting and Servicing program. The Company’s
maximum credit risk for recourse associated with loans sold under this program totaled
approximately $1.6 billion at each of March 31, 2011 and December 31, 2010.
Since many loan commitments, standby letters of credit, and guarantees and indemnification
contracts expire without being funded in whole or in part, the contract amounts are not necessarily
indicative of future cash flows.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. Commitments and contingencies, continued
The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the
fair value of real estate loans held for sale. Such commitments are considered derivatives and
along with commitments to originate real estate loans to be held for sale are generally recorded in
the consolidated balance sheet at estimated fair market value.
The Company has an agreement with the Baltimore Ravens of the National Football League whereby
the Company obtained the naming rights to a football stadium in Baltimore, Maryland. Under the
agreement, the Company is obligated to pay $5 million per year through 2013 and $6 million per year
from 2014 through 2017.
The Company also has commitments under long-term operating leases.
The Company reinsures credit life and accident and health insurance purchased by consumer loan
customers. The Company also enters into reinsurance contracts with third party insurance companies
who insure against the risk of a mortgage borrower’s payment default in connection with certain
mortgage loans originated by the Company. When providing reinsurance coverage, the Company
receives a premium in exchange for accepting a portion of the insurer’s risk of loss. The
outstanding loan principal balances reinsured by the Company were approximately $82 million at
March 31, 2011. Assets of subsidiaries providing reinsurance that are available to satisfy claims
totaled approximately $53 million at March 31, 2011. The amounts noted above are not necessarily
indicative of losses which may ultimately be incurred. Such losses are expected to be
substantially less because most loans are repaid by borrowers in accordance with the original loan
terms. Management believes any reinsurance losses that may be payable by the Company will not be
material to the Company’s consolidated financial position.
The Company is contractually obligated to repurchase previously sold residential real estate
loans that do not ultimately meet investor sale criteria related to underwriting procedures or loan
documentation. When required to do so, the Company may reimburse loan purchasers for losses
incurred or may repurchase certain loans. The Company reduces residential mortgage banking
revenues by an estimate for losses related to its obligations to loan purchasers. The amount of
those charges is based on the volume of loans sold, the level of reimbursement requests received
from loan purchasers and estimates of losses that may be associated with previously sold loans. At
March 31, 2011, management believes that any remaining liability arising out of the Company’s
obligation to loan purchasers is not material to the Company’s consolidated financial position.
M&T and its subsidiaries are subject in the normal course of business to various pending and
threatened legal proceedings in which claims for monetary damages are asserted. Management, after
consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising
out of litigation pending against M&T or its subsidiaries will be material to the Company’s
consolidated financial position, but at the present time is not in a position to determine whether
such litigation will have a material adverse effect on the Company’s consolidated results of
operations in any future reporting period.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. Segment information
Reportable segments have been determined based upon the Company’s internal profitability reporting
system, which is organized by strategic business unit. Certain strategic business units have been
combined for segment information reporting purposes where the nature of the products and services,
the type of customer and the distribution of those products and services are similar. The
reportable segments are Business Banking, Commercial Banking, Commercial Real Estate, Discretionary
Portfolio, Residential Mortgage Banking and Retail Banking.
The financial information of the Company’s segments was compiled utilizing the accounting
policies described in note 22 to the Company’s consolidated financial statements as of and for the
year ended December 31, 2010. The management accounting policies and processes utilized in
compiling segment financial information are highly subjective and, unlike financial accounting, are
not based on authoritative guidance similar to GAAP. As a result, the financial information of the
reported segments is not necessarily comparable with similar information reported by other
financial institutions. As also described in note 22 to the Company’s 2010 consolidated financial
statements, neither goodwill nor core deposit and other intangible assets (and the amortization
charges associated with such assets) resulting from acquisitions of financial institutions have
been allocated to the Company’s reportable segments, but are included in the “All Other” category.
The Company does, however, assign such intangible assets to business units for purposes of testing
for impairment.
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. Segment information, continued
Information about the Company’s segments is presented in the following table:
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NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. Segment information, continued
15. Relationship with Bayview Lending Group LLC and Bayview Financial Holdings, L.P.
M&T holds a 20% minority interest in Bayview Lending Group LLC (“BLG”), a privately-held commercial
mortgage lender. M&T recognizes income or loss from BLG using the equity method of accounting. The
carrying value of that investment was $212 million at March 31, 2011.
Bayview Financial Holdings, L.P. (together with its affiliates, “Bayview Financial”), a
privately-held specialty mortgage finance company, is BLG’s majority investor. In addition to
their common investment in BLG, the Company and Bayview Financial conduct other business activities
with each other. The Company has obtained loan servicing rights for small-balance commercial
mortgage loans from BLG and Bayview Financial having outstanding principal balances of $5.1 billion
and $5.2 billion at March 31, 2011 and December 31, 2010, respectively. Amounts recorded as
capitalized servicing assets for such loans totaled $23 million at March 31, 2011 and $26 million
at December 31, 2010. In addition, capitalized servicing rights at March 31, 2011 and December 31,
2010 also included $8 million and $9 million, respectively, for servicing rights that were obtained
from Bayview Financial related to residential mortgage loans with outstanding principal balances of
$3.5 billion at March 31, 2011 and $3.6 billion at December 31, 2010. Revenues from servicing
residential and small-balance commercial mortgage loans obtained from BLG and Bayview Financial
were $11 million and $12 million during the quarters ended March 31, 2011 and 2010, respectively.
In addition, at March 31, 2011 and December 31, 2010, the Company held $20 million and $22 million,
respectively, of collateralized mortgage obligations in its available-for-sale investment
securities portfolio that were securitized by Bayview Financial. Finally, the Company held $300
million and $313 million of similar investment securities in its held-to-maturity portfolio at
March 31, 2011 and December 31, 2010, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
M&T Bank Corporation (“M&T”) recorded net income in the first quarter of 2011 of $206 million or
$1.59 of diluted earnings per common share, compared with $151 million or $1.15 of diluted earnings
per common share in the initial quarter of 2010. During the fourth quarter of 2010, net income
aggregated $204 million or $1.59 of diluted earnings per common share. Basic earnings per common
share were $1.59 in each of the first 2011 quarter and the fourth quarter of 2010, compared with
$1.16 in the first quarter of 2010. The after-tax impact of acquisition and integration-related
expenses (included herein as merger-related expenses) was $3 million ($4 million pre-tax), or $.02
of basic and diluted earnings per common share in the recent quarter. Such expenses were
associated with M&T’s pending acquisition of Wilmington Trust Corporation (“Wilmington Trust”),
headquartered in Wilmington, Delaware, and the November 5, 2010 purchase and assumption agreement
between M&T Bank, M&T’s principal banking subsidiary, and the Federal Deposit Insurance Corporation
(“FDIC”) to assume most of the deposits and acquire certain assets of K Bank, based in
Randallstown, Maryland, in an assisted transaction with the FDIC. The net after-tax impact of
merger-related expenses and the gain associated with the K Bank acquisition transaction totaled to
a net gain of $16 million ($27 million pre-tax) or $.14 of basic and diluted earnings per common
share in the fourth quarter of 2010. There were no merger-related expenses in 2010’s initial
quarter.
The annualized rate of return on average total assets for M&T and its consolidated
subsidiaries (“the Company”) in the first three months of 2011 was 1.23%, compared with .89% in the
year-earlier quarter and 1.18% in the fourth quarter of 2010. The annualized rate of return on
average common shareholders’ equity was 10.16% in the first quarter of 2011, compared with 7.86%
and 10.03% in the first and fourth quarters of 2010, respectively.
On November 1, 2010, M&T announced that it had entered into a definitive agreement with
Wilmington Trust, under which Wilmington Trust will be acquired by M&T. Pursuant to the terms of
the agreement, Wilmington Trust common shareholders will receive .051372 shares of M&T common stock
in exchange for each share of Wilmington Trust common stock in a stock-for-stock transaction valued
at $351 million (with the price based on M&T’s closing price of $74.75 per share as of October 29,
2010), plus the assumption of $330 million in preferred stock issued by Wilmington Trust as part of
the Troubled Asset Relief Program — Capital Purchase Program of the U.S. Department of Treasury
(“U.S. Treasury”).
At December 31, 2010, Wilmington Trust had approximately $10.9 billion of assets, including
$7.5 billion of loans, $10.1 billion of liabilities, including $9.0 billion of deposits, and $60.1
billion of combined assets under management, including $43.6 billion managed by Wilmington Trust
and $16.5 billion managed by affiliates. At a special shareholder meeting held on March 22, 2011,
Wilmington Trust’s common shareholders approved the merger transaction. M&T announced on April 26,
2011 that it had received the approval of the Board of Governors of the Federal Reserve System to
acquire Wilmington Trust. Additional regulatory approvals, including those from the New York State
Banking Superintendent and the Delaware Banking Commissioner, are still pending. Subject to the
terms and conditions of the merger agreement, M&T expects to close the merger with Wilmington Trust
promptly after receiving the remaining regulatory approvals and after the 15-day waiting period
associated with the Federal Reserve Board’s approval order has expired.
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As noted by M&T at the time the merger with Wilmington Trust was announced on November 1,
2010, following completion of the merger, M&T expects its capital ratios at the end of the second
quarter of 2011 to be comparable to what they were as of September 30, 2010. Pursuant to its
capital plan, M&T intends to undertake a series of actions during the second quarter of 2011:
Assets acquired in the K Bank transaction totaled approximately $556 million, including $154
million in loans and $186 million in cash, and liabilities assumed aggregated $528 million,
including $491 million in deposits. The $28 million (pre-tax) gain associated with the transaction
reflects the amount of financial support and indemnification against loan losses that M&T Bank
obtained from the FDIC. The transaction did not have a material effect on the Company’s results of
operations in 2011.
The condition of the domestic and global economy over the last several years has significantly
impacted the financial services industry as a whole, and specifically, the financial results of the
Company. In particular, high unemployment levels and significantly depressed residential real
estate valuations have led to increased loan charge-offs experienced by financial institutions
throughout that time period. Since the official end of the recession in the United States sometime
in the latter half of 2009, the recovery of the economy has been very slow. The Company has
experienced charge-offs at higher than historical levels since 2008, including in the first quarter
of 2011. In addition, many financial institutions have continued to experience unrealized losses
related to investment securities backed by residential and commercial real estate due to a lack of
liquidity in the financial markets and anticipated credit losses. Many financial institutions,
including the Company, have taken charges for those unrealized losses that were deemed to be other
than temporary.
Reflected in the Company’s first quarter 2011 results were gains from the sale of investment
securities, predominantly residential mortgage-backed securities guaranteed by the Federal National
Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
Such gains increased net income in the recent quarter by $24 million ($39 million before taxes),
or $.20 of diluted earning per common share. In response to strong growth in average loans in the
recent quarter and in anticipation of the impending acquisition of Wilmington Trust, the Company
sold the securities in order to manage its forecasted balance sheet size and resultant capital
ratios. Also impacting the recent quarter’s results were $10 million of after-tax
other-than-temporary impairment charges ($16 million before taxes) on certain investment
securities, reducing diluted earnings per common share by $.08. Specifically, such charges related
to certain privately issued collateralized mortgage obligations (“CMOs”).
The Company recorded after-tax other-than-temporary impairment charges of $16 million ($27
million before taxes), or $.14 of diluted earnings per common share, in the first quarter of 2010
related to certain privately issued CMOs.
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During the fourth quarter of 2010, similar impairment charges of $17 million ($28 million
before taxes) were recorded, or $.14 of diluted earnings per common share, related to certain of
the Company’s privately-issued CMOs. Also reflected in the Company’s fourth quarter 2010 results
was the gain associated with the K Bank acquisition transaction as previously noted.
Recent Legislative Developments
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into
law on July 21, 2010. This new law has and will continue to significantly change the current bank
regulatory structure and affect the lending, deposit, investment, trading and operating activities
of financial institutions and their holding companies, and will fundamentally change the system of
regulatory oversight of the Company, including through the creation of the Financial Stability
Oversight Council. The Dodd-Frank Act requires various federal agencies to adopt a broad range of
new implementing rules and regulations, and to prepare numerous studies and reports for Congress.
The federal agencies are given significant discretion in drafting and implementing rules and
regulations, and, as a result, many of the details and much of the impact of the Dodd-Frank Act is
not yet known. The Dodd-Frank Act, however, could have a material adverse impact on the financial
services industry as a whole, as well as on M&T’s business, results of operations, financial
condition and liquidity.
The Dodd-Frank Act broadens the base for FDIC insurance assessments. Beginning in the second
quarter of 2011, assessments will be based on average consolidated total assets less tangible
equity capital of a financial institution. The Dodd-Frank Act also permanently increases the
maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000
per depositor, retroactive to January 1, 2009, and noninterest-bearing transaction accounts have
unlimited deposit insurance through December 31, 2013.
The legislation also requires that publicly traded companies give shareholders a non-binding
vote on executive compensation and “golden parachute” payments, and authorizes the Securities and
Exchange Commission to promulgate rules that would allow shareholders to nominate their own
candidates using a company’s proxy materials. The Dodd-Frank Act also directs the Federal Reserve
Board to promulgate rules prohibiting excessive compensation paid to bank holding company
executives, regardless of whether the company is publicly traded.
The Dodd-Frank Act established a new Bureau of Consumer Financial Protection with broad powers
to supervise and enforce consumer protection laws. The Bureau of Consumer Financial Protection has
broad rule-making authority for a wide range of consumer protection laws that apply to all banks
and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts
and practices. The Bureau of Consumer Financial Protection has examination and enforcement
authority over all banks and savings institutions with more than $10 billion in assets.
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The environment in which banking organizations will operate after the financial crisis,
including legislative and regulatory changes affecting capital, liquidity, supervision, permissible
activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate
government support for banking organizations, may have long-term effects on the business model and
profitability of banking organizations, the full extent of which cannot now be foreseen. Many
aspects of the Dodd-Frank Act remain subject to rulemaking and will take effect over several years,
making it difficult to anticipate the overall financial impact on M&T, its customers or the
financial industry more generally. Provisions in the legislation that affect deposit insurance
assessments, payment of interest on demand deposits and interchange fees could increase the costs
associated with deposits as well as place limitations on certain revenues those deposits may
generate. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred
securities and otherwise require revisions to the capital requirements of M&T and M&T Bank could
require M&T and M&T Bank to seek other sources of capital in the future. The impact of new rules
relating to overdraft fee practices is included herein under the
heading “Other Income.”
Supplemental Reporting of Non-GAAP Results of Operations
As a result of business combinations and other acquisitions, the Company had goodwill and core
deposit and other intangible assets totaling $3.6 billion at March 31, 2011 and $3.7 billion at
each of March 31, 2010 and December 31, 2010. Included in such intangible assets was goodwill of
$3.5 billion at each of those respective dates. Amortization of core deposit and other intangible
assets, after tax effect, was $7 million ($.06 per diluted common share) during the first quarter
of 2011, $10 million ($.08 per diluted common share) during the
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year-earlier quarter and $8 million ($.07 per diluted common share) in the final quarter of 2010.
M&T consistently provides supplemental reporting of its results on a “net operating” or
“tangible” basis, from which M&T excludes the after-tax effect of amortization of core deposit and
other intangible assets (and the related goodwill, core deposit intangible and other intangible
asset balances, net of applicable deferred tax amounts) and gains and expenses associated with
merging acquired operations into the Company, since such items are considered by management to be
“nonoperating” in nature. Although “net operating income” as defined by M&T is not a GAAP measure,
M&T’s management believes that this information helps investors understand the effect of
acquisition activity in reported results.
Net operating income totaled $216 million in the recently completed quarter, compared with
$161 million in the first quarter of 2010. Diluted net operating earnings per common share for the
recent quarter were $1.67, compared with $1.23 in the initial 2010 quarter. Net operating income
and diluted net operating earnings per common share were $196 million and $1.52, respectively, in
the fourth quarter of 2010.
Net operating income in the first quarter of 2011 represented an annualized rate of return on
average tangible assets of 1.36%, compared with 1.00% and 1.20% in the first and fourth quarters of
2010, respectively. Net operating income expressed as an annualized return on average tangible
common equity was 20.16% in the recently completed quarter, compared with 17.34% in the
year-earlier quarter and 18.43% in the last quarter of 2010.
Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in table 2.
Taxable-equivalent Net Interest Income
Taxable-equivalent net interest income aggregated $575 million in the first quarter of 2011, up 2%
from $562 million in the year-earlier quarter, but down slightly from $580 million in the fourth
quarter of 2010. The improvement in the recent quarter’s total as compared with the first quarter
of 2010 reflects a 14 basis point (hundredths of one percent) widening of the Company’s net
interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of
average earning assets, partially offset by lower average earning assets, which declined $900
million, or 1%, to $59.4 billion from $60.3 billion in the first quarter of 2010. The decline in
net interest income from the fourth quarter of 2010 reflects the impact of fewer days in the recent
quarter, offset, in part, by a 7 basis point widening of the net interest margin. The net interest
margin was 3.92% in the initial 2011 quarter, compared with 3.78% in the year-earlier period and
3.85% in the fourth quarter of 2010.
Average loans and leases were $52.0 billion in the first quarter of 2011, compared with $51.9
billion in the initial quarter of 2010. Commercial loans and leases averaged $13.6 billion in the
first 2011 quarter, up 1% from $13.4 billion in the year-earlier quarter. Average commercial
real estate loans increased to $21.0 billion in the recent quarter from $20.9 billion in the first
quarter of 2010. The Company’s residential real estate loan portfolio averaged $6.1 billion in the
first quarter of 2011, up $313 million or 5% from $5.7 billion in the corresponding quarter of
2010. Included in that portfolio were loans held for sale, which averaged $192 million in the
recently completed quarter, compared with $404 million in the first quarter of 2010. Excluding
loans held for sale, average residential real estate loans increased $525 million or 10% from the
first quarter of 2010 to the first quarter of 2011. The rise in average residential real estate
loans
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reflects the Company’s decision to retain for portfolio during the fourth quarter of 2010 and
a portion of the first quarter of 2011 a higher proportion of originated loans rather than selling
them. Average consumer loans and leases totaled $11.3 billion in the recent quarter, down $590
million or 5% from $11.9 billion in the year-earlier period due largely to lower average balances
of automobile loans and home equity loans.
Average loan balances in the recent quarter rose $830 million, or 2%, from the fourth quarter
of 2010. Average balances of commercial loans and leases rose $559 million, or 4%, in the recent
quarter, while average commercial real estate balances increased $379 million, or 2%, from the
fourth quarter of 2010. Average residential real estate loan balances increased $144 million, or
2% and average consumer loans declined $253 million or 2%, as compared with 2010’s final quarter.
The Company experienced growth due to improved demand for commercial loans and commercial real
estate loans, while certain of the other loan portfolios have been allowed to decline where the
Company has decided it does not want to pursue growth. Examples of those portfolios include
residential real estate construction loans, Alt-A residential mortgage loans, indirect automobile
loans outside of the Company’s footprint and out-of-footprint home equity loans. The accompanying
table summarizes quarterly changes in the major components of the loan and lease portfolio.
AVERAGE LOANS AND LEASES
(net of unearned discount) Dollars in millions
The investment securities portfolio averaged $7.2 billion during the first quarter of 2011,
down from $8.2 billion in the year-earlier quarter and $321 million below the $7.5 billion average
in 2010’s final quarter. The decline in such securities from the initial quarter of 2010 largely
reflects maturities and paydowns of mortgage-backed securities and maturities of federal agency
notes. As compared with the fourth quarter of 2010, recent quarter maturities and paydowns of
mortgage-backed securities were the most significant contributors to the lower average investment
security balances. The investment securities portfolio is largely comprised of residential
mortgage-backed securities and CMOs, debt securities issued by municipalities, capital preferred
securities issued by certain financial institutions, and shorter-term U.S. Treasury and federal
agency notes. When purchasing investment securities, the Company considers its overall
interest-rate risk profile as well as the adequacy of expected returns relative to risks assumed,
including prepayments. In managing its investment securities portfolio, the Company occasionally
sells investment securities as a result of changes in interest rates and spreads, actual or
anticipated prepayments, credit risk associated with a particular security, or as a result of
restructuring its investment securities portfolio in connection with a business combination. Near
the end of the recent quarter, the Company sold residential mortgage-backed securities guaranteed
by Fannie Mae and Freddie Mac that were held in the available-for-sale portfolio. Those securities
had an amortized cost of approximately $484 million, but because the transactions occurred near the
end of the recent quarter they did not have a significant effect on average balances.
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The Company regularly reviews its investment securities for declines in value below amortized
cost that might be characterized as “other than temporary.” An other-than-temporary impairment
charge of $16 million (pre-tax) was recognized in the first quarter of 2011 related to certain
privately issued CMOs. Other-than-temporary impairment charges of $27 million (pre-tax) and $28
million (pre-tax) were recognized during the first and the fourth quarters of 2010, respectively.
Those charges were also predominantly related to the Company’s portfolio of privately issued CMOs.
Poor economic conditions, high unemployment and depressed real estate values are significant
factors contributing to the recognition of the other-than-temporary impairment charges. A further
discussion of fair values of investment securities is included herein under the heading “Capital.”
Additional information about the investment securities portfolio is included in notes 3 and 12 of
Notes to Financial Statements.
Other earning assets include interest-earning deposits at the Federal Reserve Bank of New York
and other banks, trading account assets, federal funds sold and agreements to resell securities.
Those other earning assets in the aggregate averaged $240 million in the recently completed
quarter, compared with $211 million and $1.1 billion in the first and fourth quarters of 2010,
respectively. Reflected in those balances were purchases of investment securities under agreements to resell, which averaged $2 million, $15 million and $772 million
during the three-month periods ended March 31, 2011, March 31, 2010 and December 31, 2010,
respectively. The higher level of resell agreements in the fourth quarter of 2010 as compared with
the first quarters of 2011 and 2010 was due to the need to fulfill collateral requirements
associated with certain seasonal municipal deposits. Agreements to resell securities, of which
there were none outstanding at March 31, 2011 or December 31, 2010, are accounted for similar to
collateralized loans, with changes in market value of the collateral monitored by the Company to
ensure sufficient coverage. The amounts of investment securities and other earning assets held by
the Company are influenced by such factors as demand for loans, which generally yield more than
investment securities and other earning assets, ongoing repayments, the level of deposits, and
management of balance sheet size and resulting capital ratios.
As a result of the changes described herein, average earning assets aggregated $59.4 billion
in the first quarter of 2011, compared with $60.3 billion in the year-earlier period. Average
earning assets totaled $59.7 billion in the fourth quarter of 2010.
The most significant source of funding for the Company is core deposits. During 2010 and prior
years, the Company considered noninterest-bearing deposits, interest-bearing transaction accounts,
savings deposits and domestic time deposits under $100,000 as core deposits. A provision of the
Dodd-Frank Act permanently increased the maximum amount of FDIC deposit insurance for financial
institutions to $250,000 per depositor. That maximum was $100,000 per depositor until 2009, when
it was raised to $250,000 temporarily through December 31, 2013. As a result of the permanently
increased deposit insurance coverage, effective December 31, 2010 the Company considers time
deposits under $250,000 as core deposits. The Company’s branch network is its principal source of
core deposits, which generally carry lower interest rates than wholesale funds of comparable
maturities. Certificates of deposit under $250,000 generated on a nationwide basis by M&T Bank,
National Association (“M&T Bank, N.A.”), a wholly owned bank subsidiary of M&T, are also included
in core deposits. Core deposits averaged $46.2 billion in the first quarter of 2011, up 8% from
$42.9 billion in the similar 2010 quarter and 3% higher than $45.0 billion in the fourth quarter of
2010. The change in the Company’s definition of core deposits to include time deposits from
$100,000 to $250,000 resulted in an increase in average core deposits in the first quarter of 2011
of approximately $970 million. The growth in core deposits since the first quarter of 2010 was
due, in part, to the lack of attractive alternative investments available to the Company’s
customers resulting from
lower interest rates and from the economic environment in the U.S. The low
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interest rate
environment has resulted in a shift in customer savings trends, as average time deposits have
continued to decline, while average noninterest-bearing deposits and savings deposits have
increased. The following table provides an analysis of quarterly changes in the components of
average core deposits.
AVERAGE CORE DEPOSITS
Dollars in millions
In addition to core deposits, domestic time deposits of $250,000 or more, deposits originated
through the Company’s Cayman Islands branch office, and brokered deposits provide sources of
funding for the Company. Domestic time deposits over $250,000, excluding brokered certificates of
deposit, averaged $520 million during the first quarter of 2011. Similar time deposits over
$100,000 averaged $1.8 billion and $1.6 billion in the first and fourth quarters of 2010,
respectively. Cayman Islands branch deposits averaged $1.2 billion for each of the quarters ended
March 31, 2011 and 2010, and $809 million during the quarter ended December 31, 2010. Average
brokered time deposits totaled $482 million during the recently completed quarter, compared with
$785 million and $508 million in the first and fourth quarters of 2010, respectively. The Company
also had brokered NOW and brokered money-market deposit accounts, which in the aggregate averaged
$1.3 billion during the first quarter of 2011, compared with $678 million in the year-earlier
quarter and $1.4 billion in the fourth quarter of 2010. The significant increases in such average
brokered deposit balances since the first quarter of 2010 reflect continued uncertain economic
markets and the desire of brokerage firms to earn reasonable yields while ensuring that customer
deposits were fully insured. Cayman Islands branch deposits and brokered deposits have been used
by the Company as alternatives to short-term borrowings. Additional amounts of Cayman Islands
branch deposits or brokered deposits may be added in the future depending on market conditions,
including demand by customers and other investors for those deposits, and the cost of funds
available from alternative sources at the time.
The Company also uses borrowings from banks, securities dealers, various Federal Home Loan
Banks, the Federal Reserve and others as sources of funding. Short-term borrowings averaged $1.3
billion in the first quarter of 2011, compared with $2.4 billion in the year-earlier quarter and
$1.4 billion in the final quarter of 2010. Included in short-term borrowings were unsecured
federal funds borrowings, which generally mature on the next business day, which averaged $1.2
billion in the recent quarter, compared with $2.1 billion and $1.3 billion in the first and fourth
quarters of 2010, respectively. Overnight federal funds borrowings represented the largest
component of short-term borrowings and were obtained from a wide variety of banks and other
financial institutions. Overnight federal funds borrowings totaled $407 million and $1.7 billion
at March 31, 2011 and 2010, respectively, and $826 million at December 31, 2010. Average
short-term borrowings included borrowings from the Federal Home Loan Bank (“FHLB”) of New York and
the FHLB of Atlanta, which totaled $19 million during the recent quarter, compared with $100
million and $16 million in the first and fourth quarters of 2010, respectively.
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Long-term borrowings averaged $7.4 billion in the first quarter of 2011, compared with $10.2
billion in the similar 2010 quarter and $8.1 billion in the fourth quarter of 2010. Included in
average long-term borrowings were amounts borrowed from the FHLBs of $2.5 billion in the recent
quarter, and $5.1 billion and $3.3 billion in the first and fourth quarters of 2010, respectively,
and subordinated capital notes of $1.7 billion in each of the two most recent quarters and $1.9
billion in the three-month period ended March 31, 2010. The Company has utilized interest rate
swap agreements to modify the repricing characteristics of certain components of long-term debt.
As of March 31, 2011, swap agreements were used to hedge approximately $900 million of fixed rate
subordinated notes. Further information on interest rate swap agreements is provided in note 10 of
Notes to Financial Statements. Junior subordinated debentures associated with trust preferred
securities that were included in average long-term borrowings were $1.2 billion in each of the
quarters ended March 31, 2011, March 31, 2010 and December 31, 2010. Additional information
regarding junior subordinated debentures is provided in note 5 of Notes to Financial Statements.
Also included in long-term borrowings were agreements to repurchase securities, which averaged $1.6
billion during each of the first quarters of 2011 and 2010 and the fourth quarter of 2010. The
agreements have various repurchase dates through 2017, however, the contractual maturities of the
underlying securities extend beyond such repurchase dates.
Changes in the composition of the Company’s earning assets and interest-bearing liabilities,
as described herein, as well as changes in interest rates and spreads, can impact net interest
income. Net interest spread, or the difference between the taxable-equivalent yield on earning
assets and the rate paid on interest-bearing liabilities, was 3.69% in the first quarter of 2011
and 3.55% in the year-earlier quarter. The yield on earning assets during the recent quarter was
4.60%, up 1 basis point from 4.59% in the first quarter of 2010, while the rate paid on
interest-bearing liabilities decreased 13 basis points to .91% from 1.04%. In the fourth quarter
of 2010, the net interest spread was 3.61%, the yield on earning assets was 4.58% and the rate paid
on interest-bearing liabilities was .97%. The improvement in the net interest spread in the recent
quarter as compared with the first and fourth quarters of 2010 was due largely to declines in the
rates paid on deposits. Those lower rates reflect the impact of the Federal Reserve’s monetary
policies on both short-term and long-term interest rates. The Federal Open Market Committee has
noted that economic conditions continue to warrant low levels for the federal funds rate.
Net interest-free funds consist largely of noninterest-bearing demand deposits and
shareholders’ equity, partially offset by bank owned life insurance and non-earning assets,
including goodwill and core deposit and other intangible assets. Net interest-free funds averaged
$15.5 billion in the first quarter of 2011, compared with $13.7 billion and $15.2 billion in the
first and fourth quarters of 2010, respectively. The rise in net interest free funds in the two
most recent quarters as compared with the first quarter of 2010 was largely the result of higher
average balances of noninterest-bearing deposits. Such deposits averaged $14.5 billion in the
recent quarter, compared with $13.3 billion and $14.3 billion in the first and fourth quarters of
2010, respectively. Goodwill and core deposit and other intangible assets averaged $3.6 billion
during the quarter ended March 31, 2011, compared with $3.7 billion during each of the quarters
ended March 31, 2010 and December 31, 2010. The cash surrender value of bank owned life insurance
averaged $1.5 billion in each of the quarters ended March 31, 2011, March 31, 2010 and December 31,
2010. Increases in the cash surrender value of bank owned life insurance and benefits received are
not included in interest income, but rather are recorded in “other revenues from operations.” The
contribution of net interest-free funds to net interest margin was .23% in each of the quarters
ended March 31, 2011 and 2010, compared with .24% in the fourth quarter of 2010.
Reflecting the changes to the net interest spread and the contribution of interest-free funds
as described herein, the Company’s net interest margin
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was 3.92% in the first quarter of 2011, compared with 3.78% in the year-earlier quarter and
3.85% in the final quarter of 2010. Future changes in market interest rates or spreads, as well as
changes in the composition of the Company’s portfolios of earning assets and interest-bearing
liabilities that result in reductions in spreads, could adversely impact the Company’s net interest
income and net interest margin.
Management assesses the potential impact of future changes in interest rates and spreads by
projecting net interest income under several interest rate scenarios. In managing interest rate
risk, the Company has utilized interest rate swap agreements to modify the repricing
characteristics of certain portions of its portfolios of earning assets and interest-bearing
liabilities. Periodic settlement amounts arising from these agreements are generally reflected in
either the yields earned on assets or the rates paid on interest-bearing liabilities. The notional
amount of interest rate swap agreements entered into for interest rate risk management purposes was
$900 million at each of March 31, 2011 and December 31, 2010, and $1.1 billion at March 31, 2010.
Under the terms of those swap agreements, the Company received payments based on the outstanding
notional amount at fixed rates and made payments at variable rates. Those swap agreements were
designated as fair value hedges of certain fixed rate long-term borrowings and, to a lesser extent
at March 31, 2010, certain fixed rate time deposits. There were no interest rate swap agreements
designated as cash flow hedges at those respective dates.
In a fair value hedge, the fair value of the derivative (the interest rate swap agreement) and
changes in the fair value of the hedged item are recorded in the Company’s consolidated balance
sheet with the corresponding gain or loss recognized in current earnings. The difference between
changes in the fair value of the interest rate swap agreements and the hedged items represents
hedge ineffectiveness and is recorded in “other revenues from operations” in the Company’s
consolidated statement of income. In a cash flow hedge, unlike in a fair value hedge, the
effective portion of the derivative’s gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into earnings when the forecasted transaction
affects earnings. The ineffective portion of the gain or loss is reported in “other revenues from
operations” immediately. The amounts of hedge ineffectiveness recognized during the quarters ended
March 31, 2011 and 2010 and the quarter ended December 31, 2010 were not material to the Company’s
results of operations. The estimated aggregate fair value of interest rate swap agreements
designated as fair value hedges represented gains of approximately $84 million at March 31, 2011,
$67 million at March 31, 2010 and $97 million at December 31, 2010. The fair values of such swap
agreements were substantially offset by changes in the fair values of the hedged items. The
changes in the fair values of the interest rate swap agreements and the hedged items primarily
result from the effects of changing interest rates and spreads. The Company’s credit exposure as
of March 31, 2011 with respect to the estimated fair value of interest rate swap agreements used
for managing interest rate risk has been substantially mitigated through master netting
arrangements with trading account interest rate contracts with the same counterparty as well as
counterparty postings of $60 million of collateral with the Company.
The weighted-average rates to be received and paid under interest rate swap agreements
currently in effect were 6.07% and 1.85%, respectively, at March 31, 2011. The average notional
amounts of interest rate swap agreements entered into for interest rate risk management purposes,
the related effect on net interest income and margin, and the weighted-average rates paid or
received on those swap agreements are presented in the accompanying table. Additional information
about the Company’s use of interest rate swap agreements and other derivatives is included in note
10 of Notes to Financial Statements.
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INTEREST RATE SWAP AGREEMENTS
Dollars in thousands
As a financial intermediary, the Company is exposed to various risks, including liquidity and
market risk. Liquidity refers to the Company’s ability to ensure that sufficient cash flow and
liquid assets are available to satisfy current and future obligations, including demands for loans
and deposit withdrawals, funding operating costs, and other corporate purposes. Liquidity risk
arises whenever the maturities of financial instruments included in assets and liabilities differ.
M&T’s banking subsidiaries have access to additional funding sources through borrowings from the
FHLB of New York, lines of credit with the Federal Reserve Bank of New York, and other available
borrowing facilities. The Company has, from time to time, issued subordinated capital notes to
provide liquidity and enhance regulatory capital ratios. Such notes qualify for inclusion in the
Company’s total capital as defined by Federal regulators.
The Company has informal and sometimes reciprocal sources of funding available through various
arrangements for unsecured short-term borrowings from a wide group of banks and other financial
institutions. Short-term federal funds borrowings were $407 million at March 31, 2011, $1.7
billion at March 31, 2010 and $826 million at December 31, 2010. In general, those borrowings were
unsecured and matured on the next business day. As previously noted, Cayman Islands branch
deposits and brokered certificates of deposit have been used by the Company as an alternative to
short-term borrowings. Cayman Islands branch deposits also generally mature on the next business
day and totaled $1.1 billion, $790 million and $1.6 billion at March 31, 2011, March 31, 2010 and
December 31, 2010, respectively. Outstanding brokered time deposits at March 31, 2011, March 31,
2010 and December 31, 2010 were $478 million, $732 million and $485 million, respectively. At
March 31, 2011, the weighted-average remaining term to maturity of brokered time deposits was 17
months. Certain of those brokered time deposits have provisions that allow for early redemption.
The Company also had brokered NOW and brokered money-market deposit accounts which aggregated $1.3
billion at each of March 31, 2011 and December 31, 2010, and $942 million at March 31, 2010. The
higher level of such deposits at the two most recent quarter-ends resulted from higher demand for
these deposits due to the unsettled economy and the need for brokerage firms to ensure that
customer deposits are fully insured while earning a yield on such deposits.
The Company’s ability to obtain funding from these or other sources could be negatively
impacted should the Company experience a substantial deterioration in its financial condition or
its debt ratings, or should the availability of short-term funding become restricted due to a
disruption in the financial markets. The Company attempts to quantify such credit-event risk by
modeling scenarios that estimate the liquidity impact resulting from a short-term ratings downgrade
over various grading levels. Such impact is
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estimated by attempting to measure the effect on available unsecured lines of credit,
available capacity from secured borrowing sources and securitizable assets. In addition to
deposits and borrowings, other sources of liquidity include maturities of investment securities and
other earning assets, repayments of loans and investment securities, and cash generated from
operations, such as fees collected for services.
Certain customers of the Company obtain financing through the issuance of variable rate demand
bonds (“VRDBs”). The VRDBs are generally enhanced by direct-pay letters of credit provided by M&T
Bank. M&T Bank oftentimes acts as remarketing agent for the VRDBs and, at its discretion, may from
time-to-time own some of the VRDBs while such instruments are remarketed. When this occurs, the
VRDBs are classified as trading assets in the Company’s consolidated balance sheet. Nevertheless,
M&T Bank is not contractually obligated to purchase the VRDBs. The value of VRDBs in the Company’s
trading account totaled $23 million at March 31, 2011, $20 million at March 31, 2010 and $107
million at December 31, 2010. The total amount of VRDBs outstanding backed by M&T Bank letters of
credit was $1.9 billion at each of March 31, 2011 and 2010, compared with $2.0 billion at December
31, 2010. M&T Bank also serves as remarketing agent for most of those bonds.
The Company enters into contractual obligations in the normal course of business which require
future cash payments. Such obligations include, among others, payments related to deposits,
borrowings, leases, and other contractual commitments. Off-balance sheet commitments to customers
may impact liquidity, including commitments to extend credit, standby letters of credit, commercial
letters of credit, financial guarantees and indemnification contracts, and commitments to sell real
estate loans. Because many of these commitments or contracts expire without being funded in whole
or in part, the contract amounts are not necessarily indicative of future cash flows. Further
discussion of these commitments is provided in note 13 of Notes to Financial Statements.
M&T’s primary source of funds to pay for operating expenses, shareholder dividends and
treasury stock repurchases has historically been the receipt of dividends from its banking
subsidiaries, which are subject to various regulatory limitations. Dividends from any banking
subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current
year and the two preceding years. For purposes of the test, approximately $849 million at March
31, 2011 was available for payment of dividends to M&T from banking subsidiaries. These historic
sources of cash flow have been augmented in the past by the issuance of trust preferred securities
and senior notes payable. Information regarding trust preferred securities and the related junior
subordinated debentures is included in note 5 of Notes to Financial Statements. M&T also maintains
a $30 million line of credit with an unaffiliated commercial bank, of which there were no
borrowings outstanding at March 31, 2011 or at December 31, 2010.
Management closely monitors the Company’s liquidity position on an ongoing basis for
compliance with internal policies and believes that available sources of liquidity are adequate to
meet funding needs anticipated in the normal course of business. Management does not anticipate
engaging in any activities, either currently or in the long-term, for which adequate funding would
not be available and would therefore result in a significant strain on liquidity at either M&T or
its subsidiary banks.
Market risk is the risk of loss from adverse changes in the market prices and/or interest
rates of the Company’s financial instruments. The primary market risk the Company is exposed to is
interest rate risk. Interest rate risk arises from the Company’s core banking activities of
lending and deposit-taking, because assets and liabilities reprice at different times and by
different amounts as interest rates change. As a result, net interest income earned by the Company
is subject to the effects of changing interest rates. The Company measures interest rate risk by
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calculating the variability of net interest income in future periods under various interest
rate scenarios using projected balances for earning assets, interest-bearing liabilities and
derivatives used to hedge interest rate risk. Management’s philosophy toward interest rate risk
management is to limit the variability of net interest income. The balances of financial
instruments used in the projections are based on expected growth from forecasted business
opportunities, anticipated prepayments of loans and investment securities, and expected maturities
of investment securities, loans and deposits. Management uses a “value of equity” model to
supplement the modeling technique described above. Those supplemental analyses are based on
discounted cash flows associated with on- and off-balance sheet financial instruments. Such
analyses are modeled to reflect changes in interest rates and provide management with a long-term
interest rate risk metric.
The Company’s Risk Management Committee, which includes members of senior management, monitors
the sensitivity of the Company’s net interest income to changes in interest rates with the aid of a
computer model that forecasts net interest income under different interest rate scenarios. In
modeling changing interest rates, the Company considers different yield curve shapes that consider
both parallel (that is, simultaneous changes in interest rates at each point on the yield curve)
and non-parallel (that is, allowing interest rates at points on the yield curve to vary by
different amounts) shifts in the yield curve. In utilizing the model, market implied forward
interest rates over the subsequent twelve months are generally used to determine a base interest
rate scenario for the net interest income simulation. That calculated base net interest income is
then compared to the income calculated under the varying interest rate scenarios. The model
considers the impact of ongoing lending and deposit-gathering activities, as well as
interrelationships in the magnitude and timing of the repricing of financial instruments, including
the effect of changing interest rates on expected prepayments and maturities. When deemed prudent,
management has taken actions to mitigate exposure to interest rate risk through the use of on- or
off-balance sheet financial instruments and intends to do so in the future. Possible actions
include, but are not limited to, changes in the pricing of loan and deposit products, modifying the
composition of earning assets and interest-bearing liabilities, and adding to, modifying or
terminating existing interest rate swap agreements or other financial instruments used for interest
rate risk management purposes.
The accompanying table as of March 31, 2011 and December 31, 2010 displays the estimated
impact on net interest income from non-trading financial instruments in the base scenario described
above resulting from parallel changes in interest rates across repricing categories during the
first modeling year.
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES Dollars in thousands
The Company utilized many assumptions to calculate the impact that changes in interest rates
may have on net interest income. The more significant of those assumptions included the rate of
prepayments of mortgage-related assets, cash flows from derivative and other financial instruments
held for non-trading purposes, loan and deposit volumes and pricing, and deposit maturities. In
the scenarios presented, the Company also assumed gradual changes in rates during a twelve-month
period of 100 and 200 basis points, as compared with the assumed base scenario. In the event that
a 100 or 200 basis point rate change cannot be achieved, the applicable
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rate changes are limited to lesser amounts such that interest rates cannot be less than zero.
The assumptions used in interest rate sensitivity modeling are inherently uncertain and, as a
result, the Company cannot precisely predict the impact of changes in interest rates on net
interest income. Actual results may differ significantly from those presented due to the timing,
magnitude and frequency of changes in interest rates and changes in market conditions and interest
rate differentials (spreads) between maturity/repricing categories, as well as any actions, such as
those previously described, which management may take to counter such changes. In light of the
uncertainties and assumptions associated with the process, the amounts presented in the table are
not considered significant to the Company’s past or projected net interest income.
Changes in fair value of the Company’s financial instruments can also result from a lack of
trading activity for similar instruments in the financial markets. That impact is most notable on
the values assigned to the Company’s investment securities. Information about the fair valuation
of such securities is presented herein under the heading “Capital” and in notes 3 and 12 of Notes
to Financial Statements.
The Company engages in trading activities to meet the financial needs of customers, to fund
the Company’s obligations under certain deferred compensation plans and, to a limited extent, to
profit from perceived market opportunities. Financial instruments utilized in trading activities
consist predominantly of interest rate contracts, such as swap agreements, and forward and futures
contracts related to foreign currencies, but have also included forward and futures contracts
related to mortgage-backed securities and investments in U.S. Treasury and other government
securities, mortgage-backed securities and mutual funds and, as previously described, a limited
number of VRDBs. The Company generally mitigates the foreign currency and interest rate risk
associated with trading activities by entering into offsetting trading positions. The fair values
of the offsetting trading positions associated with interest rate contracts and foreign currency
and other option and futures contracts are presented in note 10 of Notes to Financial Statements.
The amounts of gross and net trading positions, as well as the type of trading activities conducted
by the Company, are subject to a well-defined series of potential loss exposure limits established
by management and approved by M&T’s Board of Directors. However, as with any non-government
guaranteed financial instrument, the Company is exposed to credit risk associated with
counterparties to the Company’s trading activities.
The notional amounts of interest rate contracts entered into for trading purposes aggregated
$12.3 billion at March 31, 2011, compared with $12.8 billion at each of March 31, 2010 and December
31, 2010. The notional amounts of foreign currency and other option and futures contracts entered
into for trading purposes totaled $982 million at March 31, 2011, compared with $701 million and
$769 million at March 31, 2010 and December 31, 2010, respectively. Although the notional amounts
of these trading contracts are not recorded in the consolidated balance sheet, the fair values of
all financial instruments used for trading activities are recorded in the consolidated balance
sheet. The fair values of all trading account assets and liabilities were $414 million and $304
million, respectively, at March 31, 2011, $403 million and $316 million, respectively, at March 31,
2010, and $524 million and $333 million, respectively, at December 31, 2010. Included in trading
account assets were assets related to deferred compensation plans totaling $36 million and $34
million at March 31, 2011 and 2010, respectively, and $35 million at December 31, 2010. Changes in
the fair value of such assets are recorded as “trading account and foreign exchange gains” in the
consolidated statement of income. Included in “other liabilities” in the consolidated balance
sheet at March 31, 2011 were $35 million of liabilities related to deferred compensation plans,
compared with $36 million at each of March 31, 2010 and December 31, 2010. Changes in the balances
of such liabilities due to the valuation of allocated investment options to which the liabilities
are indexed
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are recorded in “other costs of operations” in the consolidated statement of income.
Given the Company’s policies, limits and positions, management believes that the potential
loss exposure to the Company resulting from market risk associated with trading activities was not
material, however, as previously noted, the Company is exposed to credit risk associated with
counterparties to transactions associated with the Company’s trading activities. Additional
information about the Company’s use of derivative financial instruments in its trading activities
is included in note 10 of Notes to Financial Statements.
Provision for Credit Losses
The Company maintains an allowance for credit losses that in management’s judgment is adequate to
absorb losses inherent in the loan and lease portfolio. A provision for credit losses is recorded
to adjust the level of the allowance as deemed necessary by management. The provision for credit
losses in the first quarter of 2011 was $75 million, compared with $105 million in the year-earlier
quarter and $85 million in the fourth quarter of 2010. While the levels of the provision
subsequent to 2007 have been higher than historical levels, the Company has experienced some
improvement in its credit quality metrics over the past five quarters. Nevertheless, generally
declining real estate valuations and higher than normal levels of delinquencies and charge-offs
have significantly affected the quality of the Company’s residential real estate-related loan
portfolios. Specifically, the Company’s Alt-A residential real estate loan portfolio and its
residential real estate builder and developer loan portfolio experienced the majority of the credit
problems related to the turmoil in the residential real estate market place. The Company also
experienced increased levels of commercial and consumer loan charge-offs over the past three years
due to, among other things, higher unemployment levels and the recessionary economy. Although
nonperforming and criticized loans remain at historically high levels, the Company has seen some
early signs of improving economic conditions within the market areas in which it operates.
Net loan charge-offs were $74 million in the first quarter of 2011, compared with $95 million
and $77 million during the three-month periods ended March 31, 2010 and December 31, 2010,
respectively. Net charge-offs as an annualized percentage of average loans and leases were .58% in
the first quarter of 2011, compared with .74% and .60% in the first and fourth quarters of 2010,
respectively. A summary of net charge-offs by loan type follows.
NET CHARGE-OFFS
BY LOAN/LEASE TYPE In thousands
Included in net charge-offs of commercial real estate loans were charge-offs of loans to
residential homebuilders and developers of $18 million in the quarter ended March 31, 2011 compared
with $22 million for each of the quarters ended March 31, 2010 and December 31, 2010. Reflected in
net charge-offs of residential real estate loans were net charge-offs of Alt-A first mortgage loans
of $8 million in each of the quarters ended March 31, 2011, March 31, 2010 and December 31, 2010.
Included in net charge-offs of consumer loans and leases were net charge-offs during the quarters
ended March 31, 2011, March 31, 2010 and December 31, 2010, respectively, of: indirect automobile
loans of $6
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million, $10 million and $7 million; recreational vehicle loans of $6 million, $7 million and
$5 million; and home equity loans and lines of credit, including Alt-A second lien loans, of $8
million, $9 million and $7 million. Including both first and second lien mortgages, net
charge-offs of Alt-A loans totaled $9 million for each of the quarters ended March 31, 2011, March
31, 2010 and December 31, 2010.
Nonaccrual loans totaled $1.21 billion or 2.32% of total loans and leases outstanding at March
31, 2011, compared with $1.34 billion or 2.60% a year earlier and $1.24 billion or 2.38% at
December 31, 2010. The decline in nonaccrual loans from March 31, 2010 to the two most recent
quarter-ends was largely due to the impact of charge-offs, individually significant payments made
in 2010’s second and third quarters by a borrower that operates retirement communities and by a
borrower that is a consumer finance and credit insurance company, and the transfer to real estate
and other foreclosed assets of $98 million of collateral related to a commercial real estate loan
that was placed in nonaccrual status during the fourth quarter of 2009. Those reductions were
partially offset by additional loans being transferred to nonaccrual status. In particular, in the
fourth quarter of 2010 such transfers included an $80 million relationship with a residential
builder and developer and $66 million of commercial construction loans to an owner/operator of
retirement and assisted living facilities. The continuing softness in the residential real estate
marketplace has resulted in depressed real estate values and high levels of delinquencies, both for
loans to consumers and loans to builders and developers of residential real estate. Despite the
recent quarter’s decline in nonaccrual loans, conditions in the U.S. economy have resulted in
generally higher levels of nonaccrual loans than historically experienced by the Company.
Accruing loans past due 90 days or more were $264 million or .51% of total loans and leases at
March 31, 2011, compared with $203 million or .40% at March 31, 2010 and $270 million or .52% at
December 31, 2010. Those loans included loans guaranteed by government-related entities of $215
million, $195 million and $214 million at March 31, 2011, March 31, 2010 and December 31, 2010,
respectively. Such guaranteed loans included one-to-four family residential mortgage loans
serviced by the Company that were repurchased to reduce associated servicing costs, including a
requirement to advance principal and interest payments that had not been received from individual
mortgagors. Despite the loans being purchased by the Company, the insurance or guarantee by the
applicable government-related entity remains in force. The outstanding principal balances of the
repurchased loans are fully guaranteed by government-related entities and totaled $195 million and
$179 million as of March 31, 2011 and 2010, respectively, and $191 million at December 31, 2010.
Loans past due 90 days or more and accruing interest that were guaranteed by government-related
entities also included foreign commercial and industrial loans supported by the Export-Import Bank
of the United States that totaled $11 million at each of March 31, 2011, March 31, 2010 and
December 31, 2010.
Loans obtained in the 2009 and 2010 acquisition transactions that were impaired at the date of
acquisition were recorded at estimated fair value and are generally delinquent in payments, but, in
accordance with GAAP the Company continues to accrue interest income on such loans based on the
estimated expected cash flows associated with the loans. The carrying amount of such loans was $89
million at March 31, 2011, or less than .2% of total loans.
In an effort to assist borrowers, the Company modified the terms of select loans secured by
residential real estate, largely from the Company’s portfolio of Alt-A loans. Included in loans
outstanding at March 31, 2011 were $305 million of modified loans, of which $126 million were
classified as nonaccrual. The remaining modified loans have demonstrated payment capability
consistent with the modified terms and, accordingly, were classified as renegotiated loans and were
accruing interest at March 31, 2011. Loan
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modifications included such actions as the extension of loan maturity dates (generally from
thirty to forty years) and the lowering of interest rates and monthly payments. The objective of
the modifications was to increase loan repayments by customers and thereby reduce net charge-offs.
In accordance with GAAP, the modified loans are included in impaired loans for purposes of
determining the allowance for credit losses. Modified residential real estate loans totaled $296
million at March 31, 2010, of which $109 million were in nonaccrual status, and $308 million as of
December 31, 2010, of which $117 million were classified as nonaccrual.
Nonaccrual commercial loans and leases aggregated $173 million at March 31, 2011, $325 million
at March 31, 2010 and $187 million at December 31, 2010. The decline in such loans at the two most
recent quarter-ends as compared with March 31, 2010 reflects 2010 activity consisting of $62
million of payments related to a single borrower that operates retirement communities and the
payoffs of a $37 million loan to a consumer finance and credit insurance company and a $36 million
loan to a borrower in the commercial real estate sector.
Commercial real estate loans classified as nonaccrual totaled $658 million at March 31, 2011,
$641 million at March 31, 2010 and $682 million at December 31, 2010. Reflected in such nonaccrual
loans were loans to residential homebuilders and developers aggregating $320 million and $307
million at March 31, 2011 and 2010, respectively, and $346 million at December 31, 2010.
Information about the location of nonaccrual and charged-off loans to residential real estate
builders and developers as of and for the three-month period ended March 31, 2011 is presented in
the accompanying table.
RESIDENTIAL BUILDER AND DEVELOPER LOANS, NET OF UNEARNED DISCOUNT
Residential real estate loans classified as nonaccrual were $289 million at March 31, 2011,
compared with $282 million at March 31, 2010 and $279 million at December 31, 2010. Depressed real
estate values and high levels of delinquencies have contributed to the higher than historical
levels of residential real estate loans classified as nonaccrual and to the elevated level of
charge-offs, largely in the Company’s Alt-A portfolio. Included in residential real estate loans
classified as nonaccrual were Alt-A loans of $111 million, $114 million and $106 million at March
31, 2011, March 31, 2010 and December 31, 2010, respectively. Residential real estate loans past
due 90 days or more and accruing interest totaled $195 million at March 31, 2011, compared with
$181 million a year earlier and $192 million at December 31, 2010. A substantial portion of such
amounts related to guaranteed loans
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repurchased from government-related entities. Information about the location of nonaccrual
and charged-off residential real estate loans as of and for the quarter ended March 31, 2011 is
presented in the accompanying table.
Nonaccrual consumer loans and leases aggregated $91 million at each of March 31, 2011 and
December 31, 2010, compared with $92 million at March 31, 2010. As a percentage of consumer loan
balances outstanding, nonaccrual consumer loans and leases were .81% at March 31, 2011, compared
with .78% and .79% at March 31, 2010 and December 31, 2010, respectively. Included in nonaccrual
consumer loans and leases at March 31, 2011, March 31, 2010 and December 31, 2010 were indirect
automobile loans of $30 million, $35 million and $32 million, respectively; recreational vehicle
loans of $13 million, $16 million and $13 million, respectively; and outstanding balances of home
equity loans and lines of credit, including second lien, Alt-A loans, of $44 million, $37 million
and $43 million, respectively. Consumer loans delinquent 30-89 days at March 31, 2011 totaled $96
million, compared with $108 million and $120 million at March 31, 2010 and December 31, 2010,
respectively. Consumer loans past due 90 days or more and accruing interest totaled $4 million at
each of March 31, 2011 and December 31, 2010, compared with $3 million at March 31, 2010.
Information about the location of nonaccrual and charged-off home equity loans and lines of credit
as of and for the quarter-ended March 31, 2011 is presented in the accompanying table.
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SELECTED RESIDENTIAL REAL ESTATE-RELATED LOAN DATA
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Real estate and other foreclosed assets were $218 million and $95 million at March 31,
2011 and March 31, 2010, and $220 million at December 31, 2010. The increase at the two most
recent quarter-ends as compared with March 31, 2010 reflects the $98 million addition in the second
quarter of 2010 of a commercial real estate property located in New York City. Excluding that
property, at March 31, 2011, the Company’s holding of residential real estate-related properties
comprised 74% of the remaining foreclosed assets.
A comparative summary of nonperforming assets and certain past due loan data and credit
quality ratios as of the end of the periods indicated is presented in the accompanying table.
NONPERFORMING ASSET AND PAST DUE, RENEGOTIATED AND IMPAIRED LOAN DATA
Dollars in thousands
Management regularly assesses the adequacy of the allowance for credit losses by performing
ongoing evaluations of the loan and lease portfolio, including such factors as the differing
economic risks associated with each loan category, the financial condition of specific borrowers,
the economic environment in which borrowers operate, the level of delinquent loans, the value of
any collateral and, where applicable, the existence of any
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guarantees or indemnifications. Management evaluated the impact of changes in interest rates
and overall economic conditions on the ability of borrowers to meet repayment obligations when
quantifying the Company’s exposure to credit losses and assessing the adequacy of the Company’s
allowance for such losses as of each reporting date. Factors also considered by management when
performing its assessment, in addition to general economic conditions and the other factors
described above, included, but were not limited to: (i) the impact of declining residential real
estate values in the Company’s portfolio of loans to residential real estate builders and
developers; (ii) the repayment performance associated with the Company’s portfolio of Alt-A
residential mortgage loans; (iii) the concentrations of commercial real estate loans in the
Company’s loan portfolio; (iv) the amount of commercial and industrial loans to businesses in areas
of New York State outside of the New York City metropolitan area and in central Pennsylvania that
have historically experienced less economic growth and vitality than the vast majority of other
regions of the country; and (v) the size of the Company’s portfolio of loans to individual
consumers, which historically have experienced higher net charge-offs as a percentage of loans
outstanding than other loan types. The level of the allowance is adjusted based on the results of
management’s analysis.
Management cautiously and conservatively evaluated the allowance for credit losses as of March
31, 2011 in light of: (i) residential real estate values and the level of delinquencies of
residential real estate loans; (ii) economic conditions in the markets served by the Company; (iii)
continuing weakness in industrial employment in upstate New York and central Pennsylvania; (iv) the
significant subjectivity involved in commercial real estate valuations for properties located in
areas with stagnant or low growth economies; and (v) the amount of loan growth experienced by the
Company. Considerable concerns continue to exist about economic conditions in both national and
international markets; the level and volatility of energy prices; a weakened housing market; the
troubled state of financial and credit markets; Federal Reserve positioning of monetary policy;
high levels of unemployment; the impact of economic conditions on businesses’ operations and
abilities to repay loans; continued stagnant population growth in the upstate New York and central
Pennsylvania regions; and continued uncertainty about possible responses to state and local
government budget deficits. Although the U.S. economy experienced recession and weak economic
conditions during recent years, the impact of those conditions was not as pronounced on borrowers
in the traditionally slower growth or stagnant regions of upstate New York and central
Pennsylvania. Approximately one-half of the Company’s loans are to customers in upstate New York
and Pennsylvania. Home prices in upstate New York and central Pennsylvania were largely unchanged
in 2009 and 2010, in contrast to declines in values in many other regions of the country.
Therefore, despite the conditions, as previously described, the most severe credit issues
experienced by the Company have been centered around residential real estate, including loans to
builders and developers of residential real estate, in areas other than New York State and
Pennsylvania. In response, the Company expanded its normal loan review process to conduct detailed
reviews of all loans to residential real estate builders and developers that exceeded $2.5 million.
Those credit reviews often resulted in commencement of intensified collection efforts, including
foreclosure.
The Company utilizes an extensive loan grading system which is applied to all commercial and
commercial real estate loans. On a quarterly basis, the Company’s loan review department reviews
commercial and commercial real estate loans that are classified as “Special Mention” or worse.
Meetings are held with loan officers and their managers, workout specialists and senior management
to discuss each of the relationships. Borrower-specific information is reviewed, including
operating results, future cash flows, recent developments and the borrower’s outlook, and other
pertinent data. The timing and extent of potential losses, considering collateral valuation, and
the Company’s potential courses of action are reviewed. To the extent that these
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loans are collateral-dependent, they are evaluated based on the fair value of the loan’s
collateral as estimated at or near the financial statement date. As the quality of a loan
deteriorates to the point of classifying the loan as “Special Mention,” the process of obtaining
updated collateral valuation information is usually initiated, unless it is not considered
warranted given factors such as the relative size of the loan, the characteristics of the
collateral or the age of the last valuation. In those cases where current appraisals may not yet
be available, prior appraisals are utilized with adjustments, as deemed necessary, for estimates of
subsequent declines in value as determined by line of business and/or loan workout personnel in the
respective geographic regions. Those adjustments are reviewed and assessed for reasonableness by
the Company’s loan review department. Accordingly, for real estate collateral securing larger
commercial and commercial real estate loans, estimated collateral values are based on current
appraisals and estimates of value. For non-real estate loans, collateral is assigned a discounted
estimated liquidation value and, depending on the nature of the collateral, is verified through
field exams or other procedures. In assessing collateral, real estate and non-real estate values
are reduced by an estimate of selling costs. With regard to residential real estate loans, the
Company expanded its collections and loan work-out staff and further refined its loss
identification and estimation techniques by reference to loan performance and house price
depreciation data in specific areas of the country where collateral that was securing the Company’s
residential real estate loans was located. For residential real estate-related loans, including
home equity loans and lines of credit, the excess of the loan balance over the net realizable value
of the property collateralizing the loan is charged-off when the loan becomes 150 days delinquent.
That charge-off is based on recent indications of value from external parties.
Factors that influence the Company’s credit loss experience include overall economic
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