M&T Bank
Annual Report 2016

Plain-text annual report

M &T B A N K C O R P O R AT I O N 2 0 1 6 A N N U A L R E P O R T Cover Art: German photographers Bernd and Hilla Becher are known for their black-and-white photographs of industrial buildings and objects. Taken in 1982, this photograph captures the industrial spirit that was key to Buffalo’s rise in the nineteenth century and that has been rekindled in recent years. Buffalo’s rebirth seeks not only to embrace what once made the city a hub of commerce, industry and life, but also to reinvent it, including the grain elevators that grace Buffalo’s Outer Harbor. Grain Elevator, Buffalo, New York, USA, 1982 is one of 15 gelatin silver prints from the Bechers that are housed in the Albright-Knox Art Gallery’s collection as part of the typology Industrial Facades, 1970–1992. The divider pages also exhibit some of Buffalo’s grain elevators, photographed by Jay W. Baxtresser, who was an employee of the Albright Art Gallery, as it was called at the time of his employment. His photographs were featured in a 1940 exhibition at the gallery that celebrated Buffalo’s rich architectural and planning heritage. Founded in 1862 as the Buffalo Fine Arts Academy, the gallery has grown and expanded into the world-renowned institution celebrated today. For more than 30 years, M&T Bank has been a proud supporter of the Albright-Knox Art Gallery, its programs and exhibitions. This is the latest in the series of annual reports to feature works from artists and galleries with strong connections to the communities served by M&T Bank. Bernd and Hilla Becher (German, established 1959 [Bernd Becher, 1931–2007; Hilla Becher, 1934–2015]). Grain Elevator, Buffalo, New York, USA, 1982. Black-and-white photograph. Gelatin silver print, edition 1/5, print: 22 5/8 × 19 5/8 inches (60 × 50 cm), framed: 36 × 29 inches (91.44 × 73.66 cm), BHB-268 (1). Collection Albright-Knox Art Gallery, Buffalo, New York; James S. Ely Fund, 1997 (P1997:17). ©2017 Estate of Bernd and Hilla Becher. Photograph by Tom Loonan. Sonnabend Gallery, NY. © Estate Bernd & Hilla Becher. M&T Bank Corporation Contents Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii Message to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxix United States Securities and Exchange Commission (SEC) Form 10-K . . . . . .xlii Annual Meeting The annual meeting of shareholders will take place at 11:00 a .m . on April 18, 2017 at One M&T Plaza in Buffalo . Profile M&T Bank Corporation is a bank holding company headquartered in Buffalo, New York, which had assets of $123 .4 billion at December 31, 2016 . M&T Bank Corporation’s subsidiaries include M&T Bank and Wilmington Trust, National Association . M&T Bank has banking offices in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia and the District of Columbia . Major subsidiaries include: M&T Insurance Agency, Inc . M&T Securities, Inc . M&T Real Estate Trust Wilmington Trust Company M&T Realty Capital Corporation Wilmington Trust Investment Advisors, Inc . M&T Bank Corporation and Subsidiaries Financial Highlights For the year Performance Net income (thousands) . . . . . . . . . . . . . . . . $ 1,315,114 Net income available to common shareholders — diluted (thousands) . . . . 1,223,481 Return on Average assets . . . . . . . . . . . . . . . . . . . . . . . Average common equity . . . . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . . . . . . Net charge-offs/average loans . . . . . . . . . . . 1 .06% 8 .16% 3 .11 % .18% 2016 2015 Change $ 1,079,667 + 22% 987,724 + 24% 1 .06% 8 .32% 3 .14% .19% $ 7 .22 7 .18 2 .80 + 8% + 8%   —   + 18% Per common share data Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 .80 Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . 7 .78 2 .80 Net operating (tangible) results(a) Net operating income (thousands) . . . . . . $ 1,362,692 $ 1,156,637 Diluted net operating earnings per common share . . . . . . . . . . . . . . . . . . . 8 .08 7 .74 + 4% Net operating return on Average tangible assets . . . . . . . . . . . . . . . 1 .14% Average tangible common equity . . . . . . Efficiency ratio(b) . . . . . . . . . . . . . . . . . . . . . . . 12 .25% 56 .10% 1 .18% 13 .00% 57 .98% At December 31 Balance sheet data (millions) Loans and leases, net of unearned discount . . . . . . . . . . . . . $ 90,853 123,449 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,494 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,487 Total shareholders’ equity . . . . . . . . . . . . . . 15,252 Common shareholders’ equity . . . . . . . . . . Loan quality Allowance for credit losses to total loans Nonaccrual loans ratio . . . . . . . . . . . . . . . . . . 1 .09% 1 .01% Capital Common equity Tier 1 ratio . . . . . . . . . . . . . 10 .70% Tier 1 risk-based capital ratio . . . . . . . . . . . 11 .92% Total risk-based capital ratio . . . . . . . . . . . . 14 .09% Leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . 9 .99% Total equity/total assets . . . . . . . . . . . . . . . . 13 .35% Common equity (book value) per share . . $ 97 .64 Tangible common equity per share . . . . . . 67 .85 Market price per share Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 .43 High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 .35 Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 .08 + 4% + 1% + 4% + 2% + 2% + 4% + 6% + 29% $ 87,489 122,788 91,958 16,173 14,939 1 .09% .91% 11 .08% 12 .68% 14 .92% 10 .89% 13 .17% $ 93 .60 64 .28 121 .18 134 .00 111 .50 (a) Excludes amortization and balances related to goodwill and core deposit and other intangible assets and merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. A reconciliation of net income and net operating income appears in Item 7, Table 2 in Form 10-K. (b) Excludes impact of merger-related expenses and net securities gains or losses. ii DILUTED EARNINGS PER COMMON SHARE SHAREHOLDERS’ EQUITY PER COMMON SHARE AT YEAR-END 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 $7.88 $7.54 $8.48 $8.20 $7.57 $7.42 $7.74 $7.18 $8.08 $7.78 $72.73 $79.81 $83.88 $93.60 $97.64 $44.61 $52.45 $57.06 $64.28 $67.85 Diluted net operating(a) Diluted Shareholders’ equity per common share at year-end Tangible shareholders’ equity per common share at year-end NET INCOME In millions RETURN ON AVERAGE COMMON SHAREHOLDERS’ EQUITY 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 $1,072.5 $1,174.6 $1,086.9 $1,156.6 $1,362.7 $1,029.5 $1,138.5 $1,066.2 $1,079.7 $1,315.1 Net operating income(a) Net income 19.42% 17.79% 13.76% 13.00% 12.25% 8.16% 9.08% 10.96% 10.93% 8.32% Net operating return on average tangible common shareholders’ equity(a) Return on average common shareholders’ equity (a) Excludes merger-related gains and expenses and amortization of intangible assets, net of applicable income tax effects. A reconciliation of net operating (tangible) results with net income is included in Item 7, Table 2 in Form 10-K. iii Message to Shareholders Dellwood Warehouse & Elevator Company . Image courtesy of the Albright-Knox Art Gallery G. Robert Strauss, Jr. Memorial Library, Digital Assets Collection and Archives. Photograph by Jay W. Baxtresser. ©2017 Albright-Knox Art Gallery, Buffalo, New York. iv  O urs is a company that has consistently sought steady improvement in earnings, reliable returns to shareholders, and the provision of credit and financial advice to our communities through both times of prosperity and times of uncertainty . The past year was among the more uncertain and eventful in recent memory . Political change, both domestically and internationally, buffeted equity and bond markets, with implications for monetary policy . No bank can be insulated from such volatility . But neither can a prudent bank overreact to such gyrations . As we have throughout our history, we at M&T sought, this year past, to resist the temptation to respond to events in haste, and instead based our decisions on what we believed was best over the long term . The U .S . equity markets, as measured by the Dow Jones Industrial Average, began 2016 by dropping as much as 10 .1%, only to recover fully by the middle of March . The “Brexit” vote in June shocked world markets, sending long-term U .S . Treasury yields downward to historically low levels before recovering at year end . The U .S . presidential election triggered still more volatility in the financial markets, most notably in the banking sector . In no instance did we rush toward action . Instead, we sought to maintain a consistent focus on long-term returns . The results that follow reflect continued improvement at M&T, even as we dealt with our particular challenges . Here are the specifics . v Net income under generally accepted accounting principles (“GAAP”) totaled $1 .32 billion in 2016, improving 22% from $1 .08 billion in 2015 . Results reflect a full year of operations acquired in our merger with Hudson City Bancorp, Inc . (“Hudson City”), versus just two months in the prior year . Diluted earnings per common share amounted to $7 .78, or 8% higher than $7 .18 in the previous year . The 2016 results, expressed as a percentage of average assets and average common equity, were 1 .06% and 8 .16%, respectively . Since 1998, M&T has provided its results to investors on a “net operating” or “tangible” basis, which have consistently excluded only the after-tax effect from any gains or expenses realized in connection with mergers and acquisitions as well as the impact from intangible assets recorded in those mergers . We believe that these figures give investors a better view of how merger activity affects our reported results on both the income statement and balance sheet . M&T recognized $22 million, after tax effect, of Hudson City merger-related expenses in 2016 . This compares with $61 million in 2015, when the merger was consummated . Net operating income amounted to $1 .36 billion last year, an increase of 18% from the year prior . Net operating income per diluted common share increased to $8 .08, improved by 4% from $7 .74 in the previous year . The net operating results expressed as a percentage of average tangible assets were 1 .14% and expressed as a percentage of average tangible common equity were 12 .25% . The net operating results highlight the value of the Hudson City transaction and the accretive nature of that combination . vi Net interest income—interest collected on loans, securities, and other investments, less interest paid on deposits and borrowings, expressed on a taxable-equivalent basis—totaled $3 .50 billion in 2016, representing an increase of 22% from $2 .87 billion in the previous year . Average loans increased by 25% to $88 .6 billion last year, reflecting the full-year impact of the loans acquired with Hudson City as well as the increase from those originated across our footprint . Average earning assets increased by 23% to $112 .6 billion . Slightly offsetting the growth in balances was a decrease in the net interest margin, or taxable-equivalent net interest income divided by average earning assets, to 3 .11%, a decrease of three basis points from 3 .14% in 2015 . The net interest margin has been continuously pressured by the low interest rate environment that prevailed over the past decade and competitors’ response to the same . Credit performance in 2016 essentially mirrored the results seen in 2015 and 2014 . Net charge-offs, which represent loan balances written off as uncollectible, less recoveries of amounts previously written-off, totaled $157 million in 2016 . Notably, net charge-offs expressed as a percentage of average loans equaled 0 .18% in the past year, compared with 0 .19% in each of 2014 and 2015 . These credit metrics reflect consistent, yet slow, economic growth as well as the results of prudent underwriting . Credit losses remain at a level about half of M&T’s long-term average loss rate of 0 .36% . The provision for loan losses was $190 million in 2016, exceeding net charge-offs by $33 million . The allowance for loan losses increased to $989 million, or 1 .09% of loans outstanding at year-end . Noninterest income, which represents fees for services and other revenues, amounted to $1 .83 billion this past year, unchanged from vii the previous year . M&T’s three largest fee categories, namely, mortgage banking, trust income, and service charges on deposit accounts, were each little changed from 2015 . Over the past few years, significant strides have been made in growing businesses that complement existing banking activities and enhance overall returns . Mortgage banking, both commercial and residential, as well as the Wealth and Institutional Services Division, which generates trust income, are positioned to grow . Noninterest expenses were $3 .05 billion for 2016, an 8% increase from $2 .82 billion in 2015 . The increase largely reflects the full-year cost of operating the acquired Hudson City branches, partially offset by the lower merger-related expenses previously mentioned . The efficiency ratio, which expresses noninterest operating expenses as a percentage of total revenues, and which reflects the cost to produce a dollar of revenue, was 56 .1% in 2016, improved by nearly two percentage points from 58 .0% in 2015 . Investments continue to be made in new technology, risk management infrastructure, and new business development, including growth in New Jersey . M&T’s performance during 2016 enabled the company to grow both its capital base and tangible book value, while also returning a greater amount of capital to shareholders . Common shareholders’ equity at the end of 2016 increased by $313 million from the prior year end to $15 .3 billion . The ratio of tangible common equity to tangible assets increased from 8 .69% at year-end 2015 to 8 .92% at year-end 2016 . Tangible book value per share ended 2016 at $67 .85, up $3 .57 from the prior year, representing an increase of more than 5% . During the year, M&T also returned an aggregate $1 .08 billion of capital to shareholders through common stock dividends viii and the repurchase of 5 .6 million shares of its common stock at an average price of $114 .37 per share . Prudent use of shareholder capital remains our most important priority, as we seek growth opportunities that enhance returns while also looking to distribute excess capital to shareholders . One is justified, then, in counting 2016 as a productive year for M&T . Despite the ups and downs of the financial markets, we are well-positioned and poised for growth . 2016: A PRODUCTIVE YEAR Performance during our 160th year provides ample cause for optimism . The year past saw the full integration of the recently-acquired Hudson City, through which we added $37 billion in assets, 217,707 consumer households, and 135 branches in New Jersey, Connecticut, and New York . We continue to believe that this is an acquisition both prudent and promising, one which, like others we have undertaken, builds upon our historic presence in contiguous markets . Dealing successfully with the logistics of such a merger could not be taken for granted . Experience has taught us the rigor with which these tasks should be embarked upon . After years of planning and preparation, 1,070 dedicated M&T bankers went to work, integrating Hudson City’s systems and welcoming new colleagues . Doing so required the commitment of a brigade drawn from many divisions and geographies throughout M&T, completing work over and above what would ordinarily have been asked of them . Converting a thrift into a commercial bank is a process measured in years, not weeks, but early results are encouraging . M&T knows New Jersey, and now New Jersey knows M&T . ix We also made continued crucial progress in another multi-year project: building out our risk management infrastructure . Such ongoing investments will do more, however, than meet regulatory requirements; they will help lay the groundwork for securing and increasing our market share in our growing footprint . It should be a source of satisfaction to M&T colleagues and shareholders that we were able to accomplish these sorts of crucial but not flashy projects while maintaining healthy earnings per share and low net loan charge-offs, even as commercial real estate, commercial, and consumer lending all grew . Optimism, in other words, is altogether justified . We are mindful, however, that the year past could just as well be characterized as good— but not-quite-great . We continued to outperform our peers but the bar for doing so remains low . Perhaps it is only to be expected that bank earnings would be increasing slowly at a time of tepid economic performance . But the specific reasons why our growth has been relatively constrained matter . These same factors have also worked to the detriment of the consumers, businesses, and communities we serve . A TIME FOR REFLECTION: This is an unsettled and, for some, an unsettling time . There is no doubt, however, that the U .S . is poised for significant policy adjustments, with important effects on key levers impacting the economy . Understanding past constraints is worthwhile as new political leadership contemplates change . With that in mind, this is not the time to focus this Message to Shareholders narrowly on the prospects and accomplishments of M&T, as proud and as optimistic as we are about them . Rather, the goal of what follows is to put our own situation in a broader context . It is, all told, a picture that one wishes were brighter . x One could address a wide range of economic indicators and policies, but in recent years, two far-reaching forces—monetary policy and business regulation—stand out in their importance . Both have a self-evident relationship with bank revenues and expenses . Ultra-low interest rates, of course, make it more difficult to realize traditional rates of return on bank lending and investment . Banks have seen exactly these effects upon measures such as their net interest margins, and in the buildup of liquidity to levels well above historical norms . Furthermore, the raft of new financial industry regulation—embodied in the Dodd- Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) but not limited to it—has necessitated that banks hold much higher levels of capital, while pushing compliance costs to record levels . It has not only become more costly, but taken an increasing number of forms that require reporting to an increasing number of regulatory bodies . Banks are now called upon to undertake such varied tasks as monitoring the activities of vendors that we do not control, systematically collecting and sharing information regarding certain customer transactions with law enforcement authorities, and ensuring that our mortgage products and services meet a range of complex standards specified by numerous agencies that do not always work in coordination . But the focus of concern about the effects of policy should not, first or foremost, be on banks and banking—but, rather, on consumers and communities . And it is therein that recent “results” are alarming . The markets that M&T serves are, in the main, those of historically middle class communities with historically vibrant local economies, often manufacturing-based . Economic and survey data, as it pertains xi to them, are concerning . On so many measures of economic well-being and security, the so-called middle class has been losing ground for many years . Since 1973, total median household income from all sources, including wages, which comprise more than 80% of income for middle class families, has increased only 13% . In fact, earnings for the typical family actually peaked in 1999 . Even as the overall economy, as measured by GDP growth, has approached recovery to a pre-recession level, the typical family has yet to make up the earnings lost in both the 2001 and 2008 recessions . It is no wonder that a declining share of households even consider themselves to be part of the middle class; 63% did so in 2001 . By 2015, that number had fallen to just 51% . Numbers alone cannot fully convey the effects of such stagnation, effects our colleagues observe among their neighbors and in the communities surrounding our branches—whether in college enrollment foregone, retirement postponed, even modest vacations put off . It is worth considering what effects the macroeconomic policies that impact banking referenced above might also have on the hopes and plans of families, workers, and small business owners . MONETARY POLICY AND THE PROLONGED LOW RATE ENVIRONMENT To appreciate fully the current state of the economy, it is important to understand the events that led to this point . Recall, the Great Recession, as it has come to be known, was, unlike prior recessions, precipitated by the aftermath of a broad-based credit bubble spurred by excessive housing- related debt . The severity and unique nature of this downturn necessitated policy responses not previously employed—the effects of which were xii not well understood . While these responses proved effective early on at stabilizing the economy, their lingering effects continue to weigh on middle class households and communities . The standard playbook in a normal recession calls for government to pursue structural expansion in fiscal support—elevated government spending and investment coupled with tax relief—while also reducing interest rates . These responses would work in concert to stimulate the economy and reverse its decline, to the advantage of businesses and consumers generally . In December of 2007, a nearly twenty-year period characterized by generally consistent economic growth ended abruptly, and the economy began to suffer to an extent not experienced in any prior post- World War II recession . The loss of confidence in the financial system led to a state of near-panic . The unprecedented problems posed by this recession demanded unprecedented solutions—bold and drastic action was needed . Unconventional policy responses were implemented, while other heretofore standard responses were not . The government’s most significant fiscal measures were structured not as a general stimulus, but programs specifically aimed at the parts of the economy under the greatest duress . In particular, enormous sums were spent on providing temporary liquidity and capital to rescue key institutions that were at risk of failure, in hopes of limiting collateral damage to the rest of the economy . Such measures were to the direct benefit of large banks, insurance companies, and auto manufacturers—the failure of which could have spurred broader, catastrophic effects . xiii With comparatively limited support from the usual fiscal measures that would follow a recession, monetary policy bore the burden of stimulating the economy, necessitating a series of measures that were extraordinary and untested . Policymakers were compelled to reduce rates time and again, ultimately reaching a practical limit as short-term rates approached zero, the lowest level ever in the U .S ., and remained there for more than seven years . The march into uncharted territory continued . To address the crisis and its aftermath, the Federal Reserve directly infused cash into the economy by purchasing more than $3 trillion of securities, equivalent to nearly a year of federal government spending . This unparalleled use of monetary policy helped to avert a depression . The responses in the years following the worst of the crisis were also unconventional . Rather than spending to promote growth, the government instead enacted legislation and regulation that in practice restricted it—effectively, a form of negative fiscal policy . Put forth in the name of preventing a recurrence of the circumstances that led to the financial crisis, the plethora of new regulations intended to limit taxpayer risk have ultimately proved a drag on growth . Regulation took many shapes and forms across all sectors of the economy, affecting not only the financial sector but also industries as diverse as energy, healthcare, housing, and construction . Businesses were no longer willing or able to take the prudent risks that even moderate growth expectations demand . With the benefit of hindsight, it appears the economy in recent years has fallen out of balance—overly reliant on monetary policy not xiv accompanied by traditional fiscal stimulus . Policies designed to benefit the majority have perversely only benefited a few . The impacts of these decisions or non-decisions are real . In particular, the middle class and small businesses are losing ground . So, too, are their communities . The details that follow illuminate trends that should be of concern to all . This extended period of ultra-low interest rates no longer benefits the average U .S . household . The majority of the wealth of the typical M&T customer, like that of most Americans, takes the form of equity in their homes, retirement savings, bank deposits and, to a lesser extent, stock market investments . Low rates initially provided middle class households with relief both by lowering monthly mortgage payments and supporting a recovery in home values . However, the investments of these same families have suffered . Indeed, many middle class families, frightened by the precipitous market decline of 2008, responded by pulling out of the market . Only half of these households today hold any stocks or mutual fund shares; before the crisis, fully 72% did so . Crucially, without stocks and the growth in value and dividends they can provide, most households must rely on interest from their investments to save for college, a down payment on a home, or to prepare for and navigate retirement . It is here that they have felt the sting of near-zero interest rates . Interest income for households has declined sharply in the aggregate . In 2014, it had, compared to 2005, fallen by some $64 billion . This disproportionately affected households with an income less than $100,000; their interest income declined by $44 billion, or 68% of the total decrease for all households . There are, to be sure, some who can take such xv a drop in stride—those, for instance, fortunate enough to hold dividend- paying stocks . Dividend income in 2014 was, in fact, $162 billion higher than it had been in 2005 . But 95% of that increase in dividend income has accrued to households whose income was greater than $100,000 . Indeed, only $9 billion of the $162 billion increase in total dividend income has found its way to households with annual earnings under $100,000—not enough to offset the lost interest income . Investments managed on behalf of the typical American family are not immune to these economic trends . At the heart of the issue is the declining rate of return on investments—particularly secure investments like bonds . The practical implications for the alternatives through which typical households preserve and grow wealth, such as insurance, retirement accounts, and pensions, are troubling . Indicative of what has happened in the marketplace, insurers that have traditionally invested premiums in safe, long-term instruments such as government securities and high-quality corporate bonds have come under pressure . The average yield on 10-year U .S . Treasury bonds since 2010 has, unfortunately, declined to a level 274 basis points, or 53%, below the 30-year average . Insurers ultimately have limited options to offset sustained low yields on their investments . Should rates remain low, it will eventually be necessary to raise prices or invest in assets that offer higher returns but also carry higher risk . Neither outcome would benefit middle class families . Pension plans sponsored by employers, long a pillar of retirement savings for many workers, face similar pressures . Low rates that pension funds earn on investments mean either that businesses and governments xvi must set aside more to ensure future benefits, or put those benefits at risk by under-funding them . The trend is disconcerting . Although, at the end of 2007, corporate pension plans showed a modest surplus, they had, by the end of 2016, developed a $408 billion deficit . Not even public sector employees can remain confident in the health of their pension plans, as some major state pension funds reduce their estimated rates of return and contemplate reductions in benefits . To offset the impact of low returns and still deliver on their promises to consumers, investment professionals are increasingly turning to alternative investments such as hedge funds and private equity that offer the potential for higher returns, but come with more risk . Given these costs and challenges, many businesses have responded by transitioning away from offering pensions altogether, instead sponsoring programs such as 401(k) accounts through which employees largely bear responsibility for determining the amount they save and the manner in which they invest . Workers then confront the same difficult choices as investment managers, weighing the tradeoff between accepting low returns or undertaking greater risk with their hard-earned savings . No wage growth . No investment earnings growth . No wonder families are stretched and stressed . We should hardly be surprised, then, to see a sharply increased rate of savings—fully 1 .5 percentage points higher than that in 2000-2004 . Accompanied by lower interest income, this has led middle class families to spend less, dampening economic growth . Simple math suggests that a 1 .5 percentage point increase in the savings rate equated to nearly $200 billion in consumer spending— spending that did not occur as families instead saved more to make up xvii for their lost income . Monetary policy was intended to act as an accelerant for an economy in recession, and did in fact accomplish that goal early on; however, its benefits have waned, if not reversed, over time . BIG BUSINESS AND SMALL: CRUCIAL DIFFERENCES Similar to the experience of American families, the response to the financial crisis has contributed to a dichotomy between the performance of the largest American firms and the smaller businesses that form the backbone of the communities we serve . By many measures, the performance of large businesses following the recession has been impressive . Between 2007 and 2012, the receipts of firms with 500 or more employees increased, in real terms, at an annual rate of 2 .4% . Employment levels for such firms have fully rebounded from the Great Recession and then some; as a group, they employed 2 .4 million more workers in 2014 than in 2007 . So, too, we saw the profit margins of the corporations in the S&P 500, the nation’s largest public companies, exceed pre-recession levels and reach their highest level in the past three decades, increasing from less than 6% near the end of the Great Recession to 9 .2% in 2014 . This recovery in the fortunes of large businesses is not all that it seems, however, when one looks more closely at its underpinnings . In effect, the largest firms—and their shareholders—have benefited disproportionately from a recovery fueled by monetary policy based on inexpensive access to financing and historically low interest rates . Large businesses have taken full advantage of the availability of credit at low cost, which, for such firms, has never been more favorable . xviii Highly-rated corporations issued more than $1 .2 trillion of debt in 2016 alone, the highest level ever recorded . Indeed, the level of debt as compared to earnings before interest, taxes, depreciation, and amortization has reached its highest level since 1980 . It is also instructive to examine what large firms are doing with this tsunami of cheap capital . One would hope, of course, that the debt issued would be used to support the sort of investment in tools, technologies, and research and development that has historically improved labor productivity and consequently created well-paying jobs for middle class families . That, however, has not been the case . Unfortunately, due to the stagnant economy, firms are left with no choice but to return their earnings to their shareholders, few of whom are middle class families . Indeed, in 2015, S&P 500 companies returned $978 billion of their earnings to shareholders through dividends and share buybacks, exceeding the $923 billion they invested in capital goods and research and development of the sort that would lay the foundation for future growth . These large firms have also taken advantage of low interest rates and their own appreciating share prices to acquire smaller competitors . The average valuation of the large firms in the S&P 500 has increased by 37% from 12 .9 times annual earnings in 2011 to 17 .7 times in 2016, providing them with a strong currency to fund acquisitions . During 2015, the S&P 500 companies alone spent more than $400 billion on such acquisitions . This is all the more concerning because, to the extent that we have seen job growth, it has come on the payrolls of the largest firms . Job growth that is bought, not hired, is not net job growth for the community . xix Implicit in the story of how larger businesses and their shareholders have benefited from economic policy is the less-than-happy but related tale of how small businesses have not . By small businesses, we mean the 5 .7 million firms employing fewer than 100, the types of businesses we customarily serve at M&T—small and start-up manufacturers, car dealers, construction firms, and retailers, among others . Historically, small business has been the engine of new job creation and, indeed, even the womb in which new American industrial sectors were incubated . However, over the past four decades, the role of such enterprises has been steadily diminishing, to the nation’s detriment . While U .S . businesses have added more than 44 million jobs since 1980, small businesses accounted for less than 12 million jobs, or just 26%, of this growth . The severity of the Great Recession and its aftermath only exacerbated this trend . Where large businesses have seen employment grow by 2 .4 million since 2007, small business employment is down by 1 .9 million over the same period . Payrolls in real dollars have retreated by $85 billion at small businesses but are up $245 billion at their larger counterparts . As the number of large businesses has grown, the ranks of smaller firms have declined by 224,000 since 2007 . We have seen small business growth wither and its independence threatened, with implications for communities and the overall economy . Small businesses, like their larger brethren, are reluctant to invest and expand despite the historically low interest rates . There is more to this story than just the stagnant economy . At M&T, we surveyed our small and medium-sized business clients in an effort to understand xx the challenges they face . One might expect them to express traditional concerns—such as the cost of materials or the pressure of competition . Instead, 55% cited the cost of employee healthcare benefits as their greatest hurdle, while 36% cited the not-unrelated challenge of complying with government regulation . To underscore: notwithstanding the slow- growth environment of the post-recession economy, our own business clients view regulation as a greater concern than sales growth, the lifeblood of any business . As we have found in our own markets, so has a national survey conducted by the National Federation of Independent Business (“NFIB”) . Indeed, since 2009, that survey has cited regulation as the single greatest challenge facing small businesses across the country . This suggests that their core problem is not a lack of opportunity, but government-imposed obstacles that limit their ability to capitalize on the opportunities they identify . If concern over new regulation seems justified and plausible, the record confirms this . It shows that a bloom of regulation and regulators has accelerated since the 2008 recession . The extent of the growth in regulation is both impressive and staggering . Since 2010, the average number of pages of new regulations issued has exceeded 25,000 annually, up nearly 60% from the level of the 1980s . The total length of the Federal Register, the official repository of federal rules, reached 178,277 pages in 2015, up from some 151,973 ten years earlier and just 71,224 in 1975 . The cost to the private sector of the regulations promulgated in 2015 alone has been estimated by the regulators themselves at $23 billion . The estimated annual cost of rules enacted since 2009 exceeds $108 billion, or fully 0 .6% of U .S . gross domestic product . The scope of regulation facing xxi the businesses we serve has dampened and diverted their energies . It is very much uncertain whether the benefits of the ever-growing volume of regulation outweigh its drag on economic growth . One especially worrisome insight from a 2012 NFIB study: 55% of small business owners would not again choose to open shop . The declining rate of small business formation reflects this growing caution on the part of would-be entrepreneurs . The number of new small businesses has declined from an annual average of 529,055 during the period 2003-2007 to 399,483 during 2010-2014—a 25% decline . Even more worrisome is the fact that the average number of new jobs created annually by new small businesses decreased from 2 .8 million during 2003-2007 to 2 .0 million during 2010- 2014—a 26% decline . To make matters worse, many of the smaller companies that we serve have capitulated, selling to distant investors and larger competitors with the scale to withstand the onslaught of regulation . Private equity firms in particular have been aggressively consolidating industries, buoyed by capital from pension funds and insurers and leveraged by low-cost financing . During 2015 alone, private equity firms acquired more than 4,100 businesses at a cost of $737 billion, surpassing even the number of such acquisitions in the boom years preceding the financial crisis . Nationally, the number of businesses owned by private equity funds has increased by 46% since 2009 . The pace of growth in private equity acquisitions has only stabilized in the past two years as a different type of buyer surged—larger publicly-traded firms . This is not the kind of data one associates with healthy, long-term economic growth, nor an economy that xxii can pull discouraged workers back into the labor force or encourage them to improve their skills . HUMAN CAPITAL AND THE SKILLED LABOR GAP Employment and economic growth have been held back not just by regulation and monetary policy but by what the economists would call human capital deficits—a shortage of qualified potential employees to fill available jobs in healthy industries . Nearly 30% of small businesses, for instance, report that they have been unable to fill open positions, double the rate of five years earlier . The number of positions across the country that remain unfilled has grown from less than 2 .2 million in the depths of the financial crisis to more than 5 .5 million today . This is not an abstract point to us at M&T . It is one made regularly by perplexed and frustrated business owners with whom we meet, whether in western New York, central Pennsylvania, New Jersey, or Maryland . These are firms that would like to hire—but cannot find the right kind of employee . Somehow, the combination of primary and secondary education systems, and post-graduate training, is failing both employers and their potential employees . Our own survey found that 61% of all small businesses reported difficulty in hiring qualified entry-level employees . The picture is most bleak in the construction industry, where we found that 64% of small business owners had difficulty finding skilled labor . Indeed, the number of open positions in the construction industry relative to overall industry employment continues to increase and now exceeds its pre-recession peak . In our own markets, we hear reports that upstate New York construction firms must look as far away as California xxiii to find qualified applicants . This is, without doubt, a problem that goes beyond M&T’s markets . In a national survey, fully 44% of businesses seeking to hire reported that they could not find employees with the skills needed . At a time when elected officials signal the prospect of a major national investment in infrastructure construction and reconstruction, a lack of skilled tradesmen must be viewed as a pressing concern . CHANGE AND CHALLENGE IN OUR COMMUNITIES The effects of slow economic growth, a shortage of qualified labor, and the growing regulatory burden can express themselves in ways that transcend specific firms and business sectors . These impediments cloud the prospects of entire communities . Locales with long traditions of industry and industriousness, innovation and livability, have found themselves buffeted by a perfect storm of business regulation, business takeovers, and subsequent exits . Left in its wake, these communities face a lower tax base but greater social service needs, at the same time the business and corporate philanthropy that was once a bedrock of local charity has shriveled . This is a downward spiral that starts with what has happened to many small and middle market firms we find in our footprint—whether in central or western New York, central Pennsylvania, or Delaware . It is tempting to believe that the shuttering of once-thriving independent middle market businesses in so-called Rust Belt communities is an inevitable side effect of much larger economic factors . We do not subscribe to this view . Policy matters . The cost and complexity of regulation helps to make these communities and their smaller employers vulnerable to xxiv takeover by outsiders, both public and private, with the scale necessary to prosper in the face of ever-greater regulation . Following such takeovers, headquarters offices depart, and local employment—and, quite possibly, technological innovation—withers . Local tax revenues of all types— whether based on home values or business offices—decline . Ancillary businesses, whether lunch counters or parts manufacturers, are at risk as well . This is how communities with great histories, a willing workforce, and affordable housing are passed by and hollowed out . The effect in our own communities has been both substantial and concerning . Consider some specifics . M&T surveyed the impact of business acquisitions by non-local investors in Syracuse . Like so many of the markets we serve, this city has historically been a hub of manufacturing, home to dozens of firms in industries such as specialty steel, fasteners, and custom machining . Such are the firms that are being shuttered or diminished . We found that, since 2004, at least 55 small and middle market firms in the Syracuse area alone were acquired by firms headquartered outside the region . After being acquired, these firms subsequently reduced employment by 40%, or 7,687 jobs . The jobs lost just by these firms represent 2 .4% of all jobs in the Syracuse area . This is no isolated case . Across our markets from upstate New York to Maryland, we identified at least 407 local businesses that were sold to buyers headquartered elsewhere—employment at these businesses later declined by an average of 25% . Beyond the jobs and families directly affected, we looked at the impact of this loss of local companies upon some of the largest charities xxv in our mid-sized markets . In city after city, from Buffalo to Syracuse, from Rochester to Harrisburg, the same pattern emerged . Research showed that, for local companies that were acquired by out-of-town firms, associated corporate and employee donations have declined by 59% to 89% . This is in contrast to the trends for companies that preserved local ownership, where philanthropic giving remained essentially flat or, in some instances, modestly increased . Membership of business leaders on not-for-profit boards declined—robbing the community of not just dollars but advice and expertise . Such local businesses have not only created new jobs but also groomed generation after generation of leaders for their communities, a critical role that distant acquirers cannot easily fill . So it is that we see the sinews of healthy communities atrophying, the quality of life for their citizens deteriorating . No single factor is to blame . The tides of change cannot altogether be held back, to be sure—nor should they be . But the policy decisions made in the aftermath of the Great Recession also matter—and have made crucial differences . The growing weight of regulation and the low interest rate environment that has outlived its usefulness have added impetus to this wave of takeovers . In their own way, they have held the economic recovery in check . REGULATION AND ITS RISKS Beyond these detrimental effects upon the businesses and communities that we serve, the scope of regulation has, in many respects, reshaped entire sectors of the economy . Consider just a few key industries that have been disproportionately affected by regulation . Energy, healthcare, xxvi housing, and finance, which in combination contribute 29% of U .S . economic output, have together faced a total of 7,260 new regulations just since the beginning of 2009 . The effects of such regulation are sweeping and often severe—its deployment invariably well-intentioned, yet its implications often unappreciated or misunderstood . As just one example, a recent survey suggests that, on average, regulation adds nearly $85,000 to the cost of developing and constructing a new home . Perhaps not coincidentally, fewer new homes were sold in 2016 than in 1973, a time when the U .S . was one-third less populous than today . It is instructive to consider the ways in which regulation has transformed the industry with which we are most familiar—our own . Regulation, more than any economic force in memory, has changed the face of banking . And because the fates of banks and the communities they serve are so intertwined, the regulatory impacts borne by regional banks are inextricably linked to the repercussions experienced by their customers . When oversight efforts made in good faith to alleviate one perceived problem inadvertently create another, the consequences, unintended as they may be, are tangible and far-reaching . In the wake of the financial crisis, legislators and regulators imposed a wide array of new laws and regulations, ostensibly to instill confidence in the U .S . financial system by limiting the amount and type of risks the largest financial institutions could undertake . So cataclysmic was the crisis, lawmakers felt pressured to react swiftly . It was decided, abruptly and arbitrarily, that banks whose assets exceeded a $50 billion threshold would be subjected to the most demanding requirements of the xxvii subsequently enacted Dodd-Frank legislation, regardless of an individual bank’s complexity or the nature of its business activities . Of course, not all banks are of equal size and complexity and not all companies that would call themselves banks are actually in the business of traditional banking—taking deposits and making loans to support community growth . Nonetheless, regional banks such as M&T find that they must meet the same onerous requirements as the largest global systemically important banks or “G-SIBs”—essentially those banks that have been deemed too big to fail . Significantly, these large banks generate a substantial portion of their revenue both through trading activities and lending to some of the largest companies in the world . To wit, just five of these large banks account for 90% of the industry’s total trading revenue with total notional derivatives exceeding $200 trillion, or more than 11 times U .S . GDP—a mix of business that differs drastically from the community-focused approach employed by regional banks . The differences between the largest banks and their regional counterparts extend not just to their business models but also to the ways in which they are executed . Indeed, there is compelling evidence to suggest that the regulators themselves would concur with such assertions, as evidenced by the sheer volume of regulatory sanctions and fines that these large firms have distinguished themselves by incurring . Particularly concerning are the instances where institutions or their employees placed their interests before those of their own customers . In the past decade, five large banks alone were subject to at least 187 legal settlements and fines totaling $158 billion, with at least another 89 investigations and lawsuits currently pending . The magnitude and frequency of these events xxviii have brought the wrath of the public upon the entire industry, creating a perceived necessity for more regulation . Leadership has an obligation to set a moral tone . What’s more, regional banks pursuing straightforward, traditional business models have been determined to pose low levels of risk, as measured by the scorecard designed by the Basel Committee on Banking Supervision to assess the risk that any given bank poses . This measure considers a host of factors including a bank’s size, complexity, interconnectedness, and international exposures . The commendable marks for regional banks stand in stark contrast to those of the largest banks, which operate across the globe and have much higher risk scores . If M&T and our 10 regional bank peers that individually have total assets between $50 billion and $500 billion were combined into a single institution spanning the country, the systemic risk score of that entity would not be nearly as large as that of any one of these five large banks . But despite the fundamentally lower risk that regional banks pose to the financial system as judged by the regulators’ own yardstick, they are still subject to nearly the same number of regulators and volume and character of regulations that rightly apply to their much larger and far more complicated brethren, with all of the attendant costs . One-size-fits-all rulemaking has thus created an uneven playing field, to the particular disadvantage of regional banks . The largest banks can bring their vast resources to bear in addressing these new measures of oversight, while the smallest banks escape many of the most punitive regulations altogether . This arbitrary approach confers, as well, a distinct xxix benefit on an emerging class of non-bank lenders—a group indirectly empowered by regulation that has ensnared traditional banks . These lenders have subsequently capitalized fully on the cost advantage resulting from their lesser regulatory burden . Such firms participate in many facets of banking . To understand the damage, consider mortgage banking, where non-banks originate more than half of new U .S . residential mortgage loans, compared to just 9% seven years ago . Regional banks are penalized at the starting line, paying dearly to try to narrow the gap but not always succeeding . At M&T, our own estimated cost of complying with regulation has increased from $90 million in 2010 to $440 million in 2016, representing nearly 15% of our total operating expenses . These monetary costs are exacerbated by the toll they take on our human capital . Hundreds of M&T colleagues have logged tens of thousands of hours navigating an ever more entangled web of concurrent examinations from an expanding roster of regulators . During 2016 alone, M&T faced 27 different examinations from six regulatory agencies . Examinations were ongoing during 50 of the 52 weeks of the year, with as many as six exams occurring simultaneously . In advance of these reviews, M&T received more than 1,200 distinct requests for information, and provided more than 225,000 pages of documentation in response . The onsite visits themselves were accompanied by an additional, often duplicative, 2,500 requests that required more than 100,000 pages to fulfill—a level of industry that, beyond being exhausting, inhibits our ability to invest in our franchise and meet the needs of our customers . xxx The sheer magnitude of this cost and requisite management focus diverted to compliance with expanding regulations overextends traditional banks’ finite resources—thereby hindering their ability to introduce new products and technologies, or pursue other projects that might be in the best of interests of their shareholders, customers, and communities . But as substantial as the compliance cost burden may be, regulatory consequences extend far beyond mere dollars and hours . Regulation has altered the fundamental underpinnings of traditional banking activities, including prudent decision-making regarding lending and, ultimately, the efficient allocation of capital . A STRESSED ECONOMY: Perhaps the most notable and intrusive regulation is the Comprehensive Capital Analysis and Review (CCAR) “stress test” exercise, an annual activity in which regulators forecast whether a bank is capable of withstanding an economic downturn more severe than the Great Recession of a decade ago . Results of these tests are widely publicized—giving banks a compelling incentive to pass and avoid the potential reputational damage that might accompany a failing grade . The stress test considers many types of risk, but for regional banks, which focus on lending rather than trading, credit risk (the risk that borrowers will not be able to repay their loans) is the most salient . Its inclusion in the vitally important stress test calculus has forced a fundamental change in the way that lending decisions are made, reshaping the historically symbiotic relationship between regional banks and businesses . To understand the nature of the change wrought by regulation, one must understand the traditional loan underwriting process . Regional xxxi banks base decisions to grant loans not just on such empirical (and universally available) factors as credit scores, but on local and personal knowledge, as well: the established reputation or known character of the applicant, or on the unquantifiable value that business owners bring to the table through their proven experience or entrepreneurial expertise . Yet the regulators’ models do not acknowledge the full range of valuable skills and local market knowledge that banks have long used in prudently determining whether to extend loans to worthy borrowers . Instead, banks are forced into a regulator’s Procrustean bed, called upon to follow an altogether formulaic process for reporting the characteristics of each loan . Regulators then evaluate the potential risk of default for each transaction using only financial models that use a prescribed set of variables, including the borrower’s credit score, the age of the business, and the type of lending product in question . Banks are not called upon to provide, and presumably the stress test models cannot consider, other pertinent information that reflects the true risk of individual small businesses . Such information would provide a more accurate and meaningful picture—the tale that a set of one-dimensional numbers cannot possibly tell . The implications of these regulatory shortcomings are not inconsequential . Forced to compete on an already skewed playing field, regional banks are diverging from what they do best by making lending decisions based not on their wealth of local knowledge and experience, but primarily through the narrow lens of the factors considered in the regulators’ models . Ever-looming stress test consequences have forced traditional banks to deploy a cold and calculated rubric that fails to comprehensively evaluate the ineffable quality of loans they make to small businesses . xxxii A recent industry analysis demonstrates the extent to which the stress test may distort the allocation of capital . The study suggests that, in the context of the stress test, banks must effectively hold as much as 140% more capital for a small business loan than for a loan to a larger firm—remarkably, small business loans are actually treated more punitively than even the potentially risky trading assets predominantly held by the largest banks . Deprived of their competitive advantage, regional banks must reconsider whether to make otherwise prudent loans that might face even the possibility of running afoul of the stress test models . The effect was all but inevitable: small business loan originations by regional banks subject to the stress test have not grown at all since 2009 . The stress test process has wrested decisions regarding the allocation of capital from regional banks that have a vested interest in the health of their communities and placed them in the hands of distant regulators . A small business owner’s experience and the informed perspective of a bank have been discounted to the detriment of all involved . A CAPITAL BIND: While stress tests have hindered banks’ ability to properly serve their customers, they are hardly unique in inflicting collateral damage in the name of mitigating risk to the U .S . financial system . Heightened liquidity requirements have also constrained deployment of capital that might otherwise help expand the economy . Once again, in the name of risk mitigation, these provisos require banks to use the funds entrusted to them by their customers to purchase government securities classified as “liquid .” In other words, banks are effectively mandated to use deposits to fund the needs of government rather than those of businesses and consumers . xxxiii Banks typically prefer to use the vast majority of the deposits they gather to support new loan growth . The total deposits of M&T and our 10 regional bank peers that individually have total assets between $50 billion and $500 billion increased by $733 billion during the past decade . Of these monies, $308 billion, or more than 42%, were diverted to purchase securities such as government bonds or simply stored at the Federal Reserve rather than being deployed in the community as loans . Worse still, liquidity regulations do not treat all deposits equally . Deposits by consumers are considered to be “sticky” and are preferred to those emanating from businesses large and small, which are in turn preferred to deposits of governments or other financial institutions . As a result, the largest banks have begun to aggressively compete for consumer deposits— often in markets where they had not previously been active—because they allow the bank to hold a lower percentage of government securities in offset . The largest banks have used technology and advertising to increase their market share in these communities . During 2016 alone, three of the largest banks grew their combined deposits by more than twice as much as M&T has grown its deposits during its entire 160-year history, including through 24 acquisitions in the last 30 years . Again we bear witness to an all-too-common theme: large banks gaining ground at the particular expense of community-focused institutions . Other regulations such as the so-called living will, a mechanism intended to assist regulators in coping with the potential failure of one of the largest global banks, have also been inappropriately applied to regional banks with simpler business models . Such a rule may be sensible for the largest institutions; just five of these large banks each have, on xxxiv average, 1,977 subsidiaries . In contrast, at M&T, in a structure more typical of regional banks, the total number of such entities is only 41 . But despite their comparative simplicity, the limited degree to which they change year-over-year, and the much lesser degree of risk they pose to the financial system, regional banks are subject to the same costly living will preparation process as the larger banks . FORWARD OVER LOST GROUND: We have directly observed the fundamental changes that regulation, as presently structured, has wrought upon our own industry, whether to the competitive balance between large and small banks or the nature of the relationships between banks and our customers . To the extent that our experience is mirrored across the many other industries impacted by regulation, it is no surprise that the performance of the economy and the sentiment of businesses and families has, until recently, remained subdued . Innovation has been stifled . The rewards of entrepreneurship may, in many instances, no longer outweigh its risks and its higher costs . With the crisis long past, the time for meaningful change—call it reform of the reforms—has arrived . Policies implemented over the past decade have needlessly impaired the ability of businesses of all stripes to perform their core function . Regulation meant to protect Americans has unwittingly inflicted unintended consequences across the country—the profound impacts of which are only now coming to be fully appreciated by the public and understood by the legislators themselves . Our own core function as a regional bank has long been to lend the deposits entrusted to us to support productive investments by families and businesses, which ultimately create not just jobs, but a better standard xxxv of living for our citizens . Thoughtful reform would help us to better fulfill this important role . For instance, communities throughout America could benefit if legislators reconsidered the undiscriminating manner in which capital and liquidity regulations have been applied to banks with little regard to their regional scope or the limited risk that they truly pose to the financial system . This is not to suggest that one should ignore the pain that the Great Recession inflicted on so many, nor to assume that some measure of change has not been beneficial . However, a more tailored approach to regulation would benefit both regional banks and their communities, helping to recover the ground lost over the last decade . We welcome some of the recent trends in that regard—those that recognize the lesser degree of systemic risk that regional banks pose, such as the elimination of the qualitative objection to the stress test for regional banks and the increased differentiation in capital and liquidity requirements for the largest banks that truly pose systemic risk . At the same time, we also recognize that, in practice, the tailoring of regulations implemented to date has not significantly alleviated the burden borne by M&T and banks of a similar ilk . More can be done . Consumers, small businesses and, ultimately, our communities will be the better for it . Change was needed but now change is needed again . REFLECTIONS AND LOOKING FORWARD I cannot conclude my recollections of the past year without pausing to acknowledge the passing of two members of our Board of Directors, men who we considered more than business colleagues . They were like family . xxxvi Richard G . King joined the boards of both M&T and M&T Bank in 2000, following M&T’s acquisition of Keystone Financial . Rick brought a wealth of knowledge gained through his diverse leadership experience . His business acumen was often prescient and always helpful . So much of what we know about our Pennsylvania communities comes via the relationships he cultivated . Patrick W .E . Hodgson was among the longest-tenured directors of M&T, having joined the board of M&T Bank in 1984 . A man of great integrity, his quiet dignity and sound judgment helped ensure that we never lost our way . Much of our culture and character can be traced back to Pat . His guidance and experience were invaluable over three decades of growth and change at M&T . We will greatly miss their counsel, contributions, and their friendship . These are men I am proud to have known . This is now my 35th year in a management role at M&T . In many ways, I marvel at the pace and character of change that has occurred—not only at the bank but in banking itself . What was once community and regional competition has increasingly become national and international . Products and services once offered only by specialists are now provided by a broad array of firms . Just as many one-time competitors have fallen by the wayside, so, too, new ones have emerged—often enabled by new technology . Yet I remain convinced that the hallmarks of the M&T way of doing business will continue to be relevant and successful . We worry today about robots and algorithms replacing humans the same way we worried yesterday about ATMs and the Internet . Time has taught us that technology xxxvii and humans are complements, not substitutes . Time has also taught us that successful underwriting and investment require sound, non-predictable, non-formulaic judgment—an essential element of the M&T culture . Without question, the results we’ve achieved in decades past and the progress we hope to make in those to come would not be possible without the tireless efforts of the 16,972 M&T bankers I’m proud to call my colleagues . It’s a group whose character and commitment to customers and to one another is without peer . From Jamestown to Ocean City and Watertown to Richmond, these employees are the heart and soul of our bank . In recent years, these faces have grown increasingly diverse— reflective of our changing communities . We are stronger for their many and varied perspectives—not just welcoming, but embracing the value and contribution of each of our colleagues . I well understand that, every year—indeed, every day—the relevance of this traditional approach, complemented by new technologies, will be tested . Still, I remain confident that M&T’s people and culture position us not merely to endure but to prosper in the face of new challenges . Robert G . Wilmers Chairman of the Board and Chief Executive Officer February 22, 2017 xxxviii MARK J. CZARNECKI: FRIEND AND COLLEAGUE It was just as this Message went to print that, after a long illness, we lost Mark Czarnecki, our President and Chief Operating Officer . We mourn him as colleague, friend, family man, mentor and community leader . In many ways, Mark personified both the roots and growth of the bank . A Western New York native, he joined M&T 40 years ago— when we had but 61 banking offices in and around Buffalo . His own career followed—and enabled—our subsequent growth . As a young graduate of the State University of New York at Buffalo he began at M&T as a “platform assistant” at what was then our Main Tupper branch—the first of 24 positions he would hold . From his next post as assistant branch manager he would ultimately go on to become President and COO, along the way serving as a branch manager, business banker, commercial lender and head of the investment group . He could understand—and mentor, as he loved to do—both colleagues and newcomers throughout the bank because he had been in their shoes . To understand Mark’s career is to understand his character . For Mark, no detail was too small and no job was too large . He related easily to everyone, whether a teller at his local branch, business leaders on a community board or presidents of other banks . His humble, approachable style made others feel cared about and comfortable . Mark knew how to bring the right people together and teach them the skills to succeed, not just in their current job, but in the one they could have tomorrow . He never stopped cultivating talent and that legacy will last longer than his storied career . xxxviii (a) Mark set an example as a community leader in the town where he was born—pointing the way for those in the many towns and cities we serve today . Nothing animated or inspired him more than his work as chairman of the Westminster Community Charter School . He was not the businessman who just showed up for meetings; he aspired to help build a better school for Buffalo’s disadvantaged and went the extra mile—in raising funds and recruiting talent—to help make that happen . Throughout Buffalo, there are many whose lives were changed and enriched by Mark Czarnecki . Mark’s influence on the community is surpassed only by the inheritance of love he left as a husband and father . My deepest sympathies go out to his wife, Elizabeth, his sons, Christopher and Gregory, and their entire family . We’re grateful to them for sharing Mark with us . May his memory be a blessing to them . Throughout the bank and our community, Mark’s success felt like our own—and showed what we all might do . It’s only seven tenths of a mile from the Main Tupper branch to headquarters, but Mark’s path inspired the hopes and dreams of many . Others may assume his duties but he will never be replaced . Thanks for everything . Rest in peace, dear friend . xxxviii (b) Denis J . Salamone Former Chairman and Chief Executive Officer Hudson City Bancorp, Inc. Herbert L . Washington President H.L.W. Fast Track, Inc. M&T Bank Corporation Officers and Directors OFFICERS DIRECTORS Robert G . Wilmers Chairman of the Board and Chief Executive Officer Robert G . Wilmers Chairman of the Board and Chief Executive Officer Mark J . Czarnecki President and Chief Operating Officer Robert J . Bojdak Executive Vice President and Chief Credit Officer Janet M . Coletti Executive Vice President William J . Farrell II Executive Vice President Richard S . Gold Executive Vice President and Chief Risk Officer Brian E . Hickey Executive Vice President René F . Jones Executive Vice President Darren J . King Executive Vice President and Chief Financial Officer Gino A . Martocci Executive Vice President Doris P . Meister Executive Vice President Kevin J . Pearson Executive Vice President Michael J . Todaro Executive Vice President Michele D . Trolli Executive Vice President and Chief Information Officer D . Scott N . Warman Executive Vice President and Treasurer John L . D’Angelo Senior Vice President and General Auditor Michael R . Spychala Senior Vice President and Controller Robert T . Brady Vice Chairman of the Board Former Chairman of the Board and Chief Executive Officer Moog Inc. Edward G . Amoroso Chief Executive Officer TAG Cyber LLC Brent D . Baird Private Investor C . Angela Bontempo Former President and Chief Executive Officer Saint Vincent Health System T . Jefferson Cunningham III Former Chairman of the Board and Chief Executive Officer Premier National Bancorp, Inc. Mark J . Czarnecki President and Chief Operating Officer Gary N . Geisel Former Chairman of the Board and Chief Executive Officer Provident Bankshares Corporation Richard A . Grossi Former Senior Vice President and Chief Financial Officer Johns Hopkins Medicine John D . Hawke, Jr . Senior Counsel Arnold & Porter LLP Newton P .S . Merrill Former Senior Executive Vice President The Bank of New York Melinda R . Rich Vice Chairman Rich Products Corporation and President Rich Entertainment Group Robert E . Sadler, Jr . Former President and Chief Executive Officer M&T Bank Corporation xxxix Denis J . Salamone Former Chairman and Chief Executive Officer Hudson City Bancorp, Inc. Herbert L . Washington President H.L.W. Fast Track, Inc. M&T Bank Officers and Directors OFFICERS Robert G . Wilmers Chairman of the Board and Chief Executive Officer Mark J . Czarnecki President and Chief Operating Officer Vice Chairmen Richard S . Gold René F . Jones Kevin J . Pearson Executive Vice Presidents Robert J . Bojdak Janet M . Coletti Atwood Collins III John F . Cook William J . Farrell II Mark A . Graham Brian E . Hickey Darren J . King Gino A . Martocci Doris P . Meister Michael J . Todaro Michele D . Trolli D . Scott N . Warman Senior Vice Presidents John M . Beeson, Jr . Keith M . Belanger Deborah A . Bennett Peter M . Black Daniel M . Boscarino Ira A . Brown Christina A . Brozyna Daniel J . Burns Nicholas L . Buscaglia Noel Carroll Mark I . Cartwright David K . Chamberlain August J . Chiasera Jerome W . Collier Frank Conway Cynthia L . Corliss R . Joe Crosswhite John L . D’Angelo Peter G . D’Arcy Carol A . Dalton Ayan DasGupta Shelley C . Drake Michael A . Drury Gary D . Dudish Peter J . Eliopoulos Ralph W . Emerson, Jr . Jeffrey A . Evershed Eric B . Feldstein Tari L . Flannery James M . Frank Timothy E . Gillespie Lawrence E . Gore xl DIRECTORS Robert G . Wilmers Chairman of the Board and Chief Executive Officer Edward G . Amoroso Chief Executive Officer TAG Cyber LLC Brent D . Baird Private Investor C . Angela Bontempo Former President and Chief Executive Officer Saint Vincent Health System Robert T . Brady Former Chairman of the Board and Chief Executive Officer Moog Inc. T . Jefferson Cunningham III Former Chairman of the Board and Chief Executive Officer Premier National Bancorp, Inc. Mark J . Czarnecki President and Chief Operating Officer Gary N . Geisel Former Chairman of the Board and Chief Executive Officer Provident Bankshares Corporation Richard A . Grossi Former Senior Vice President and Chief Financial Officer Johns Hopkins Medicine John D . Hawke, Jr . Senior Counsel Arnold & Porter LLP Newton P .S . Merrill Former Senior Executive Vice President The Bank of New York Melinda R . Rich Vice Chairman Rich Products Corporation and President Rich Entertainment Group Robert E . Sadler, Jr . Former President and Chief Executive Officer M&T Bank Corporation Robert S . Graber Sam Guerrieri, Jr . Cecilia A . Hodges Harish A . Holla Neil Hosty Gregory Imm Carl W . Jordan Michael T . Keegan Nicholas P . Lambrow Michele V . Langdon Yakov Lantsman Lon P . LeClair Joe A . Lombardo Robert G . Loughrey Alfred F . Luhr III Christopher R . Madel Paula Mandell Louis P . Mathews, Jr . Richard J . McCarthy William McKenna Mark J . Mendel Frank P . Micalizzi Christopher R . Morphew Michael S . Murchie Allen J . Naples Peter G . Newman Peter J . Olsen Anabel Pichler Eileen M . Pirson Paul T . Pitman Michael J . Quinlivan Christopher D . Randall Rajiv Ranjan Dave N . Richardson Daniel J . Ripienski Paris F . Roselli M . Julieta Ross Anthony M . Roth John P . Rumschik Allison L . Sagraves Mahesh Sankaran Jack D . Sawyer Jean-Christophe Schroeder Susan F . Sciarra Eugene J . Sheehy Douglas A . Sheline William M . Shickluna Sabeth Siddique Glenn R . Small Philip M . Smith Michael R . Spychala David W . Stender Douglas R . Stevens Kemp C . Stickney John R . Taylor Christopher E . Tolomeo Patrick M . Trainor Scott B . Vahue Linda J . Weinberg Jeffrey A . Wellington Tracy S . Woodrow Brian R . Yoshida Viktor Ziskin M&T Bank Regional Management and Directors Advisory Councils AREA EXECUTIVES R . Joe Crosswhite Peter G . D’Arcy Michael T . Keegan Paula Mandell Michael S . Murchie Jeffrey A . Wellington REGIONAL PRESIDENTS Jeffrey A . Wellington Western New York Allen J . Naples Central New York Stephen A . Foreman Central/Western Pennsylvania Nicholas P . Lambrow Delaware August J . Chiasera Baltimore and Chesapeake Peter M . Black Greater Washington and Central Virginia Michael T . Keegan Albany/Hudson Valley North Peter G . D’Arcy New York City/Long Island Philip H . Johnson Northern Pennsylvania Ira A . Brown Philadelphia/Southern New Jersey Daniel J . Burns Rochester Peter G . Newman Southern New York Thomas C . Koppmann Southeast Pennsylvania Thomas H . Comiskey New Jersey Frank P . Micalizzi Tarrytown /Connecticut DIRECTORS ADVISORY COUNCILS NEW YORK STATE Albany Division Kevin M . Bette Nancy E . Carey Cassidy Richard A . Fuerst Michael Joyce William Lia, Jr . Christopher Madden Lisa M . Marello Michael C . McPartlon Lauren Van Dermark Central New York Division James V . Breuer Carl V . Byrne Mara Charlamb Richard W . Cook James A . Fox Richard R . Griffith Robert L . Lewis Robert H . Linn Margaret O’Connell Richard J . Zick Hudson Valley Division Elizabeth P . Allen T . Jefferson Cunningham III John K . Gifford Michael H . Graham William Murphy Patrick Paul Andrea L . Reynolds Lewis J . Ruge Albert K . Smiley Thomas G . Struzzieri Charles C . Tallardy III Peter Van Kleeck Alan Yassky Jamestown Division Sebastian A . Baggiano John R . Churchill Steven A . Godfrey Joseph C . Johnson Stan Lundine Michael D . Metzger Kim Peterson Allen Short Michael J . Wellman New York City/Long Island Division Earle S . Altman Jay I . Anderson Brent D . Baird Louis Brause Martin Seth Burger Patrick J . Callan Anthony J . Dowd Lloyd M . Goldman Peter Hauspurg Leslie Wohlman Himmel Gary Jacob Mickey Rabina Don M . Randel Michael D . Sullivan Alair A . Townsend Rochester Division Marlene Bessette William A . Buckingham Christopher Czarnecki R . Carlos Carballada Timothy D . Fournier Jocelyn Goldberg-Schaible Marc L . Iacona, Sr . Laurence Kessler Anne M . Kress Jett Mehta Mark S . Peterson Ronald S . Ricotta Victor E . Salerno Derace L . Schaffer Kevin R . Wilmot NEW JERSEY / PENNSYLVANIA / DELAWARE / MARYLAND / VIRGINIA /WEST VIRGINIA Baltimore-Washington Division Thomas S . Bozzuto Daniel J . Canzoniero Jeffrey S . Detwiler Scott E . Dorsey Steve Dubin Kevin R . Dunbar Gary N . Geisel Richard A . Grossi John F . Jaeger John H . Phelps Marc B . Terrill Ernie Vaile Central Pennsylvania Division Mark X . DiSanto Rolen E . Ferris Ronald M . Leitzel John P . Massimilla Craig J . Nitterhouse Ivo V . Otto III William F . Rothman Lynn C . Rotz Herbert E . Sandifer Michael J . Schwab John D . Sheridan Glen R . Sponaugle Daniel K . Sunderland Sondra Wolfe Elias Central Virginia Division Toni R . Ardabell Otis L . Brown Robert J . Clark Daniel Loftis Bart H . Mitchell Robert Wayne Ohly, Jr . Robert H . Newton, Jr . Michael Patrick Charles W . Payne, Jr . Brian R . Pitney Frank L . Robinson Katheryn E . Surface Burks Debbie L . Sydow Chesapeake Upper Shore Division Richard Bernstein Hugh E . Grunden William W . McAllister, Jr . Lee McMahan Chesapeake Lower Shore Division Michael G . Abercrombie, Jr . John H . Harrison John M . McClellan James F . Morris John M . Stern Southern New York Division George Akel, Jr . Lee P . Bearsch Richard J . Cole Joseph W . Donze Albert Nocciolino Robert R . Sprole III Frank H . Suits, Jr . Terry R . Wood Eastern Pennsylvania Division Paul J . Datte Steven I . Field Roy A . Heim Joseph H . Jones, Jr . David C . Laudeman Eric M . Mika Jeanne Boyer Porter Larry A . Wittig New Jersey Division Michael W . Azzara William G . Bardel Scott A . Belair Victoria H . Bruni Cornelius E . Golding L . Robert Lieb Donald O . Quest Joseph G . Sponholz Northeast Mid-Atlantic Division Richard Alter Clarence C . Boyle, Jr . Nicole A . Funk Stephanie Novak Hau Thomas C . Mottley Paul T . Muddiman John D . Pursell, Jr . John Thomas Sadowski, Jr . Kimberly L . Wagner Craig A . Ward Northeastern Pennsylvania Division Richard S . Bishop Christopher L . Borton Maureen M . Bufalino Stephen N . Clemente Robert Gill Thomas F . Torbik Murray Ufberg Northern Pennsylvania Division Sherwin O . Albert, Jr . Jeffrey A . Cerminaro James E . Douthat Charlene A . Friedman Steven P . Johnson Kenneth R . Levitzky Robert E . More John D . Rinehart J . David Smith Donald E . Stringfellow Philadelphia Division Edward M . D’Alba Linda Ann Galante Ruth S . Gehring Eli A . Kahn Mark Nicoletti Robert N . Reeves, Jr . Robert W . Sorrell Steven L . Sugarman Christina Wagoner Western Pennsylvania Division Jodi L . Cessna Paul I . Detweiler III Philip E . Devorris Michael A . Fiore Joseph A . Grappone Daniel R . Lawruk Gerald E . Murray Robert F . Pennington Joseph S . Sheetz William T . Ward J . Douglas Wolf xli SEC Form 10-K Evans Elevator . Image courtesy of the Albright-Knox Art Gallery G. Robert Strauss, Jr. Memorial Library, Digital Assets Collection and Archives. Photograph by Jay W. Baxtresser. ©2017 Albright-Knox Art Gallery, Buffalo, New York. xlii UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 or  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-9861 M&T BANK CORPORATION (Exact name of registrant as specified in its charter) New York (State of incorporation) One M&T Plaza, Buffalo, New York (Address of principal executive offices) 16-0968385 (I.R.S. Employer Identification No.) 14203 (Zip Code) Registrant’s telephone number, including area code: 716-635-4000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $.50 par value 6.375% Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation preference per share 6.375% Cumulative Perpetual Preferred Stock, Series C, $1,000 liquidation preference per share Warrants to purchase shares of Common Stock (expiring December 23, 2018) Name of Each Exchange on Which Registered New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No ☒ 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, and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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): Large accelerated filer Non-accelerated filer ☒  (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No ☒ Aggregate market value of the Common Stock, $0.50 par value, held by non-affiliates of the registrant, computed by reference to the closing price as of the close of business on June 30, 2016: $16,919,525,595. Number of shares of the Common Stock, $0.50 par value, outstanding as of the close of business on February 17, 2017: 154,172,084 shares. (1) Portions of the Proxy Statement for the 2017 Annual Meeting of Shareholders of M&T Bank Corporation in Parts II and III. Documents Incorporated By Reference: M&T BANK CORPORATION Form 10-K for the year ended December 31, 2016 CROSS-REFERENCE SHEET PART I Item 1. Business ................................................................................................... Statistical disclosure pursuant to Guide 3 I. Distribution of assets, liabilities, and shareholders’ equity; interest rates and interest differential A. Average balance sheets ........................................................................ B. Interest income/expense and resulting yield or rate on average interest-earning assets (including non-accrual loans) and interest-bearing liabilities ................................................................ C. Rate/volume variances ......................................................................... Investment portfolio A. Year-end balances ............................................................................... B. Maturity schedule and weighted average yield ................................... C. Aggregate carrying value of securities that exceed ten percent of II. Form 10-K Page 4 55 55 26 24,127 92 shareholders’ equity ........................................................................ 128 III. Loan portfolio A. Year-end balances ............................................................................... B. Maturities and sensitivities to changes in interest rates ....................... C. Risk elements Nonaccrual, past due and renegotiated loans....................................... Actual and pro forma interest on certain loans .................................... Nonaccrual policy ................................................................................ Loan concentrations ............................................................................. IV. Summary of loan loss experience A. Analysis of the allowance for loan losses ............................................ Factors influencing management’s judgment concerning the 24,131 90 70,133-138 134,143 118-119 80 67,139-146 adequacy of the allowance and provision........................................ 66-80,120,139-146 B. Allocation of the allowance for loan losses .........................................79,139-140,144-146 V. Deposits A. Average balances and rates.................................................................. B. Maturity schedule of domestic time deposits with balances of $100,000 or more ............................................................................ 55 93 VI. Return on equity and assets ..................................................................... 26,49,96-97,100 VII. Short-term borrowings ............................................................................ Item 1A. Risk Factors ............................................................................................. Item 1B. Unresolved Staff Comments ................................................................... Item 2. Properties ................................................................................................. Item 3. Legal Proceedings ................................................................................... Item 4. Mine Safety Disclosures .......................................................................... Executive Officers of the Registrant ....................................................... 150 27-38 39 39 39-41 41 41-43 Item 5. Market for Registrant’s Common Equity, Related Stockholder PART II Matters and Issuer Purchases of Equity Securities ............................. A. Principal market ................................................................................... Market prices ....................................................................................... B. Approximate number of holders at year-end ....................................... 44-46 44 107 24 2 2 C. Frequency and amount of dividends declared ..................................... 25-26,107,116 D. Restrictions on dividends .................................................................... E. Securities authorized for issuance under equity 8-9 Form 10-K Page compensation plans ......................................................................... F. Performance graph ............................................................................... G. Repurchases of common stock ............................................................ Item 6. Selected Financial Data ........................................................................... A. Selected consolidated year-end balances ............................................ B. Consolidated earnings, etc. ................................................................. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ................................................................... Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................ Item 8. Financial Statements and Supplementary Data ....................................... A. Report on Internal Control Over Financial Reporting ......................... B. Report of Independent Registered Public Accounting Firm ............... C. Consolidated Balance Sheet — December 31, 2016 and 2015 ........... D. Consolidated Statement of Income — Years ended December 31, 2016, 2015 and 2014 ....................................................................... E. Consolidated Statement of Comprehensive Income — Years ended December 31, 2016, 2015 and 2014 ..................................... F. Consolidated Statement of Cash Flows — Years ended December 31, 2016, 2015 and 2014 .................................................... G. Consolidated Statement of Changes in Shareholders’ Equity — Years ended December 31, 2016, 2015 and 2014 ........................... H. Notes to Financial Statements ............................................................. I. Quarterly Trends .................................................................................. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................................................... Item 9A. Controls and Procedures .......................................................................... A. Conclusions of principal executive officer and principal financial officer regarding disclosure controls and procedures ...................... B. Management’s annual report on internal control over financial reporting ............................................................................................... C. Attestation report of the registered public accounting firm ................. D. Changes in internal control over financial reporting ........................... Item 9B. Other Information .................................................................................... PART III Item 10. Directors, Executive Officers and Corporate Governance ...................... Item 11. Executive Compensation ......................................................................... Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........................................................ Item 13. Certain Relationships and Related Transactions, and Director Independence ........................................................................................... Item 14. Principal Accountant Fees and Services ................................................. PART IV 44-45 45 46 46 24 25 46-108 109 109 110 111 112 113 114 115 116 117-201 107 202 202 202 202 202 202 202 202 203 203 203 203 Item 15. Exhibits and Financial Statement Schedules ........................................... Item 16. Form 10-K Summary .............................................................................. SIGNATURES ........................................................................................................ EXHIBIT INDEX ................................................................................................... 203 203 204-205 206-208 3 3 PART I Item 1. Business. M&T Bank Corporation (“Registrant” or “M&T”) is a New York business corporation which is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”) and as a bank holding company (“BHC”) under Article III-A of the New York Banking Law (“Banking Law”). The principal executive offices of M&T are located at One M&T Plaza, Buffalo, New York 14203. M&T was incorporated in November 1969. M&T and its direct and indirect subsidiaries are collectively referred to herein as the “Company.” As of December 31, 2016 the Company had consolidated total assets of $123.4 billion, deposits of $95.5 billion and shareholders’ equity of $16.5 billion. The Company had 16,000 full-time and 973 part-time employees as of December 31, 2016. At December 31, 2016, M&T had two wholly owned bank subsidiaries: Manufacturers and Traders Trust Company (“M&T Bank”) and Wilmington Trust, National Association (“Wilmington Trust, N.A.”). The banks collectively offer a wide range of retail and commercial banking, trust and wealth management, and investment services to their customers. At December 31, 2016, M&T Bank represented 99% of consolidated assets of the Company. The Company from time to time considers acquiring banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses within markets currently served by the Company or in other locations that would complement the Company’s business or its geographic reach. The Company has pursued acquisition opportunities in the past, continues to review different opportunities, including the possibility of major acquisitions, and intends to continue this practice. Subsidiaries M&T Bank is a banking corporation that is incorporated under the laws of the State of New York. M&T Bank is a member of the Federal Reserve System and the Federal Home Loan Bank System, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. M&T acquired all of the issued and outstanding shares of the capital stock of M&T Bank in December 1969. The stock of M&T Bank represents a major asset of M&T. M&T Bank operates under a charter granted by the State of New York in 1892, and the continuity of its banking business is traced to the organization of the Manufacturers and Traders Bank in 1856. The principal executive offices of M&T Bank are located at One M&T Plaza, Buffalo, New York 14203. As of December 31, 2016, M&T Bank had 799 domestic banking offices located in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, and the District of Columbia, a full-service commercial banking office in Ontario, Canada, and an office in George Town, Cayman Islands. As of December 31, 2016, M&T Bank had consolidated total assets of $122.6 billion, deposits of $97.3 billion and shareholder’s equity of $14.5 billion. The deposit liabilities of M&T Bank are insured by the FDIC through its Deposit Insurance Fund (“DIF”). As a commercial bank, M&T Bank offers a broad range of financial services to a diverse base of consumers, businesses, professional clients, governmental entities and financial institutions located in its markets. Lending is largely focused on consumers residing in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, and Washington, D.C., and on small and medium- size businesses based in those areas, although loans are originated through offices in other states and in Ontario, Canada. In addition, the Company conducts lending activities in various states through other subsidiaries. Trust and other fiduciary services are offered by M&T Bank and through its wholly owned subsidiary, Wilmington Trust Company. M&T Bank and certain of its subsidiaries also offer commercial mortgage loans secured by income producing properties or properties used by borrowers in a trade or business. Additional financial services are provided through other operating subsidiaries of the Company. 4 4 Wilmington Trust, N.A., a national banking association and a member of the Federal Reserve System and the FDIC, commenced operations on October 2, 1995. The deposit liabilities of Wilmington Trust, N.A. are insured by the FDIC through the DIF. The main office of Wilmington Trust, N.A. is located at 1100 North Market Street, Wilmington, Delaware 19890. Wilmington Trust, N.A. offers various trust and wealth management services. Historically, Wilmington Trust, N.A. offered selected deposit and loan products on a nationwide basis, through direct mail, telephone marketing techniques and the Internet. As of December 31, 2016, Wilmington Trust, N.A. had total assets of $3.7 billion, deposits of $3.2 billion and shareholder’s equity of $496 million. Wilmington Trust Company, a wholly owned subsidiary of M&T Bank, was incorporated as a Delaware bank and trust company in March 1901 and amended its charter in July 2011 to become a nondepository trust company. Wilmington Trust Company provides a variety of Delaware based trust, fiduciary and custodial services to its clients. As of December 31, 2016, Wilmington Trust Company had total assets of $1.3 billion and shareholder’s equity of $554 million. Revenues of Wilmington Trust Company were $121 million in 2016. The headquarters of Wilmington Trust Company are located at 1100 North Market Street, Wilmington, Delaware 19890. M&T Insurance Agency, Inc. (“M&T Insurance Agency”), a wholly owned insurance agency subsidiary of M&T Bank, was incorporated as a New York corporation in March 1955. M&T Insurance Agency provides insurance agency services principally to the commercial market. As of December 31, 2016, M&T Insurance Agency had assets of $35 million and shareholder’s equity of $18 million. M&T Insurance Agency recorded revenues of $31 million during 2016. The headquarters of M&T Insurance Agency are located at 285 Delaware Avenue, Buffalo, New York 14202. M&T Real Estate Trust (“M&T Real Estate”) is a Maryland Real Estate Investment Trust that traces its origin to the incorporation of M&T Real Estate, Inc. in July 1995. M&T Real Estate engages in commercial real estate lending and provides loan servicing to M&T Bank. As of December 31, 2016, M&T Real Estate had assets of $22.9 billion, common shareholder’s equity of $22.0 billion, and preferred shareholders’ equity, consisting of 9% fixed-rate preferred stock (par value $1,000), of $1 million. All of the outstanding common stock and 89% of the preferred stock of M&T Real Estate is owned by M&T Bank. The remaining 11% of M&T Real Estate’s outstanding preferred stock is owned by officers or former officers of the Company. M&T Real Estate recorded $852 million of revenue in 2016. The headquarters of M&T Real Estate are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203. M&T Realty Capital Corporation (“M&T Realty Capital”), a wholly owned subsidiary of M&T Bank, was incorporated as a Maryland corporation in October 1973. M&T Realty Capital engages in multifamily commercial real estate lending and provides loan servicing to purchasers of the loans it originates. As of December 31, 2016, M&T Realty Capital serviced $11.8 billion of commercial mortgage loans for non-affiliates and had assets of $1.2 billion and shareholder’s equity of $119 million. M&T Realty Capital recorded revenues of $139 million in 2016. The headquarters of M&T Realty Capital are located at 25 South Charles Street, Baltimore, Maryland 21202. M&T Securities, Inc. (“M&T Securities”) is a wholly owned subsidiary of M&T Bank that was incorporated as a New York business corporation in November 1985. M&T Securities is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended, and as an investment advisor under the Investment Advisors Act of 1940, as amended (the “Investment Advisors Act”). M&T Securities is licensed as a life insurance agent in each state where M&T Bank operates branch offices and in a number of other states. It provides securities brokerage, investment advisory and insurance services. As of December 31, 2016, M&T Securities had assets of $51 million and shareholder’s equity of $41 million. M&T Securities recorded $99 million of revenue during 2016. The headquarters of M&T Securities are located at One M&T Plaza, Buffalo, New York 14203. 5 5 Wilmington Trust Investment Advisors, Inc. (“WT Investment Advisors”), a wholly owned subsidiary of M&T Bank, was incorporated as a Maryland corporation on June 30, 1995. WT Investment Advisors, a registered investment advisor under the Investment Advisors Act, serves as an investment advisor to the Wilmington Funds, a family of proprietary mutual funds, and institutional clients. As of December 31, 2016, WT Investment Advisors had assets of $47 million and shareholder’s equity of $40 million. WT Investment Advisors recorded revenues of $39 million in 2016. The headquarters of WT Investment Advisors are located at 100 East Pratt Street, Baltimore, Maryland 21202. Wilmington Funds Management Corporation (“Wilmington Funds Management”) is a wholly owned subsidiary of M&T that was incorporated in September 1981 as a Delaware corporation. Wilmington Funds Management is registered as an investment advisor under the Investment Advisors Act and serves as an investment advisor to the Wilmington Funds. Wilmington Funds Management had assets of $29 million and shareholder’s equity of $28 million as of December 31, 2016. Wilmington Funds Management recorded revenues of $27 million in 2016. The headquarters of Wilmington Funds Management are located at 1100 North Market Street, Wilmington, Delaware 19890. Wilmington Trust Investment Management, LLC (“WTIM”) is a wholly owned subsidiary of M&T and was incorporated in December 2001 as a Georgia limited liability company. WTIM is a registered investment advisor under the Investment Advisors Act and provides investment management services to clients, including certain private funds. As of December 31, 2016, WTIM has assets and shareholder’s equity of $26 million each. WTIM recorded revenues of $2 million in 2016. WTIM’s headquarters is located at Terminus 27th Floor, 3280 Peachtree Road N.E., Atlanta, Georgia 30305. The Registrant and its banking subsidiaries have a number of other special-purpose or inactive subsidiaries. These other subsidiaries did not represent, individually and collectively, a significant portion of the Company’s consolidated assets, net income and shareholders’ equity at December 31, 2016. Segment Information, Principal Products/Services and Foreign Operations Information about the Registrant’s business segments is included in note 22 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” and is further discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Registrant’s reportable segments have been determined based upon its 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 Company’s international activities are discussed in note 17 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” The only activities that, as a class, contributed 10% or more of the sum of consolidated interest income and other income in any of the last three years were interest on loans and trust income. The amount of income from such sources during those years is set forth on the Company’s Consolidated Statement of Income filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” Supervision and Regulation of the Company M&T and its subsidiaries are subject to the comprehensive regulatory framework applicable to bank and financial holding companies and their subsidiaries. Regulation of financial institutions such as M&T and its subsidiaries is intended primarily for the protection of depositors, the FDIC’s Deposit 6 6 Insurance Fund and the banking and financial system as a whole, and generally is not intended for the protection of shareholders, investors or creditors other than insured depositors. Proposals to change the applicable regulatory framework may be introduced in the United States Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. A change in statutes, regulations or regulatory policies applicable to M&T or any of its subsidiaries could have a material effect on the business, financial condition or results of operations of the Company. Significant changes in this regulatory scheme arising from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) have affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, and the system of regulatory oversight of the Company. As required by the Dodd-Frank Act, various federal regulatory agencies have proposed or adopted a broad range of implementing rules and regulations and have prepared numerous studies and reports for Congress. However, given that many of these regulatory changes are highly complex and are not fully implemented, the full impact of the Dodd-Frank Act regulatory reform will not be known until the rules are implemented and market practices develop under the final regulations. Furthermore, recent political developments, including the change in administration in the United States, have added uncertainty to the implementation, scope and timing of regulatory reforms, including those relating to the implementation of the Dodd- Frank Act. Described below are material elements of selected laws and regulations applicable to M&T and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Overview M&T is registered with the Board of Governors of the Federal Reserve System (“Federal Reserve”) as a BHC under the BHCA. As such, M&T and its subsidiaries are subject to the supervision, examination and reporting requirements of the BHCA and the regulations of the Federal Reserve. Its investment advisor subsidiaries are subject to SEC regulation. In general, the BHCA limits the business of a BHC to banking, managing or controlling banks, and other activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies are to serve as a managerial and financial source of strength to their subsidiary depository institutions, including committing resources to support its subsidiary banks. This support may be required at times when M&T may not be inclined or able to provide it. In addition, any capital loans by a BHC to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a BHC’s bankruptcy, any commitment by the BHC to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Bank holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve, by regulation or order, in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository 7 7 institutions or the financial system generally (as solely determined by the Federal Reserve). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. In order for a financial holding company to commence any new activity or to acquire a company engaged in any activity pursuant to the financial holding company provisions of the BHCA, each insured depository institution subsidiary of the financial holding company also must have at least a “satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). See the section captioned “Community Reinvestment Act” included elsewhere in this item. M&T became a financial holding company on March 1, 2011. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” The failure to meet such requirements could result in material restrictions on the activities of M&T and may also adversely affect the Company’s ability to enter into certain transactions or obtain necessary approvals in connection therewith, as well as loss of financial holding company status. Current federal law also establishes a system of functional regulation under which, in addition to the broad supervisory authority that the Federal Reserve has over both the banking and non- banking activities of bank holding companies, the federal banking agencies regulate the banking activities of bank holding companies, banks and savings associations and subsidiaries of the foregoing, the U.S. Securities and Exchange Commission (“SEC”) regulates their securities activities, and state insurance regulators regulate their insurance activities. M&T Bank is a New York chartered bank and a member of the Federal Reserve Bank of New York. As a result, it is subject to extensive regulation, examination and oversight by the New York State Department of Financial Services (“NYSDFS”) and the Federal Reserve. New York laws and regulations govern many aspects of M&T Bank’s operations, including branching, dividends, subsidiary activities, fiduciary activities, lending, and deposit taking. M&T Bank is also subject to Federal Reserve regulations and guidance, including oversight of capital levels. Its deposits are insured by the FDIC to $250,000 per depositor, which also exercises regulatory oversight over certain aspects of M&T Bank’s operations. Certain subsidiaries of M&T Bank are subject to regulation by other federal and state regulators as well. For example, M&T Securities is regulated by the SEC, the Financial Industry Regulatory Authority and state securities regulators, and WT Investment Advisors is also subject to SEC regulation. Wilmington Trust, N.A. is a national bank with operations that include fiduciary and related activities with some limited lending and deposit business. It is subject to extensive regulation, examination and oversight by the Office of the Comptroller of the Currency (“OCC”), which governs many aspects of the operations, including fiduciary activities, capital levels, office locations, dividends and subsidiary activities. Its deposits are insured by the FDIC to $250,000 per depositor, which also exercises regulatory oversight over certain aspects of the operations of Wilmington Trust, N.A. The Dodd-Frank Act broadened the base for FDIC insurance assessments which are based on average consolidated total assets less average Tier 1 capital and certain allowable deductions of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions. Dividends M&T is a legal entity separate and distinct from its banking and other subsidiaries. Historically, the majority of M&T’s revenue has been from dividends paid to M&T by its subsidiary banks. M&T Bank and Wilmington Trust, N.A. are subject to laws and regulations imposing restrictions on the amount of dividends they may declare and pay. Future dividend payments to M&T by its subsidiary 8 8 banks will be dependent on a number of factors, including the earnings and financial condition of each such bank, and are subject to the limitations referred to in note 23 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data,” and to other statutory powers of bank regulatory agencies. An insured depository institution is prohibited from making any capital distribution to its owner, including any dividend, if, after making such distribution, the depository institution fails to meet the required minimum level for any relevant capital measure, including the risk-based capital adequacy and leverage standards discussed herein. Dividend payments by M&T to its shareholders and stock repurchases by M&T are subject to the oversight of the Federal Reserve. As described below in this section under “Stress Testing and Capital Plan Review,” dividends and stock repurchases (net of any new stock issuances as per a capital plan) generally may only be paid or made under a capital plan as to which the Federal Reserve has not objected. Capital Requirements M&T and its subsidiary banks are required to comply with applicable capital adequacy standards established by the federal banking agencies. Beginning on January 1, 2015, M&T and its subsidiary banks became subject to a new comprehensive capital framework for U.S. banking organizations that was issued by the federal banking agencies in July 2013 (the “New Capital Rules”), subject to phase- in periods for certain components and other provisions. The New Capital Rules generally implement the Basel Committee’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The New Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including M&T, M&T Bank and Wilmington Trust, N.A., as compared to the U.S. general risk-based capital rules that were applicable to the Company through December 31, 2014. The New Capital Rules revised the definitions and the components of regulatory capital, as well as addressed other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also addressed asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios. Among other matters, the New Capital Rules: (i) introduced a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to the previous regulations. Under the New Capital Rules, for most banking organizations, including M&T, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the New Capital Rules’ specific requirements. 9 9 Pursuant to the New Capital Rules, the minimum capital ratios are as follows:     4.5% CET1 to risk-weighted assets; 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). In calculating regulatory capital ratios M&T must assign risk weights to the Company’s assets and off-balance sheet items. M&T has an ongoing process to review data elements associated with certain assets that from time to time may affect how specific assets are classified and could lead to increases or decreases of the regulatory risk weights assigned to such assets. In connection with this process, in February 2017 M&T revised the risk weights assigned to certain commercial real estate construction loans as of December 31, 2016 pending completion of a review to compare loan system data elements with underlying loan documentation. That revision increased risk-weighted assets as of December 31, 2016 by 2% and thereby lowered the corresponding CET1 ratio by 26 basis points to 10.70% from an estimate of that ratio which had been previously disclosed by M&T in January 2017. The New Capital Rules also introduce a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the capital standards applicable to M&T will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%; (iii) Total capital to risk-weighted assets of at least 10.5% and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. In addition, M&T is also subject to the Federal Reserve’s capital plan rule and supervisory Comprehensive Capital Analysis and Review (“CCAR”) process, pursuant to which its ability to make capital distributions and repurchase or redeem capital securities may be limited unless M&T is able to demonstrate its ability to meet applicable minimum capital ratios and currently a 5% minimum Tier 1 common equity ratio, as well as other requirements, over a nine quarter planning horizon under a “severely adverse” macroeconomic scenario generated yearly by the federal bank regulators. See “Stress Testing and Capital Plan Review” below. The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. In addition, under the risk-based capital rules applicable to the Company through December 31, 2014, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, unrealized gains and losses on securities held in the available-for- sale portfolio) under U.S. GAAP were reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including M&T, may make a one-time permanent election to continue to exclude these items. M&T made such election in 2015. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion 10 10 in bank holding companies’ Tier 1 capital, subject to phase-out in the case of bank holding companies, such as M&T, that had $15 billion or more in total consolidated assets as of December 31, 2009. As a result, beginning in 2015, 25% of M&T’s trust preferred securities were includable in Tier 1 capital, and beginning in 2016, none of M&T’s trust preferred securities were includable in Tier 1 capital. Trust preferred securities no longer included in M&T’s Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase- out and irrespective of whether such securities otherwise meet the revised definition of Tier 2 capital set forth in the New Capital Rules. Management believes that M&T is in compliance with the targeted capital ratios. M&T’s regulatory capital ratios are presented in note 23 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” Stress Testing and Capital Plan Review As part of the enhanced prudential requirements applicable to systemically important financial institutions, the Federal Reserve conducts annual analyses of bank holding companies with at least $50 billion in assets, such as M&T, to determine whether the companies have sufficient capital on a consolidated basis necessary to absorb losses in three economic and financial scenarios generated by the Federal Reserve: baseline, adverse and severely adverse scenarios. M&T is also required to conduct its own semi-annual stress analysis (together with the Federal Reserve’s stress analysis, the “stress tests”) to assess the potential impact on M&T of the economic and financial conditions used as part of the Federal Reserve’s annual stress analysis. The Federal Reserve may also use, and require companies to use, additional components in the adverse and severely adverse scenarios or additional or more complex scenarios designed to capture salient risks to specific business groups. M&T Bank is also required to conduct annual stress testing using the same economic and financial scenarios as M&T and report the results to the Federal Reserve. A summary of results of the Federal Reserve’s analysis under the adverse and severely adverse stress scenarios are publicly disclosed, and bank holding companies subject to the rules, including M&T, must disclose a summary of the company-run severely adverse stress test results. M&T is required to include in its disclosure a summary of the severely adverse scenario stress test conducted by M&T Bank. In addition, bank holding companies with total consolidated assets of $50 billion or more, such as M&T, must submit annual capital plans for approval as part of the Federal Reserve’s CCAR process. Covered bank holding companies may execute capital actions, such as paying dividends and repurchasing stock, only in accordance with a capital plan that has been reviewed and approved by the Federal Reserve (or any approved amendments to such plan). The comprehensive capital plans include a view of capital adequacy under four scenarios — a BHC-defined baseline scenario, a baseline scenario provided by the Federal Reserve, at least one BHC-defined stress scenario, and a stress scenario provided by the Federal Reserve. The CCAR process is intended to help ensure that these bank holding companies have robust, forward-looking capital planning processes that account for each company’s unique risks and that permit continued operations during times of economic and financial stress. Each of the bank holding companies participating in the CCAR process is also required to collect and report certain related data to the Federal Reserve on a quarterly basis to allow the Federal Reserve to monitor progress against the approved capital plans. Each capital plan must include a view of capital adequacy under the stress test scenarios described above. The Federal Reserve may object to a capital plan if the plan does not show that the covered BHC will maintain a Tier 1 common equity ratio of at least 5% on a pro forma basis under expected and stressful conditions throughout the nine-quarter planning horizon covered by the capital plan. Even if such quantitative thresholds are met, the Federal Reserve could object to a capital plan for qualitative reasons, including inadequate assumptions in the plan, other unresolved supervisory issues or an insufficiently robust capital adequacy process, or if the capital plan would otherwise constitute an 11 11 unsafe or unsound practice or violate law. The rules also provide that a covered BHC may not make a capital distribution unless after giving effect to the distribution it will meet all minimum regulatory capital ratios and have a ratio of Tier 1 common equity to risk-weighted assets of at least 5%. The CCAR rules, consistent with prior Federal Reserve guidance, also provide that capital plans contemplating dividend payout ratios exceeding 30% of net income will receive particularly close scrutiny. M&T’s annual CCAR capital plan is due in April each year and the Federal Reserve will publish the results of its supervisory CCAR review of M&T’s capital plan by June 30 of each year. The Federal Reserve generally limits a BHC’s ability to make quarterly capital distributions – that is, dividends and share repurchases, if the amount of the BHC’s actual cumulative quarterly capital issuances of instruments that qualify as regulatory capital are less than the BHC had indicated in its submitted capital plan as to which it received a non-objection from the Federal Reserve. For example, if the BHC issued a smaller amount of additional common stock than it had stated in its capital plan, it would be required to reduce common dividends and/or the amount of common stock repurchases so that the dollar amount of capital distributions, net of the dollar amount of additional common stock issued (“net distributions”), is no greater than the dollar amount of net distributions relating to its common stock included in its capital plan, as measured on an aggregate basis beginning in the third quarter of the nine-quarter planning horizon through the end of the then current quarter. However, not raising sufficient amounts of common stock as planned would not affect distributions related to Additional Tier 1 Capital instruments and/ or Tier 2 Capital. These limitations also contain several important qualifications and exceptions, including that scheduled dividend payments on (as opposed to repurchases of) a BHC’s Additional Tier 1 Capital and Tier 2 Capital instruments are not restricted if the BHC fails to issue a sufficient amount of such instruments as planned, as well as provisions for certain de minimis excess distributions. Liquidity Historically, regulation and monitoring of bank and BHC liquidity has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. However, in January 2016 M&T became subject to final rules adopted by the Federal Reserve and other banking regulators (“Final LCR Rule”) implementing a U.S. version of the Basel Committee’s Liquidity Coverage Ratio (“LCR”) requirement. The LCR requirement is intended to ensure that banks hold sufficient amounts of so-called “high quality liquid assets” (“HQLA”) to cover the anticipated net cash outflows during a hypothetical acute 30-day stress scenario. The LCR is the ratio of an institution’s amount of HQLA (the numerator) over projected net cash out-flows over the 30- day horizon (the denominator), in each case, as calculated pursuant to the Final LCR Rule. The Final LCR Rule requires a subject institution to maintain an LCR equal to at least 100% in order to satisfy this regulatory requirement. Only specific classes of assets, including U.S. Treasury securities, other U.S. government obligations and agency mortgaged-backed securities, qualify under the rule as HQLA, with classes of assets deemed relatively less liquid and/or subject to greater degree of credit risk subject to certain haircuts and caps for purposes of calculating the numerator under the Final LCR Rule. The total net cash outflows amount is determined under the rule by applying certain hypothetical outflow and inflow rates, which reflect certain standardized stressed assumptions, against the balances of the banking organization’s funding sources, obligations, transactions and assets over the 30-day stress period. Inflows that can be included to offset outflows are limited to 75% of outflows (which effectively means that banking organizations must hold high-quality liquid assets equal to 25% of outflows even if outflows perfectly match inflows over the stress period). The total net cash outflow amount for the modified LCR applicable to M&T was capped at 70% of the outflow rate that applies to the full LCR. As of January 1, 2017, the Final LCR Rule has been fully phased-in. 12 12 The Basel III framework also included a second standard, referred to as the net stable funding ratio (“NSFR”), which is designed to promote more medium-and long-term funding of the assets and activities of banks over a one-year time horizon. In May 2016, the Federal Reserve and other federal banking regulators issued a proposed rule that would implement the NSFR for large U.S. banking organizations. Under the proposed rule, the most stringent requirements would apply to bank holding companies with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, and would require such organizations to maintain a minimum NSFR of 1.0 on an ongoing basis, calculated by dividing the organization’s available stable funding (“ASF”) by its required stable funding (“RSF”). Bank holding companies with less than $250 billion, but more than $50 billion, in total consolidated assets and less than $10 billion in on-balance sheet foreign exposure, such as M&T, would be subject to a modified NSFR requirement which would require such bank holding companies to maintain a minimum NSFR of 0.7 on an ongoing basis. Under the proposed rule, a banking organization’s ASF would be calculated by applying specified standard weightings to its equity and liabilities based on their expected stability over a one- year time horizon and its RSF would be calculated by applying specified standardized weightings to its assets, derivative exposures and commitments based on their liquidity characteristics over the same one-year time horizon. If implemented, the proposed rule would take effect on January 1, 2018. Cross-Guarantee Provisions Each insured depository institution “controlled” (as defined in the BHCA) by the same BHC can be held liable to the FDIC for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of any other insured depository institution controlled by that BHC and for any assistance provided by the FDIC to any of those banks that are in danger of default. The FDIC’s claim under the cross-guarantee provisions is superior to claims of shareholders of the insured depository institution or its BHC and to most claims arising out of obligations or liabilities owed to affiliates of the institution, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the DIF. Enhanced Supervision and Prudential Standards The Dodd-Frank Act directed the Federal Reserve to enact enhanced prudential standards applicable to foreign banking organizations and bank holding companies with total consolidated assets of $50 billion or more, such as M&T. The Federal Reserve adopted amendments to Regulation YY to implement certain of the required enhanced prudential standards. Those amendments, which are intended to help increase the resiliency of the operations of these organizations, include liquidity requirements, requirements for overall risk management (including establishing a risk committee), and a 15-to-1 debt-to-equity limit for companies that the Financial Stability Oversight Council has determined pose a grave threat to financial stability. The liquidity requirements and risk management requirements became effective as to M&T on January 1, 2015. In March 2016, the Federal Reserve issued a revised proposal regarding single counterparty credit limits, which would impose a limit on credit exposure to any counterparty. Volcker Rule On December 10, 2013, the federal banking regulators and the SEC adopted the so-called Volcker Rule to implement the provisions of the Dodd-Frank Act limiting proprietary trading and investing in 13 13 and sponsoring certain hedge funds and private equity funds (defined as covered funds in the Volcker Rule). The Company does not engage in any significant amount of proprietary trading as defined in the Volcker Rule and has implemented the required procedures for those areas in which trading does occur. The covered funds limits are imposed through a conformance period that is expected to end in July 2017. To comply with requirements of the Volcker Rule, during 2016, the Company sold the collateralized debt obligations that had been held in the available-for-sale investment securities portfolio. Safety and Soundness Standards Guidelines adopted by the federal bank regulatory agencies pursuant to the Federal Deposit Insurance Act, as amended (the “FDIA”), establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. Additionally, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. Limits on Undercapitalized Depository Institutions The FDIA establishes a system of regulatory remedies to resolve the problems of undercapitalized institutions, referred to as the prompt corrective action. The federal banking regulators have established five capital categories (“well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and must take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions which are undercapitalized, significantly undercapitalized or critically undercapitalized. The severity of these mandatory and discretionary supervisory actions depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the FDIA requires the banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. The FDIC has specified by regulation the relevant capital levels for each category. The Federal Reserve and the OCC have specified the same or similar levels for each category. Effective January 1, 2015, the New Capital Rules created new prompt corrective action requirements by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8%; and (iii) eliminating the provision that provided that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. An institution that is classified as well-capitalized based on its capital levels may be classified as adequately capitalized, and an institution that is adequately capitalized or undercapitalized based upon its capital levels may be treated as though it were undercapitalized or significantly undercapitalized, respectively, if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. 14 14 An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking regulator. Under the FDIA, in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a BHC must guarantee that a subsidiary depository institution will comply with its capital restoration plan, subject to certain limitations. The BHC must also provide appropriate assurances of performance. The obligation of a controlling BHC under the FDIA to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. Institutions that are significantly undercapitalized or undercapitalized and either fail to submit an acceptable capital restoration plan or fail to implement an approved capital restoration plan may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions failing to submit or implement an acceptable capital restoration plan are subject to appointment of a receiver or conservator. Transactions with Affiliates There are various legal restrictions on the extent to which M&T and its non-bank subsidiaries may borrow or otherwise obtain funding from M&T Bank and Wilmington Trust, N.A. In general, Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W require that any “covered transaction” by M&T Bank and Wilmington Trust, N.A. (or any of their respective subsidiaries) with an affiliate must in certain cases be secured by designated amounts of specified collateral and must be limited as follows: (a) in the case of any single such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries may not exceed 10% of the capital stock and surplus of such insured depository institution, and (b) in the case of all affiliates, the aggregate amount of covered transactions of an insured depository institution and its subsidiaries may not exceed 20% of the capital stock and surplus of such insured depository institution. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization, including for example, the requirement that the 10% of capital limit on covered transactions begin to apply to financial subsidiaries. “Covered transactions” are defined by statute to include, among other things, a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. All covered transactions, including certain additional transactions (such as transactions with a third party in which an affiliate has a financial interest), must be conducted on market terms. FDIC Insurance Assessments Deposit Insurance Assessments. M&T Bank and Wilmington Trust, N.A. pay deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC. Deposit insurance assessments are based on average total assets minus average tangible equity. For larger institutions, such as M&T Bank, the FDIC uses a performance score and a loss-severity score that are used to calculate an initial assessment rate. In calculating these scores, the FDIC uses a bank’s capital level and supervisory ratings and certain financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress. The FDIC has the ability to make discretionary 15 15 adjustments to the total score based upon significant risk factors that are not adequately captured in the calculations. In its DIF restoration plan, the FDIC designated that the DIF reserve ratio should be 1.35% by September 2020. In March 2016, the FDIC adopted a final rule that imposes a surcharge on the assessments of depository institutions with $10 billion or more in assets, including M&T Bank, beginning in the quarter following the quarter that the DIF surpasses 1.15% and continuing through the earlier of the quarter that the reserve ratio first reaches or exceeds 1.35% or December 31, 2018. In August 2016, the FDIC announced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016. As a result, beginning in the third quarter of 2016, the range of initial assessment ranges for all institutions were adjusted downward such that the initial base deposit insurance assessment rate ranges from 3 to 30 basis points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 1.5 to 40 basis points on an annualized basis. Nevertheless, at the same time depository institutions with $10 billion or more in assets, including M&T Bank, became subject to the surcharge referred to in the preceding paragraph. Additionally, an institution must pay an additional premium equal to 50 basis points on every dollar (above 3% of an institution’s Tier 1 capital) of long-term, unsecured debt held that was issued by another insured depository institution. M&T Bank recognized $98 million of expense related to its FDIC assessment and large bank surcharge and Wilmington Trust, N.A. recognized $417 thousand of FDIC insurance expense in 2016. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. FICO Assessments. In addition, the Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose assessments on DIF applicable deposits in order to service the interest on FICO’s bond obligations from deposit insurance fund assessments. The amount assessed on individual institutions by FICO is in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules. FICO assessment rates may be adjusted quarterly to reflect a change in assessment base. M&T Bank recognized $6 million of expense related to its FICO assessments and Wilmington Trust, N.A. recognized $53 thousand of such expense in 2016. Acquisitions The BHCA requires every BHC to obtain the prior approval of the Federal Reserve before: (1) it may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition, the BHC will directly or indirectly own or control 5% or more of the voting shares of the institution; (2) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or (3) it may merge or consolidate with any other BHC. Since July 2011, financial holding companies and bank holding companies with consolidated assets exceeding $50 billion, such as M&T, have been required to (i) obtain prior approval from the Federal Reserve before acquiring certain nonbank financial companies with assets exceeding $10 billion and (ii) provide prior written notice to the Federal Reserve before acquiring direct or indirect ownership or control of any voting shares of any company having consolidated assets of $10 billion or more. The BHCA further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in 16 16 meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues includes the parties’ performance under the CRA and compliance with consumer protection laws. The Federal Reserve must take into account the institutions’ effectiveness in combating money laundering. In addition, pursuant to the Dodd-Frank Act, the BHCA was amended to require the Federal Reserve, when evaluating a proposed transaction, to consider the extent to which the transaction would result in greater or more concentrated risks to the stability of the United States banking or financial system. Executive and Incentive Compensation Guidelines adopted by the federal banking agencies prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. The Federal Reserve has issued comprehensive guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, discussed below. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The Incentive Compensation Guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets, such as M&T and M&T Bank. The agencies proposed initial regulations in April 2011 and proposed revised regulations during the second quarter of 2016 that would establish general qualitative requirements applicable to all covered entities, additional specific requirements for entities with total consolidated assets of at least $50 billion, such as M&T, and further, more stringent requirements for those with total consolidated assets of at least $250 billion. The general qualitative requirements include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping. For larger financial institutions, including M&T, the proposed revised regulations would also introduce additional requirements applicable only to “senior executive officers” and “significant risk-takers” (as defined in the proposed regulations), including (i) limits on performance measures and leverage relating to performance targets; (ii) minimum deferral periods; 17 17 and (iii) subjecting incentive compensation to possible downward adjustment, forfeiture and clawback. If the final regulations are adopted in the form proposed, they will impose limitations on the manner in which M&T may structure compensation for its executives. In October 2016, the NYDFS issued guidance emphasizing that its regulated banking institutions, including M&T Bank, must ensure that any incentive compensation arrangements tied to employee performance indicators are subject to effective risk management, oversight and control. The scope and content of the banking regulators’ policies on incentive compensation are continuing to develop and are likely to continue evolving in the future. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of M&T and its subsidiaries to hire, retain and motivate their key employees. Resolution Planning Bank holding companies with consolidated assets of $50 billion or more, such as M&T, are required to report periodically to regulators a resolution plan for their rapid and orderly resolution in the event of material financial distress or failure. M&T’s resolution plan must, among other things, ensure that its depository institution subsidiaries are adequately protected from risks arising from its other subsidiaries. The regulation adopted by the Federal Reserve and FDIC sets specific standards for the resolution plans, including requiring a strategic analysis of the plan’s components, a description of the range of specific actions the company proposes to take in resolution, and a description of the company’s organizational structure, material entities, interconnections and interdependencies, and management information systems, among other elements. In addition, insured depository institutions with $50 billion or more in total assets, such as M&T Bank, are required to submit to the FDIC periodic plans for resolution in the event of the institution’s failure. M&T and M&T Bank most recently submitted resolution plans in December 2015, as required. The next resolution plans that M&T and M&T Bank will be required to file must be submitted by December 31, 2017. Insolvency of an Insured Depository Institution or a Bank Holding Company If the FDIC is appointed as conservator or receiver for an insured depository institution such as M&T Bank or Wilmington Trust, N.A., upon its insolvency or in certain other events, the FDIC has the power:  to transfer any of the depository institution’s assets and liabilities to a new obligor, including a newly formed “bridge” bank without the approval of the depository institution’s creditors; to enforce the terms of the depository institution’s contracts pursuant to their terms without regard to any provisions triggered by the appointment of the FDIC in that capacity; or to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.   In addition, under federal law, the claims of holders of domestic deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including claims of debt holders of the institution, in the “liquidation or other resolution” of such an institution by any receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of M&T Bank or Wilmington Trust, N.A., the debt holders would be treated differently from, and could receive, if anything, substantially less than, the depositors of the bank. The Dodd-Frank Act created a 18 18 new resolution regime (known as “orderly liquidation authority”) for systemically important financial companies, including bank holding companies and their affiliates. Under the orderly liquidation authority, the FDIC may be appointed as receiver for the systemically important institution, and its failed subsidiaries, for purposes of liquidating the entity if, among other conditions, it is determined at the time of the institution’s failure that it is in default or in danger of default and the failure poses a risk to the stability of the U.S. financial system. If the FDIC is appointed as receiver under the orderly liquidation authority, then the powers of the receiver, and the rights and obligations of creditors and other parties who have dealt with the institution, would be determined under the Dodd-Frank Act provisions, and not under the insolvency law that would otherwise apply. The powers of the receiver under the orderly liquidation authority were based on the powers of the FDIC as receiver for depository institutions under the FDIA. However, the provisions governing the rights of creditors under the orderly liquidation authority were modified in certain respects to reduce disparities with the treatment of creditors’ claims under the U.S. Bankruptcy Code as compared to the treatment of those claims under the new authority. Nonetheless, substantial differences in the rights of creditors exist as between these two regimes, including the right of the FDIC to disregard the strict priority of creditor claims in some circumstances, the use of an administrative claims procedure to determine creditors’ claims (as opposed to the judicial procedure utilized in bankruptcy proceedings), and the right of the FDIC to transfer claims to a “bridge” entity. An orderly liquidation fund will fund such liquidation proceedings through borrowings from the Treasury Department and risk-based assessments made, first, on entities that received more in the resolution than they would have received in liquidation to the extent of such excess, and second, if necessary, on bank holding companies with total consolidated assets of $50 billion or more, such as M&T. If an orderly liquidation is triggered, M&T could face assessments for the orderly liquidation fund. The FDIC has developed a strategy under the orderly liquidation authority referred to as the “single point of entry” strategy, under which the FDIC would resolve a failed financial holding company by transferring its assets (including shares of its operating subsidiaries) and, potentially, very limited liabilities to a “bridge” holding company; utilize the resources of the failed financial holding company to recapitalize the operating subsidiaries; and satisfy the claims of unsecured creditors of the failed financial holding company and other claimants in the receivership by delivering securities of one or more new financial companies that would emerge from the bridge holding company. Under this strategy, management of the failed financial holding company would be replaced and shareholders and creditors of the failed financial holding company would bear the losses resulting from the failure. Depositor Preference Under federal law, depositors and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution in the “liquidation or other resolution” of such an institution by any receiver. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent BHC, with respect to any extensions of credit they have made to such insured depository institution. Financial Privacy and Cybersecurity The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow 19 19 consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. In October 2016, the federal banking regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are intended to increase the operational resilience of large and interconnected entities under their supervision. Once established, the enhanced cyber risk management standards would help to reduce the potential impact of a cyber- attack or other cyber-related failure on the financial system. The advance notice of proposed rulemaking addresses five categories of cyber standards: (1) cyber risk governance; (2) cyber risk management; (3) internal dependency management; (4) external dependency management; and (5) incident response, cyber resilience, and situational awareness. In December 2016, the NYSDFS re- proposed regulations that would require financial institutions regulated by the NYSDFS, including M&T Bank, to, among other things, (i) establish and maintain a cyber security program designed to ensure the confidentiality, integrity and availability of their information systems; (ii) implement and maintain a written cyber security policy setting forth policies and procedures for the protection of their information systems and nonpublic information; and (iii) designate a Chief Information Security Officer. Consumer Protection Laws and the Consumer Financial Protection Bureau Supervision In connection with their respective lending and leasing activities, M&T Bank, Wilmington Trust, N.A. and certain of their subsidiaries, are each subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and various state law counterparts. They are also subject to consumer protection laws governing their deposit taking activities, as well securities and insurance laws governing certain aspects of their consolidated operations. Furthermore, the Bureau of Consumer Financial Protection (“CFPB”) has issued integrated disclosure requirements under the Truth-in- Lending Act and the Real Estate Settlement Procedures Act that relate to the provision of disclosures to borrowers. The Dodd-Frank Act established the CFPB with broad powers to supervise and enforce most federal consumer protection laws. The CFPB 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 CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, including M&T Bank. 20 20 The CFPB has focused on:  risks to consumers and compliance with the federal consumer financial laws, when it evaluates the policies and practices of a financial institution; the markets in which firms operate and risks to consumers posed by activities in those markets; depository institutions that offer a wide variety of consumer financial products and services; depository institutions with a more specialized focus; and non-depository companies that offer one or more consumer financial products or services.     The Electronic Fund Transfer Act prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machines (“ATM”) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those type of transactions. If a consumer does not opt in, any ATM transaction or debit that overdraws the consumer’s account will be denied. Overdrafts on the payment of checks and regular electronic bill payments are not covered by this rule. Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. Financial institutions must provide consumers who do not opt in with the same account terms, conditions and features (including pricing) that they provide to consumers who do opt in. Community Reinvestment Act The CRA is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. CRA examinations are conducted by the federal agencies that are responsible for supervising depository institutions: the Federal Reserve, the FDIC and the OCC. A financial institution's performance in helping to meet the credit needs of its community is evaluated in the context of information about the institution (capacity, constraints and business strategies), its community (demographic and economic data, lending, investment, and service opportunities), and its competitors and peers. Upon completion of a CRA examination, an overall CRA Rating is assigned using a four-tiered rating system. These ratings are: “Outstanding,” “Satisfactory,” “Needs to Improve” and “Substantial Noncompliance.” The CRA evaluation is used in evaluating applications for future approval of bank activities including mergers, acquisitions, charters, branch openings and deposit facilities. M&T Bank has a rating of “Outstanding.” M&T Bank is also subject to New York State CRA examination and is assessed using a 1 to 4 scoring system. M&T Bank has an “Outstanding” rating from the NYSDFS. Wilmington Trust, N.A. was subject to the CRA until March 3, 2016 when the OCC changed its designation of Wilmington Trust, N.A. to a special purpose trust company, which exempts Wilmington Trust, N.A. from the requirements of the CRA. Bank Secrecy and Anti-Money Laundering Federal laws and regulations impose obligations on U.S. financial institutions, including banks and broker/dealer subsidiaries, to implement and maintain appropriate policies, procedures and controls which are reasonably designed to prevent, detect and report instances of money laundering and the financing of terrorism and to verify the identity of their customers. In addition, these provisions require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and BHC acquisitions. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the institution. As a result of an inspection by the Federal Reserve Bank of New York, on June 17, 2013 21 21 M&T and M&T Bank entered into a written agreement with the Federal Reserve Bank of New York related to M&T Bank’s Bank Secrecy Act/Anti-Money Laundering Program pursuant to which M&T and M&T Bank have implemented a BSA/AML program with significantly expanded scale and scope. M&T and M&T Bank are continuing to work towards the resolution of all outstanding issues in the written agreement. Office of Foreign Assets Control Regulation The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g. property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences. Regulation of Insurers and Insurance Brokers The Company’s operations in the areas of insurance brokerage and reinsurance of credit life insurance are subject to regulation and supervision by various state insurance regulatory authorities. Although the scope of regulation and form of supervision may vary from state to state, insurance laws generally grant broad discretion to regulatory authorities in adopting regulations and supervising regulated activities. This supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling of customer funds held in a fiduciary capacity. Certain of M&T’s insurance company subsidiaries are subject to extensive regulatory supervision and to insurance laws and regulations requiring, among other things, maintenance of capital, record keeping, reporting and examinations. Federal Reserve Policies The earnings of the Company are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve. Among the instruments of monetary policy used by the Federal Reserve are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies or the effect which they may have on the Company’s business and earnings. 22 22 Competition The Company competes in offering commercial and personal financial services with other banking institutions and with firms in a number of other industries, such as thrift institutions, credit unions, personal loan companies, sales finance companies, leasing companies, securities firms and insurance companies. Furthermore, diversified financial services companies are able to offer a combination of these services to their customers on a nationwide basis. The Company’s operations are significantly impacted by state and federal regulations applicable to the banking industry. Moreover, the provisions of the Gramm-Leach-Bliley Act of 1999, the Interstate Banking Act and the Banking Law have allowed for increased competition among diversified financial services providers. Other Information Through a link on the Investor Relations section of M&T’s website at www.mtb.com, copies of M&T’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available, free of charge, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. Copies of such reports and other information are also available at no charge to any person who requests them or at www.sec.gov. Such requests may be directed to M&T Bank Corporation, Shareholder Relations Department, One M&T Plaza, 8th Floor, Buffalo, NY 14203-2399 (Telephone: (716) 842-5138). The public may read and copy any materials that M&T files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Corporate Governance M&T’s Corporate Governance Standards and the following corporate governance documents are also available on M&T’s website at the Investor Relations link: Disclosure and Regulation FD Policy; Executive Committee Charter; Nomination, Compensation and Governance Committee Charter; Audit Committee Charter; Risk Committee Charter; Financial Reporting and Disclosure Controls and Procedures Policy; Code of Ethics for CEO and Senior Financial Officers; Code of Business Conduct and Ethics; Employee Complaint Procedures for Accounting and Auditing Matters; and Excessive or Luxury Expenditures Policy. Copies of such governance documents are also available, free of charge, to any person who requests them. Such requests may be directed to M&T Bank Corporation, Shareholder Relations Department, One M&T Plaza, 8th Floor, Buffalo, NY 14203-2399 (Telephone: (716) 842-5138). Statistical Disclosure Pursuant to Guide 3 See cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10- K. Additional information is included in the following tables. 23 23 Table 1 SELECTED CONSOLIDATED YEAR-END BALANCES Interest-bearing deposits at banks ............... $ Federal funds sold ....................................... Trading account .......................................... Investment securities 2016 2015 2014 2013 2012 (In thousands) 5,000,638 $ — 323,867 7,594,350 $ 6,470,867 $ 1,651,138 $ 99,573 83,392 376,131 308,175 — 273,783 129,945 3,000 488,966 U.S. Treasury and federal agencies ....... 15,090,578 14,540,237 12,042,390 7,770,767 4,007,725 Obligations of states and political subdivisions ........................................ Other ...................................................... 203,004 180,495 845,235 1,863,632 Total investment securities .............. 16,250,468 15,656,439 12,993,542 8,796,497 6,074,361 64,499 1,095,391 157,159 793,993 124,459 991,743 Loans and leases 8,066,756 Commercial, financial, leasing, etc. ...... 22,770,629 20,576,737 19,617,253 18,876,166 17,973,140 Real estate — construction .................... 5,716,994 5,061,269 4,457,650 3,772,413 Real estate — mortgage ........................ 48,134,198 49,841,156 31,250,968 30,711,440 33,494,359 Consumer .............................................. 12,130,094 11,584,347 10,969,879 10,280,527 11,550,274 Total loans and leases ...................... 91,101,677 87,719,234 66,899,369 64,325,783 66,790,186 (219,229) Unearned discount ................................. Loans and leases, net of unearned discount ......................................... 90,853,416 87,489,499 66,668,956 64,073,159 66,570,957 (925,860) Loans and leases, net........................ 89,864,419 86,533,507 65,749,394 63,156,483 65,645,097 Goodwill ..................................................... 4,593,112 3,524,625 3,524,625 3,524,625 Core deposit and other intangible assets ..... 115,763 104,279 Real estate and other assets owned ............. Total assets ................................................. 123,449,206 122,787,884 96,685,535 85,162,391 83,008,803 4,593,112 97,655 139,206 Allowance for credit losses ................... 140,268 195,085 35,027 63,635 68,851 66,875 (230,413) (919,562) (252,624 ) (916,676 ) (248,261) (988,997) (229,735) (955,992) Noninterest-bearing deposits ...................... 32,813,896 29,110,635 26,947,880 24,661,007 24,240,802 Savings and interest-checking deposits ...... 52,346,207 49,566,644 43,393,618 38,611,021 35,763,566 Time deposits .............................................. 10,131,846 13,110,392 3,063,973 3,523,838 4,562,366 322,746 1,044,519 Deposits at Cayman Islands office .............. Total deposits ................................... 95,493,876 91,957,841 73,582,053 67,118,612 65,611,253 260,455 1,074,482 Short-term borrowings ................................ Long-term borrowings ................................ 9,493,835 10,653,858 9,006,959 5,108,870 4,607,758 Total liabilities ............................................ 106,962,584 106,614,595 84,349,639 73,856,859 72,806,210 Shareholders’ equity ................................... 16,486,622 16,173,289 12,335,896 11,305,532 10,202,593 2,132,182 176,582 192,676 201,927 163,442 170,170 Table 2 SHAREHOLDERS, EMPLOYEES AND OFFICES Number at Year-End 2016 2015 2014 2013 2012 Shareholders ................................................... 19,802 20,693 14,551 15,015 15,623 Employees ...................................................... 16,973 17,476 15,782 15,893 14,943 799 Offices ............................................................ 766 855 796 863 24 24 Table 3 CONSOLIDATED EARNINGS Interest income Loans and leases, including fees ........................................ $ 3,485,050 $ 2,778,151 $ 2,596,586 $ 2,734,708 $ 2,704,156 Investment securities 2016 2015 2014 (In thousands) 2013 2012 Fully taxable ................................................................ Exempt from federal taxes ........................................... Deposits at banks ............................................................... Other .................................................................................. 227,116 8,045 1,221 1,147 Total interest income .................................................... 3,895,871 3,170,844 2,956,877 2,957,334 2,941,685 340,391 209,244 6,802 5,201 1,379 372,162 4,263 15,252 1,016 361,494 2,606 45,516 1,205 5,356 13,361 1,183 46,869 15,515 699 101 87,704 102,841 797 3,625 231,017 425,984 46,140 27,059 615 1,677 252,766 328,257 56,235 26,439 1,018 430 217,247 199,983 280,431 284,105 Interest expense Savings and interest-checking deposits .............................. Time deposits ..................................................................... Deposits at Cayman Islands office ..................................... Short-term borrowings ....................................................... Long-term borrowings ....................................................... Total interest expense .................................................. 69,354 46,102 1,130 1,286 225,297 343,169 Net interest income .......................................................... 3,469,887 2,842,587 2,676,446 2,673,229 2,598,516 204,000 Provision for credit losses .................................................. Net interest income after provision for credit losses .......... 3,279,887 2,672,587 2,552,446 2,488,229 2,394,516 Other income Mortgage banking revenues ............................................... Service charges on deposit accounts .................................. Trust income ...................................................................... Brokerage services income ................................................ Trading account and foreign exchange gains ..................... Gain (loss) on bank investment securities .......................... Total other-than-temporary impairment (“OTTI”) losses .. Portion of OTTI losses recognized in other comprehensive income (before taxes) ............................. Net OTTI losses recognized in earnings ............................ Other revenues from operations ......................................... (15,755) (47,822) 352,776 Total other income ....................................................... 1,825,996 1,825,037 1,779,273 1,865,205 1,667,270 362,912 331,265 427,956 446,941 508,258 496,008 65,647 40,828 56,457 (1,884 ) 375,738 420,608 470,640 64,770 30,577 (130) — 373,697 419,102 472,184 63,423 41,126 30,314 — (7,916 ) (9,800 ) 383,061 437,859 349,064 446,698 471,852 59,059 35,634 9 (32,067) 67,212 29,874 — — — — 462,834 — — 426,150 124,000 185,000 — — 170,000 190,000 Other expense Salaries and employee benefits .......................................... 1,623,600 1,549,530 1,404,950 1,355,178 1,314,540 257,551 Equipment and net occupancy ........................................... 125,252 Outside data processing and software ................................ 101,110 FDIC assessments .............................................................. 52,388 Advertising and marketing ................................................. 41,929 Printing, postage and supplies ............................................ 60,631 Amortization of core deposit and other intangible assets ... 516,350 Other costs of operations.................................................... Total other expense ...................................................... 3,047,485 2,822,932 2,689,474 2,587,866 2,469,751 Income before income taxes .............................................. 2,058,398 1,674,692 1,642,245 1,765,568 1,592,035 Income taxes ...................................................................... 562,537 Net income ........................................................................ $ 1,315,114 $ 1,079,667 $ 1,066,246 $ 1,138,480 $ 1,029,498 Dividends declared 269,299 264,327 151,568 134,011 69,584 56,597 39,557 46,912 688,990 621,700 272,539 164,133 52,113 59,227 38,491 26,424 660,475 295,141 172,389 105,045 87,137 39,546 42,613 682,014 55,531 47,111 38,201 33,824 575,999 627,088 595,025 743,284 Common ...................................................................... $ 441,765 $ 374,912 $ 371,137 $ 365,171 $ 357,862 53,450 Preferred ...................................................................... 75,878 81,270 81,270 53,450 25 25 Table 4 Per share Net income COMMON SHAREHOLDER DATA 2016 2015 2014 2013 2012 Basic ............................................................................ $ 7.80 $ 7.22 $ 7.47 $ 8.26 $ 7.57 7.54 Diluted ......................................................................... Cash dividends declared .................................................... 2.80 Common shareholders’ equity at year-end ........................ 72.73 Tangible common shareholders’ equity at year-end .......................................................................... Dividend payout ratio ........................................................ 44.61 67.85 35.81% 37.56% 37.49 % 33.94 % 36.98% 7.42 8.20 2.80 2.80 83.88 79.81 7.78 2.80 97.64 7.18 2.80 93.60 57.06 52.45 64.28 Table 5 CHANGES IN INTEREST INCOME AND EXPENSE(a) 2016 Compared with 2015 2015 Compared with 2014 Resulting from Changes in: Resulting from Changes in: Total Change Volume Rate Total Change Volume Rate (Increase (decrease) in thousands) Interest income Loans and leases, including fees ....................... $710,191 703,099 Deposits at banks .............................................. 30,264 Federal funds sold and agreements to resell securities ........................................................ Trading account ................................................ Investment securities (32) 195 (65) (31) 10,805 7,092 $182,975 248,119 (65,144) 624 1,891 1,267 19,459 33 226 (29 ) (134 ) (48 ) 169 19 (303) (3,947) 12,524 (16,471) 32,695 77,565 (44,870) U.S. Treasury and federal agencies ............. Obligations of states and political (2,552) subdivisions .............................................. Other ............................................................ (6,593) Total interest income ................................... $727,526 (2,251) (301) 3,890 (10,483) (1,724 ) (1,052 ) (20 ) (886 ) $214,788 (672) (866) Interest expense Interest-bearing deposits Savings and interest-checking deposits ....... $ 41,564 10,724 Time deposits .............................................. 75,782 59,607 182 Deposits at Cayman Islands office .............. Short-term borrowings ...................................... 1,948 Long-term borrowings ...................................... (21,749) Total interest expense .................................. $ 97,727 1,288 857 (53) 30,840 $ (729 ) 3,031 16,175 11,544 7,356 (273 ) 363 (3,760) 4,188 189 1,213 (22,606) 35,519 71,014 (35,495) (84 ) 1,576 235 660 $ 47,826 (a) Interest income data are on a taxable-equivalent basis. The apportionment of changes resulting from the combined effect of both volume and rate was based on the separately determined volume and rate changes. 26 26 Item 1A. Risk Factors. M&T and its subsidiaries could be adversely impacted by a number of risks and uncertainties that are difficult to predict. As a financial institution certain risk elements are inherent in the ordinary course of the Company’s business activities and adverse experience with those risks could have a material impact on the Company’s business, financial condition and results of operations, as well as on the values of the Company’s financial instruments and M&T’s common stock. The Company has developed a risk management process to identify, understand, mitigate and balance its exposure to significant risks. The following risk factors set forth some of the risks that could materially and adversely impact the Company. Market Risk Weakness in the economy has adversely affected the Company in the past and may adversely affect the Company in the future. Poor business and economic conditions in general or specifically in markets served by the Company could have one or more of the following adverse effects on the Company’s business:  A decrease in the demand for loans and other products and services offered by the Company.  A decrease in net interest income derived from the Company’s lending and deposit gathering activities.  A decrease in the value of the Company’s investment securities, loans held for sale or other assets secured by residential or commercial real estate.  Other-than-temporary impairment of investment securities in the Company’s investment securities portfolio.  A decrease in fees from the Company’s brokerage and trust businesses associated with declines or lack of growth in stock market prices. Potential higher FDIC assessments due to the DIF falling below minimum required levels.   An impairment of certain intangible assets, such as goodwill.  An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Company. An increase in the number of delinquencies, bankruptcies or defaults could result in higher levels of nonperforming assets, net charge-offs, provision for credit losses and valuation adjustments on loans held for sale. The Company’s business and financial performance is impacted significantly by market interest rates and movements in those rates. The monetary, tax and other policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance over which the Company has no control and which the Company may not be able to anticipate adequately. As a result of the high percentage of the Company’s assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve or in spreads between different market interest rates, can have a material effect on the Company’s business and profitability and the value of the Company’s assets and liabilities. For example:  Changes in interest rates or interest rate spreads can affect the difference between the interest that the Company earns on assets and the interest that the Company pays on 27 27    liabilities, which impacts the Company’s overall net interest income and profitability. Such changes can affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments, and can, in turn, affect the Company’s loss rates on those assets. Such changes may decrease the demand for interest rate based products and services, including loans and deposits. Such changes can also affect the Company’s ability to hedge various forms of market and interest rate risk and may decrease the profitability or protection or increase the risk or cost associated with such hedges.  Movements in interest rates also affect mortgage prepayment speeds and could result in the impairment of capitalized mortgage servicing assets, reduce the value of loans held for sale and increase the volatility of mortgage banking revenues, potentially adversely affecting the Company’s results of operations. The monetary, tax and other policies of the government and its agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance. These governmental policies can thus affect the activities and results of operations of banking companies such as the Company. An important function of the Federal Reserve is to regulate the national supply of bank credit and certain interest rates. The actions of the Federal Reserve influence the rates of interest that the Company charges on loans and that the Company pays on borrowings and interest- bearing deposits and can also affect the value of the Company’s on-balance sheet and off-balance sheet financial instruments. Also, due to the impact on rates for short-term funding, the Federal Reserve’s policies also influence, to a significant extent, the Company’s cost of such funding. In addition, the Company is routinely subject to examinations from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Should tax laws change or the tax authorities determine that management’s assumptions were inappropriate, the result and adjustments required could have a material effect on the Company’s results of operations. M&T cannot predict the nature or timing of future changes in monetary, tax and other policies or the effect that they may have on the Company’s business activities, financial condition and results of operations. The Company’s business and performance is vulnerable to the impact of volatility in debt and equity markets. As most of the Company’s assets and liabilities are financial in nature, the Company’s performance tends to be sensitive to the performance of the financial markets. Turmoil and volatility in U.S. and global financial markets can be a major contributory factor to overall weak economic conditions, leading to some of the risks discussed herein, including the impaired ability of borrowers and other counterparties to meet obligations to the Company. Financial market volatility also can have some of the following adverse effects on the Company and its business, including adversely affecting the Company’s financial condition and results of operations:    It can affect the value or liquidity of the Company’s on-balance sheet and off-balance sheet financial instruments. It can affect the value of capitalized servicing assets. It can affect M&T’s ability to access capital markets to raise funds. Inability to access capital markets if needed, at cost effective rates, could adversely affect the Company’s liquidity and results of operations. 28 28   It can affect the value of the assets that the Company manages or otherwise administers or services for others. Although the Company is not directly impacted by changes in the value of such assets, decreases in the value of those assets would affect related fee income and could result in decreased demand for the Company’s services. In general, it can impact the nature, profitability or risk profile of the financial transactions in which the Company engages. Volatility in the markets for real estate and other assets commonly securing financial products has been and may continue to be a significant contributor to overall volatility in financial markets. The Company’s regional concentrations expose it to adverse economic conditions in its primary retail banking office footprint. The Company’s core banking business is largely concentrated within the Company’s retail banking office network footprint, located principally in New York, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia and the District of Columbia. Therefore, the Company is, or in the future may be, particularly vulnerable to adverse changes in economic conditions in the Northeast and Mid-Atlantic regions. Risks Relating to Compliance and the Regulatory Environment The Company is subject to extensive government regulation and supervision and this regulatory environment can be and has been significantly impacted by financial regulatory reform initiatives. The Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the financial system as a whole, not stockholders. These regulations and supervisory guidance affect the Company’s lending practices, capital structure, amounts of capital, investment practices, dividend policy and growth, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in civil or criminal penalties, including monetary penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. In this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures and may also adversely affect the Company’s ability to enter into certain transactions or engage in certain activities, or obtain necessary regulatory approvals in connection therewith. The U.S. government and others have recently undertaken major reforms of the regulatory oversight structure of the financial services industry. M&T expects to face increased regulation of its industry as a result of current and possible future initiatives. M&T also expects more intense scrutiny in the examination process and more aggressive enforcement of regulations on both the federal and state levels. Compliance with these new regulations and supervisory initiatives will likely increase the Company’s costs, reduce its revenue and may limit its ability to pursue certain desirable business opportunities. Not all of the rules required or expected to be implemented under the Dodd-Frank Act have been proposed or adopted, and certain of the rules that have been proposed or adopted under the Dodd-Frank Act are subject to phase-in or transitional periods. Reforms, both under the Dodd-Frank Act and otherwise, will have a significant effect on the entire financial services industry. Although it 29 29 is difficult to predict the magnitude and extent of these effects, M&T believes compliance with new regulations and other initiatives will likely negatively impact revenue and increase the cost of doing business, both in terms of transition expenses and on an ongoing basis, and may also limit M&T’s ability to pursue certain desirable business opportunities. Any new regulatory requirements or changes to existing requirements could require changes to the Company’s businesses, result in increased compliance costs and affect the profitability of such businesses. Additionally, reform could affect the behaviors of third parties that the Company deals with in the course of its business, such as rating agencies, insurance companies and investors. Heightened regulatory practices, requirements or expectations could affect the Company in substantial and unpredictable ways, and, in turn, could have a material adverse effect on the Company’s business, financial condition and results of operations. While the change in administration in the U.S. may ultimately lead to the modification of certain of the regulations adopted since the financial crisis, uncertainty about the timing and scope of any such changes as well as the cost of complying with a new regulatory regime may negatively impact the Company’s businesses, at least in the short term, even if the long-term impact of any such changes may be positive for the Company’s businesses. Capital and liquidity standards adopted by the U.S. banking regulators have resulted in banks and bank holding companies needing to maintain more and higher quality capital and greater liquidity than has historically been the case. New capital standards, both as a result of the Dodd-Frank Act and the U.S. Basel III-based capital rules have had a significant effect on banks and bank holding companies, including M&T. The U.S. capital rules require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. For additional information, see “Capital Requirements” under Part I, Item 1 “Business.” The need to maintain more and higher quality capital, as well as greater liquidity, going forward than historically has been required, and generally increased regulatory scrutiny with respect to capital and liquidity levels, could limit the Company’s business activities, including lending, and its ability to expand, either organically or through acquisitions. It could also result in M&T being required to take steps to increase its regulatory capital that may be dilutive to shareholders or limit its ability to pay dividends or otherwise return capital to shareholders, or sell or refrain from acquiring assets, the capital requirements for which are not justified by the assets’ underlying risks. In addition, the U.S. Basel III-based liquidity coverage ratio requirement and the liquidity- related provisions of the Federal Reserve’s liquidity-related enhanced prudential supervision requirements adopted pursuant to Section 165 of Dodd-Frank require the Company to hold increased levels of unencumbered highly liquid investments, thereby reducing the Company’s ability to invest in other longer-term assets even if deemed more desirable from a balance sheet management perspective. Moreover, U.S. federal banking agencies have been taking into account expectations regarding the ability of banks to meet these requirements, including under stressed conditions, in approving actions that represent uses of capital, such as dividend increases, share repurchases and acquisitions. M&T’s ability to return capital to shareholders and to pay dividends on common stock may be adversely affected by market and other factors outside of its control and will depend, in part, on a review of its capital plan by the Federal Reserve. Any decision by M&T to return capital to shareholders, whether through an increase in its common stock dividend or through a share repurchase program, requires the approval of the M&T Board of Directors and depends in large part on receiving regulatory approval, including through the Federal 30 30 Reserve’s CCAR process and the supervisory stress tests required under the Dodd-Frank Act whereby M&T’s financial position is tested under assumed severely adverse economic conditions. Prior to the public disclosure of a bank holding company’s CCAR results, the Federal Reserve will provide the BHC with the results of its supervisory stress test and will offer a one-time opportunity for the BHC to reduce planned capital distributions through the submission of a revised capital plan. The Federal Reserve may object to any capital plan in which a bank holding company’s regulatory capital ratios inclusive of adjustments to planned capital distributions, if any, would not meet the minimum requirements throughout a nine-quarter period under severely adverse stress conditions. In June 2016, the Federal Reserve announced that it did not object to M&T’s revised CCAR capital plan. In the future, if the Federal Reserve objects to M&T’s CCAR capital plan or raises concerns regarding the qualitative aspects of M&T’s capital planning process through its supervisory oversight of M&T, it could impose restrictions on M&T’s ability to return capital to shareholders, which in turn could negatively impact market and investor perceptions of M&T. In addition, Federal Reserve capital planning and stress testing rules generally limit a bank holding company’s ability to make quarterly capital distributions – that is, dividends and share repurchases – if the amount of actual cumulative quarterly capital issuances of instruments that qualify as regulatory capital are less than the BHC had indicated in its submitted capital plan as to which it received a non-objection from the Federal Reserve. Under these rules, for example, if a BHC issued a smaller amount of additional common stock than it had stated in its capital plan, it would be required to reduce common dividends and/or the amount of common stock repurchases so that the dollar amount of capital distributions, net of the dollar amount of additional common stock issued (“net distributions”), is no greater than the dollar amount of net distributions relating to its common stock included in its capital plan, as measured on an aggregate basis beginning in the third quarter of the nine-quarter planning horizon through the end of the then current quarter. As such, M&T’s ability to declare and pay dividends on its common stock, as well as the amount of such dividends, will depend, in part, on its ability to issue stock in accordance with its capital plan or to otherwise remain in compliance with its capital plan, which may be adversely affected by market and other factors outside of M&T’s control. The effect of resolution plan requirements may have a material adverse impact on M&T. Bank holding companies with consolidated assets of $50 billion or more, such as M&T, are required to report periodically to regulators a resolution plan for their rapid and orderly resolution in the event of material financial distress or failure. M&T’s resolution plan must, among other things, ensure that its depository institution subsidiaries are adequately protected from risks arising from its other subsidiaries. The regulation adopted by the Federal Reserve and FDIC sets specific standards for the resolution plans, including requiring a strategic analysis of the plan’s components, a description of the range of specific actions the Company proposes to take in resolution, and a description of the Company’s organizational structure, material entities, interconnections and interdependencies, and management information systems, among other elements. To address effectively any shortcomings in the Company’s resolution plan, the Federal Reserve and the FDIC could require the Company to change its business structure or dispose of businesses, which could have a material adverse effect on its liquidity and ability to pay dividends on its stock or interest and principal on its debt. If an orderly liquidation of a systemically important BHC or non-bank financial company were triggered, M&T could face assessments for the Orderly Liquidation Fund (“OLF”). The Dodd-Frank Act creates a new mechanism, the OLF, for liquidation of systemically important bank holding companies and non-bank financial companies. The OLF is administered by the FDIC 31 31 and is based on the FDIC’s bank resolution model. The Secretary of the U.S. Treasury may trigger a liquidation under this authority only after consultation with the President of the U.S. and after receiving a recommendation from the boards of the FDIC and the Federal Reserve upon a two-thirds vote. Liquidation proceedings will be funded by the OLF, which will borrow from the U.S. Treasury and impose risk-based assessments on covered financial companies. Risk-based assessments would be made, first, on entities that received more in the resolution than they would have received in the liquidation to the extent of such excess, and second, if necessary, on, among others, bank holding companies with total consolidated assets of $50 billion or more, such as M&T. Any such assessments may adversely affect the Company’s business, financial condition or results of operations. Credit Risk Deteriorating credit quality could adversely impact the Company. As a lender, the Company is exposed to the risk that customers will be unable to repay their loans in accordance with the terms of the agreements, and that any collateral securing the loans may be insufficient to assure full repayment. Credit losses are inherent in the business of making loans. Factors that influence the Company’s credit loss experience include overall economic conditions affecting businesses and consumers, generally, but also residential and commercial real estate valuations, in particular, given the size of the Company’s real estate loan portfolios. Factors that can influence the Company’s credit loss experience include: (i) the impact of residential real estate values on loans to residential real estate builders and developers and other loans secured by residential real estate; (ii) the concentrations of commercial real estate loans in the Company’s loan portfolio; (iii) the amount of commercial and industrial loans to businesses in areas of New York State outside of the New York City area and in central Pennsylvania that have historically experienced less economic growth and vitality than many other regions of the country; (iv) the repayment performance associated with first and second lien loans secured by residential real estate; 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 loans to other types of borrowers. Commercial real estate valuations can be highly subjective as they are based upon many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, interest rates and, in many cases, the results of operations of businesses and other occupants of the real property. Similarly, residential real estate valuations can be impacted by housing trends, the availability of financing at reasonable interest rates, governmental policy regarding housing and housing finance, and general economic conditions affecting consumers. The Company maintains an allowance for credit losses which represents, in management’s judgment, the amount of losses inherent in the loan and lease portfolio. The allowance is determined by management’s evaluation of the loan and lease portfolio based on such factors as the differing economic risks associated with each loan category, the current 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 guarantees or indemnifications. The effects of probable decreases in expected principal cash flows on loans acquired at a discount are also considered in the establishment of the allowance for credit losses. Management believes that the allowance for credit losses appropriately reflects credit losses inherent in the loan and lease portfolio. However, there is no assurance that the allowance will be sufficient to cover such credit losses, particularly if housing and employment conditions worsen or 32 32 the economy experiences a downturn. In those cases, the Company may be required to increase the allowance through an increase in the provision for credit losses, which would reduce net income. The Company may be adversely affected by the soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results of operations. Liquidity Risk The Company must maintain adequate sources of funding and liquidity. The Company must maintain adequate funding sources in the normal course of business to support its operations and fund outstanding liabilities, as well as meet regulatory expectations. The Company primarily relies on deposits to be a low cost and stable source of funding for the loans it makes and the operations of its business. Core customer deposits, which include noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and time deposits of $250,000 or less, have historically provided the Company with a sizeable source of relatively stable and low-cost funds. In addition to customer deposits, sources of liquidity include borrowings from third party banks, securities dealers, various Federal Home Loan Banks and the Federal Reserve Bank of New York. The Company’s liquidity and ability to fund and run the business could be materially adversely affected by a variety of conditions and factors, including financial and credit market disruptions and volatility or a lack of market or customer confidence in financial markets in general, which may result in a loss of customer deposits or outflows of cash or collateral and/or ability to access capital markets on favorable terms. Other conditions and factors that could materially adversely affect the Company’s liquidity and funding include a lack of market or customer confidence in, or negative news about, the Company or the financial services industry generally which also may result in a loss of deposits and/or negatively affect the ability to access the capital markets; the loss of customer deposits to alternative investments; inability to sell or securitize loans or other assets; and downgrades in one or more of the Company’s credit ratings. A downgrade in the Company’s credit ratings, which could result from general industry-wide or regulatory factors not solely related to the Company, could adversely affect the Company’s ability to borrow funds and raise the cost of borrowings substantially and could cause creditors and business counterparties to raise collateral requirements or take other actions that could adversely affect M&T’s ability to raise capital. Many of the above conditions and factors may be caused by events over which M&T has little or no control. There can be no assurance that significant disruption and volatility in the financial markets will not occur in the future. Recent regulatory changes relating to liquidity and risk management have also impacted the Company’s results of operations and competitive position. These regulations address, among other matters, liquidity stress testing, minimum liquidity requirements and restrictions on short-term debt issued by top-tier holding companies. 33 33 If the Company is unable to continue to fund assets through customer bank deposits or access funding sources on favorable terms or if the Company suffers an increase in borrowing costs or otherwise fails to manage liquidity effectively, the Company’s liquidity, operating margins, financial condition and results of operations may be materially adversely affected. M&T relies on dividends from its subsidiaries for its liquidity. M&T is a separate and distinct legal entity from its subsidiaries. M&T typically receives substantially all of its revenue from subsidiary dividends. These dividends are the principal source of funds to pay dividends on M&T stock and interest and principal on its debt. Various federal and/or state laws and regulations, as well as regulatory expectations, limit the amount of dividends that M&T’s banking subsidiaries and certain nonbank subsidiaries may pay. Regulatory scrutiny of capital levels at bank holding companies and insured depository institution subsidiaries has increased in recent years and has resulted in increased regulatory focus on all aspects of capital planning, including dividends and other distributions to shareholders of banks, such as parent bank holding companies. See “Item 1. Business — Dividends” for a discussion of regulatory and other restrictions on dividend declarations. Also, M&T’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors. Limitations on M&T’s ability to receive dividends from its subsidiaries could have a material adverse effect on its liquidity and ability to pay dividends on its stock or interest and principal on its debt. Strategic Risk The financial services industry is highly competitive and creates competitive pressures that could adversely affect the Company’s revenue and profitability. The financial services industry in which the Company operates is highly competitive. The Company competes not only with commercial and other banks and thrifts, but also with insurance companies, mutual funds, hedge funds, securities brokerage firms and other companies offering financial services in the U.S., globally and over the Internet. Some of the Company’s non-bank competitors are not subject to the same extensive regulations the Company and its subsidiaries are, and may have greater flexibility in competing for business. In particular, the activity and prominence of so-called marketplace lenders and other technological financial services companies have grown significantly in recent years and is expected to continue growing. The Company competes on the basis of several factors, including capital, access to capital, revenue generation, products, services, transaction execution, innovation, reputation and price. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms. These developments could result in the Company’s competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. The Company may experience pricing pressures as a result of these factors and as some of its competitors seek to increase market share by reducing prices or paying higher rates of interest on deposits. Finally, technological change is influencing how individuals and firms conduct their financial affairs and changing the delivery channels for financial services, with the result that the Company may have to contend with a broader range of competitors including many that are not located within the geographic footprint of its banking office network. 34 34 Operational Risk The Company is subject to operational risk which could adversely affect the Company’s business and reputation and create material legal and financial exposure. Like all businesses, the Company is subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes and systems, and external events. Operational risk also encompasses reputational risk and compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical standards, as well as the risk of noncompliance with contractual and other obligations. The Company is also exposed to operational risk through outsourcing arrangements, and the effect that changes in circumstances or capabilities of its outsourcing vendors can have on the Company’s ability to continue to perform operational functions necessary to its business. In addition, along with other participants in the financial services industry, the Company frequently attempts to introduce new technology-driven products and services that are aimed at allowing the Company to better serve customers and to reduce costs. The Company may not be able to effectively implement new technology-driven products and services that allows it to remain competitive or be successful in marketing these products and services to its customers. Although the Company seeks to mitigate operational risk through a system of internal controls that are reviewed and updated, no system of controls, however well designed and maintained, is infallible. Control weaknesses or failures or other operational risks could result in charges, increased operational costs, harm to the Company’s reputation or foregone business opportunities. Changes in accounting standards could impact the Company’s financial condition and results of operations. The accounting standard setters, including the Financial Accounting Standards Board (“FASB”), the SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, which would result in the restating of the Company’s prior period financial statements. M&T’s accounting policies and processes are critical to the reporting of the Company’s financial condition and results of operations. They require management to make estimates about matters that are uncertain. Accounting policies and processes are fundamental to the Company’s reported financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported amounts of assets or liabilities and financial results. Several of M&T’s accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Pursuant to generally accepted accounting principles, management is required to make certain assumptions and estimates in preparing the Company’s financial statements. If assumptions or estimates underlying the Company’s financial statements are incorrect, the Company may experience material losses. Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and 35 35 contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability, or recognizing or reducing a liability. M&T has established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding judgments and the estimates pertaining to these matters, M&T could be required to adjust accounting policies or restate prior period financial statements if those judgments and estimates prove to be incorrect. For additional information, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Estimates” and Note 1, “Significant Accounting Policies,” of Notes to Financial Statements in Part II, Item 8. Difficulties in combining the operations of acquired entities with the Company’s own operations may prevent M&T from achieving the expected benefits from its acquisitions. M&T has expanded its business through past acquisitions and may do so in the future. Inherent uncertainties exist when integrating the operations of an acquired entity. M&T may not be able to fully achieve its strategic objectives and planned operating efficiencies in an acquisition. In addition, the markets and industries in which the Company and its actual or potential acquisition targets operate are highly competitive. The Company may lose customers or fail to retain the customers of acquired entities as a result of an acquisition. Acquisition and integration activities require M&T to devote substantial time and resources, and as a result M&T may not be able to pursue other business opportunities while integrating acquired entities with the Company. After completing an acquisition, the Company may not realize the expected benefits of the acquisition due to lower financial results pertaining to the acquired entity. For example, the Company could experience higher credit losses, incur higher operating expenses or realize less revenue than originally anticipated related to an acquired entity. M&T could suffer if it fails to attract and retain skilled personnel. M&T’s success depends, in large part, on its ability to attract and retain key individuals. Competition for qualified candidates in the activities and markets that the Company serves is significant and the Company may not be able to hire candidates and retain them. Growth in the Company’s business, including through acquisitions, may increase its need for additional qualified personnel. If the Company is not able to hire or retain these key individuals, it may be unable to execute its business strategies and may suffer adverse consequences to its business, financial condition and results of operations. The federal banking agencies have issued joint guidance on executive compensation designed to help ensure that a banking organization’s incentive compensation policies do not encourage imprudent risk taking and are consistent with the safety and soundness of the organization. In addition, the Dodd-Frank Act required those agencies, along with the SEC, to adopt rules to require reporting of incentive compensation and to prohibit certain compensation arrangements. If as a result of complying with such rules the Company is unable to attract and retain qualified employees, or do so at rates necessary to maintain its competitive position, or if the compensation costs required to attract and retain employees become more significant, the Company’s performance, including its competitive position, could be materially adversely affected. 36 36 Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company’s business. Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Although the Company has established disaster recovery plans and procedures, and monitors for significant environmental effects on its properties or its investments, the occurrence of any such event could have a material adverse effect on the Company. The Company’s information systems may experience interruptions or breaches in security. The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in disruptions to its accounting, deposit, loan and other systems, and adversely affect the Company’s customer relationships. While the Company has policies and procedures designed to prevent or limit the effect of these possible events, there can be no assurance that any such failure, interruption or security breach will not occur or, if any does occur, that it can be sufficiently or timely remediated. Information security risks for large financial institutions such as M&T have increased significantly in recent years in part because of the proliferation of new technologies, such as Internet and mobile banking to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties. There have been increasing efforts on the part of third parties, including through cyber attacks, to breach data security at financial institutions or with respect to financial transactions. There have been several instances involving financial services and consumer-based companies reporting unauthorized access to and disclosure of client or customer information or the destruction or theft of corporate data, including by executive impersonation and third party vendors. There have also been several highly publicized cases where hackers have requested “ransom” payments in exchange for not disclosing customer information. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance its layers of defense or to investigate and remediate any information security vulnerabilities. The techniques used by cyber criminals change frequently, may not be recognized until launched and can be initiated from a variety of sources, including terrorist organizations and hostile foreign governments. These actors may attempt to fraudulently induce employees, customers or other users of the Company’s systems to disclose sensitive information in order to gain access to data or the Company’s systems. These risks may increase as the use of mobile payment and other Internet-based applications expands. The occurrence of any failure, interruption or security breach of the Company’s systems, particularly if widespread or resulting in financial losses to customers, could damage the Company’s reputation, result in a loss of customer business, subject it to additional regulatory scrutiny, or expose it to civil litigation and financial liability. The Company is or may become involved from time to time in suits, legal proceedings, information- gathering requests, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences. Many aspects of the Company’s business involve substantial risk of legal liability. M&T and/or its subsidiaries have been named or threatened to be named as defendants in various lawsuits arising from its or its subsidiaries’ business activities (and in some cases from the activities of companies 37 37 M&T has acquired). In addition, from time to time, M&T is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank and other regulatory agencies, the SEC and law enforcement authorities. The SEC has announced a policy of seeking admissions of liability in certain settled cases, which could adversely impact the defense of private litigation. M&T is also at risk when it has agreed to indemnify others for losses related to legal proceedings, including for litigation and governmental investigations and inquiries, such as in connection with the purchase or sale of a business or assets. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which the Company conducts its business, or reputational harm. Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where it faces a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect the Company’s financial condition and results of operations. M&T relies on other companies to provide key components of the Company’s business infrastructure. Third parties provide key components of the Company’s business infrastructure such as banking services, processing, and Internet connections and network access. Any disruption in such services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect the Company’s ability to deliver products and services to clients and otherwise to conduct business. Technological or financial difficulties of a third party service provider could adversely affect the Company’s business to the extent those difficulties result in the interruption or discontinuation of services provided by that party. The Company may not be insured against all types of losses as a result of third party failures and insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. Failures in the Company’s business infrastructure could interrupt the operations or increase the costs of doing business. Detailed discussions of the specific risks outlined above and other risks facing the Company are included within this Annual Report on Form 10-K in Part I, Item 1 “Business,” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Furthermore, in Part II, Item 7 under the heading “Forward-Looking Statements” is included a description of certain risks, uncertainties and assumptions identified by management that are difficult to predict and that could materially affect the Company’s financial condition and results of operations, as well as the value of the Company’s financial instruments in general, and M&T common stock, in particular. In addition, the market price of M&T common stock may fluctuate significantly in response to a number of other factors, including changes in securities analysts’ estimates of financial performance, volatility of stock market prices and volumes, rumors or erroneous information, changes in market valuations of similar companies and changes in accounting policies or procedures as may be required by the FASB or other regulatory agencies. 38 38 Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Both M&T and M&T Bank maintain their executive offices at One M&T Plaza in Buffalo, New York. This twenty-one story headquarters building, containing approximately 300,000 rentable square feet of space, is owned in fee by M&T Bank and was completed in 1967. M&T, M&T Bank and their subsidiaries occupy approximately 98% of the building and the remainder is leased to non- affiliated tenants. At December 31, 2016, the cost of this property (including improvements subsequent to the initial construction), net of accumulated depreciation, was $10.2 million. M&T Bank owns and occupies an additional facility in Buffalo, New York (known as M&T Center) with approximately 395,000 rentable square feet of space. At December 31, 2016, the cost of this building (including improvements subsequent to acquisition), net of accumulated depreciation, was $11.2 million. M&T Bank also owns and occupies three separate facilities in the Buffalo area which support certain back-office and operations functions of the Company. The total square footage of these facilities approximates 290,000 square feet and their combined cost (including improvements subsequent to acquisition), net of accumulated depreciation, was $27.6 million at December 31, 2016. M&T Bank owns a facility in Syracuse, New York with approximately 160,000 rentable square feet of space. Approximately 46% of that facility is occupied by M&T Bank. At December 31, 2016, the cost of that building (including improvements subsequent to acquisition), net of accumulated depreciation, was $1.2 million. M&T Bank owns facilities in Wilmington, Delaware, with approximately 340,000 (known as Wilmington Center) and 295,000 (known as Wilmington Plaza) rentable square feet of space, respectively. M&T Bank occupies approximately 97% of Wilmington Center. Wilmington Plaza is 100% occupied by a tenant. At December 31, 2016, the cost of these buildings (including improvements subsequent to acquisition), net of accumulated depreciation, was $41.9 million and $12.6 million, respectively. M&T Bank also owns facilities in Harrisburg, Pennsylvania and Millsboro, Delaware with approximately 220,000 and 325,000 rentable square feet of space, respectively. M&T Bank occupies approximately 29% and 89% of those facilities, respectively. At December 31, 2016, the cost of those buildings (including improvements subsequent to acquisition), net of accumulated depreciation, was $10.1 million and $9.2 million, respectively. No other properties owned by M&T Bank have more than 100,000 square feet of space. The cost, net of accumulated depreciation and amortization, of the Company’s premises and equipment is detailed in note 6 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” Of the 801 domestic banking offices of M&T’s subsidiary banks at December 31, 2016, 316 are owned in fee and 485 are leased. Item 3. Legal Proceedings. M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Company’s liabilities and contingencies in connection with such proceedings. For those matters where it is 39 39 probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future. Wilmington Trust Corporation Investigative and Litigation Matters M&T’s Wilmington Trust Corporation subsidiary is the subject of certain governmental investigations arising from actions undertaken by Wilmington Trust Corporation prior to M&T’s acquisition of Wilmington Trust Corporation and its subsidiaries, as set forth below. DOJ Investigation (United States v. Wilmington Trust Corp., et al, District of Delaware, Crim. No. 15-23-RGA): Prior to M&T’s acquisition of Wilmington Trust Corporation, the Department of Justice (“DOJ”) commenced an investigation of Wilmington Trust Corporation, relating to Wilmington Trust Corporation’s financial reporting and securities filings, as well as certain commercial real estate lending relationships involving its subsidiary bank, Wilmington Trust Company, all of which relate to filings and activities occurring prior to the acquisition of Wilmington Trust Corporation by M&T. On January 6, 2016, the U.S. Attorney for the District of Delaware obtained an indictment against Wilmington Trust Corporation relating to alleged conduct that occurred prior to M&T’s acquisition of Wilmington Trust Corporation in May 2011. M&T strongly believes that this unprecedented action is unjustified and Wilmington Trust Corporation will vigorously defend itself. On August 26, 2016, the Court granted defendants joint motion for a continuance of the trial date. Trial in this matter is now scheduled to begin on October 2, 2017. Wilmington Trust Corporation and its counsel are currently involved in pretrial discovery, motion practice and trial preparation. The indictment of Wilmington Trust Corporation could result in potential criminal remedies, or criminal or non-criminal resolutions or settlements, including, among other things, enforcement actions, potential statutory or regulatory restrictions on the ability to conduct certain businesses (for which waivers may or may not be available), fines, penalties, restitution, reputational damage or additional costs and expenses. In Re Wilmington Trust Securities Litigation (U.S. District Court, District of Delaware, Case No. 10-CV-0990-SLR): Beginning on November 18, 2010, a series of parties, purporting to be class representatives, commenced a putative class action lawsuit against Wilmington Trust Corporation, alleging that Wilmington Trust Corporation’s financial reporting and securities filings were in violation of securities laws. The cases were consolidated and Wilmington Trust Corporation moved to dismiss. The Court issued an order denying Wilmington Trust Corporation’s motion to dismiss on March 20, 2014. Fact discovery commenced. On April 13, 2016, the Court issued an order staying fact discovery in the case pending completion of the trial in U.S. v. Wilmington Trust Corp., et al. On September 19, 2016, the plaintiffs filed a motion to modify the stay of discovery in this matter to allow for additional, limited discovery. On December 19, 2016, the Court issued an order lifting the existing stay in its entirety, subject to appropriate protective orders to be determined by the Court. On January 24, 2017, the Court issued an order scheduling trial for June 18, 2018 and entering certain protective orders. Due to their complex nature, it is difficult to estimate when litigation and investigatory matters such as these may be resolved. As set forth in the introductory paragraph to this Item 3 — Legal 40 40 Proceedings, losses from current litigation and regulatory matters which the Company is subject to that are not currently considered probable are within a range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, and are included in the range of reasonably possible losses set forth above. Item 4. Mine Safety Disclosures. Not applicable. Executive Officers of the Registrant Information concerning M&T’s executive officers is presented below as of February 22, 2017. The year the officer was first appointed to the indicated position with M&T or its subsidiaries is shown parenthetically. In the case of each entity noted below, officers’ terms run until the first meeting of the board of directors after such entity’s annual meeting, which in the case of M&T takes place immediately following the Annual Meeting of Shareholders, and until their successors are elected and qualified. Robert G. Wilmers, age 82, is chief executive officer (2007), chairman of the board (2000) and a director (1982) of M&T. From April 1998 until July 2000, he served as president and chief executive officer of M&T and from July 2000 until June 2005 he served as chairman, president (1988) and chief executive officer (1983). He is chief executive officer (2007), chairman of the board (2005) and a director (1982) of M&T Bank, and previously served as chairman of the board of M&T Bank from March 1983 until July 2003 and as president of M&T Bank from March 1984 until June 1996. Mark J. Czarnecki, age 61, is president (2007), chief operating officer (2014) and a director (2007) of M&T and M&T Bank. He has responsibility for the day-to-day management of the Company. Previously, he was an executive vice president of M&T (1999) and M&T Bank (1997) and was responsible for the M&T Investment Group and the Company’s Retail Banking network. Mr. Czarnecki is chairman of the board, president and chief executive officer (2007) and a director (2005) of Wilmington Trust, N.A. Robert J. Bojdak, age 61, is an executive vice president and chief credit officer (2004) of M&T and M&T Bank, and is responsible for the Company’s Credit Risk Management Division. From April 2002 to April 2004, Mr. Bojdak served as senior vice president and credit deputy for M&T Bank. He is an executive vice president and a director (2004) of Wilmington Trust, N.A. Janet M. Coletti, age 53, is an executive vice president (2015) of M&T and M&T Bank, overseeing the Company’s Human Resources Division. Ms. Coletti previously served as senior vice president of M&T Bank, most recently responsible for the Business Banking Division, and has held a number of management positions within M&T Bank since 1985. William J. Farrell II, age 59, is an executive vice president (2011) of M&T and M&T Bank, and is responsible for managing administrative and business development functions of the Company’s Wealth and Institutional Services Division, which includes Institutional Client Services and M&T Insurance Agency. Mr. Farrell joined M&T through the Wilmington Trust Corporation acquisition. He joined Wilmington Trust Corporation in 1976, and held a number of senior management positions, most recently as executive vice president and head of the Corporate Client Services business. Mr. Farrell is president, chief executive officer and a director (2012) of Wilmington Trust Company, an executive vice president and a director (2011) of Wilmington Trust, N.A. and a director (2013) of M&T Securities. Richard S. Gold, age 56, is an executive vice president (2006) and chief risk officer (2014) of M&T. He is a vice chairman and chief risk officer (2014) of M&T Bank. Mr. Gold is responsible for 41 41 overseeing the Company’s governance and strategy for risk management, as well as relationships with key regulators and supervisory agencies. Previously, Mr. Gold had management responsibilities for the Mortgage, Consumer Lending, Retail and Business Banking Divisions. He served as a senior vice president of M&T Bank from 2000 to 2006 and has held a number of management positions since he began his career with M&T Bank in 1989. Mr. Gold is an executive vice president (2006) and chief risk officer (2014) of Wilmington Trust, N.A. Brian E. Hickey, age 64, is an executive vice president of M&T (1997) and M&T Bank (1996). He is a member of the Directors Advisory Council (1994) of the Rochester Division of M&T Bank. Mr. Hickey is responsible for co-managing with Mr. Martocci M&T Bank’s commercial banking lines of business and all of the non-retail banking segments in Upstate New York, Western New York and in the Northern, Central and Western Pennsylvania and Connecticut regions. Mr. Hickey is also responsible for the Dealer Commercial Services line of business. René F. Jones, age 52, is an executive vice president (2006) of M&T and a vice chairman (2014) of M&T Bank. Mr. Jones has overall responsibility for the Company’s Wealth and Institutional Services Division, Treasury Division, and Mortgage and Consumer Lending Divisions. Mr. Jones is an executive vice president (2005) and a director (2007) of Wilmington Trust, N.A., and he is chairman of the board, president (2009) and a trustee (2005) of M&T Real Estate. Mr. Jones is chairman of the board and a director (2014) of Wilmington Trust Investment Advisors, and is a director (2007) of M&T Insurance Agency. Mr. Jones is chairman of the board and a director (2014) of Wilmington Trust Company. Previously, Mr. Jones served as chief financial officer (2005) of M&T, M&T Bank and Wilmington Trust, N.A. and has held a number of management positions within M&T Bank’s Finance Division since 1992. Darren J. King, age 47, is an executive vice president (2010) and chief financial officer (2016) of M&T and executive vice president (2009) and chief financial officer (2016) of M&T Bank. Mr. King has responsibility for the overall financial management of the Company. Prior to his current role, Mr. King was the Retail Banking executive with responsibility for overseeing Business Banking, Consumer Deposits, Consumer Lending and M&T Bank’s Marketing and Communications team. Mr. King previously served as senior vice president of M&T Bank and has held a number of management positions within M&T Bank since 2000. Mr. King is an executive vice president (2009) and chief financial officer (2016) of Wilmington Trust, N.A. Gino A. Martocci, age 51, is an executive vice president (2014) of M&T and M&T Bank, and is responsible for co-managing with Mr. Hickey M&T Bank’s commercial banking lines of business and all non-retail banking segments in the metropolitan New York City, New Jersey, Philadelphia, Delaware, Baltimore and Washington, D.C. markets. He is also responsible for M&T Realty Capital. Mr. Martocci was a senior vice president of M&T Bank from 2002 to 2013, serving in a number of management positions. He is an executive vice president (2015) and a director (2009) of M&T Realty Capital, an executive vice president of M&T Real Estate, co-chairman of the Senior Loan Committee and a member of the New York City Mortgage Investment Committee. Mr. Martocci is also a member of the Directors Advisory Council of the New York City/Long Island (2013) and the New Jersey (2015) Divisions of M&T Bank. Doris P. Meister, age 61, is an executive vice president (2016) of M&T and M&T Bank, and is responsible for overseeing the Company’s wealth management business, including Wealth Advisory Services, M&T Securities and Wilmington Trust Investment Advisors. Ms. Meister is an executive vice president and a director (2016) of Wilmington Trust, N.A. and a director (2016) of M&T Securities. Prior to joining M&T in 2016, Ms. Meister served as President of U.S. Markets for BNY Mellon Wealth Management and was a Managing Director of the New York office of Bernstein Global Wealth Management. Kevin J. Pearson, age 55, is an executive vice president (2002) of M&T and is a vice chairman (2014) of M&T Bank. He is a member of the Directors Advisory Council (2006) of the New York 42 42 City/Long Island Division of M&T Bank. Mr. Pearson is responsible for M&T Bank’s Commercial Banking and Credit Divisions. Previously, Mr. Pearson served as senior vice president of M&T Bank from 2000 to 2002, and has held a number of management positions since he began his career with M&T Bank in 1989. He is an executive vice president (2003) and a trustee (2014) of M&T Real Estate, chairman of the board (2009) and a director (2003) of M&T Realty Capital, and an executive vice president and a director of Wilmington Trust, N.A. (2014). Michael J. Todaro, age 55, is an executive vice president (2015) of M&T and M&T Bank, and is responsible for the Mortgage, Consumer Lending and Customer Asset Management Divisions. Mr. Todaro previously served as senior vice president of M&T Bank and has held a number of management positions within M&T Bank’s Mortgage Division since 1995. He is an executive vice president (2015) of Wilmington Trust, N.A. Michele D. Trolli, age 55, is an executive vice president and chief information officer (2005) of M&T and M&T Bank. Ms. Trolli leads a wide range of the Company’s Technology and Banking Operations, which includes banking services, corporate services, digital and telephone banking, the enterprise data office, enterprise and cyber security, and enterprise technology. D. Scott N. Warman, age 51, is an executive vice president (2009) and treasurer (2008) of M&T and M&T Bank. He is responsible for managing the Company’s Treasury Division. Mr. Warman previously served as senior vice president of M&T Bank and has held a number of management positions within M&T Bank since 1995. He is an executive vice president and treasurer of Wilmington Trust, N.A. (2008), a trustee of M&T Real Estate (2009), and is treasurer of Wilmington Trust Company (2012). 43 43 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. M&T’s common stock is traded under the symbol MTB on the New York Stock Exchange. See cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K for market prices of M&T’s common stock, approximate number of common shareholders at year-end, frequency and amounts of dividends on common stock and restrictions on the payment of dividends. During the fourth quarter of 2016, M&T did not issue any shares of its common stock that were not registered under the Securities Act of 1933. Equity Compensation Plan Information The following table provides information as of December 31, 2016 with respect to shares of common stock that may be issued under M&T’s existing equity compensation plans. M&T’s existing equity compensation plans include the M&T Bank Corporation 2001 Stock Option Plan, the 2005 Incentive Compensation Plan, which replaced the 2001 Stock Option Plan, and the 2009 Equity Incentive Compensation Plan, each of which has been previously approved by shareholders, and the M&T Bank Corporation 2008 Directors’ Stock Plan and the M&T Bank Corporation Deferred Bonus Plan, each of which did not require shareholder approval. The table does not include information with respect to shares of common stock subject to outstanding options and rights assumed by M&T in connection with mergers and acquisitions of the companies that originally granted those options and rights. Footnote (1) to the table sets forth the total number of shares of common stock issuable upon the exercise of such assumed options and rights as of December 31, 2016, and their weighted-average exercise price. Plan Category Equity compensation plans approved by security holders ........................................ Equity compensation plans not approved by security holders ........................................ Total ...................................................... Number of Securities to be Issued Upon Exercise of Outstanding Options or Rights (A) Weighted-Average Exercise Price of Outstanding Options or Rights (B) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A) (C) 497,001 $ 92.30 3,667,800 26,217 523,218 $ 78.75 91.62 53,256 3,721,056 (1) As of December 31, 2016, a total of 1,106,805 shares of M&T common stock were issuable upon exercise of outstanding options or rights assumed by M&T in connection with merger and acquisition transactions. The weighted-average exercise price of those outstanding options or rights is $160.18 per common share. Equity compensation plans adopted without the approval of shareholders are described below: 2008 Directors’ Stock Plan. M&T maintains a plan for non-employee members of the Board of Directors of M&T and the members of its Directors Advisory Council, and the non-employee members of the Board of Directors of M&T Bank and the members of its regional Directors Advisory Councils, which allows such directors, advisory directors and members of regional Directors Advisory Councils to receive all or a portion of their directorial compensation in shares of M&T common stock. 44 44 Deferred Bonus Plan. M&T maintains a deferred bonus plan which was frozen effective January 1, 2010 and did not allow any additional deferrals after that date. Prior to January 1, 2010, the plan allowed eligible officers of M&T and its subsidiaries to elect to defer all or a portion of their annual incentive compensation awards and allocate such awards to several investment options, including M&T common stock. At the time of the deferral election, participants also elected the timing of distributions from the plan. Such distributions are payable in cash, with the exception of balances allocated to M&T common stock which are distributable in the form of shares of common stock. Performance Graph The following graph contains a comparison of the cumulative shareholder return on M&T common stock against the cumulative total returns of the KBW Nasdaq Bank Index, compiled by Keefe, Bruyette & Woods, Inc., and the S&P 500 Index, compiled by Standard & Poor’s Corporation, for the five-year period beginning on December 31, 2011 and ending on December 31, 2016. The KBW Nasdaq Bank Index is a market capitalization index consisting of 24 banking stocks representing leading large U.S. national money centers, regional banks and thrift institutions. Comparison of Five-Year Cumulative Return* $300 $250 $200 $150 $100 $50 $0 2011 2012 2013 2014 2015 2016 M&T Bank Corporation KBW Nasdaq Bank Index S&P 500 Index Shareholder Value at Year End* M&T Bank Corporation ................. $ KBW Nasdaq Bank Index .............. S&P 500 Index ............................... 100 100 100 133 133 116 162 183 154 178 176 233 200 201 259 175 177 198 2011 2012 2013 2014 2015 2016 * Assumes a $100 investment on December 31, 2011 and reinvestment of all dividends. In accordance with and to the extent permitted by applicable law or regulation, the information set forth above under the heading “Performance Graph” shall not be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the “Securities Act”), or the 45 45 Exchange Act and shall not be deemed to be “soliciting material” or to be “filed” with the SEC under the Securities Act or the Exchange Act. Issuer Purchases of Equity Securities On July 19, 2016, M&T announced that it had been authorized by its Board of Directors to purchase up to $1.15 billion of shares of its common stock through June 30, 2017. A repurchase program authorized in November 2015 by M&T’s Board of Directors was completed during 2016. In total, M&T repurchased 5,607,595 common shares for $641 million during 2016. During the fourth quarter of 2016, M&T purchased shares of its common stock as follows: Issuer Purchases of Equity Securities (c)Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (d)Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased Under the Plans or Programs (2) (a)Total  Number of Shares (or Units) Purchased (1) (b)Average Price Paid per Share (or Unit) Period October 1 – October 31, 2016 .......................... — $ 800,000,000 November 1 – November 30, 2016 .................. 336,833 125.02 300,000 762,666,000 December 1 – December 31, 2016 ................... — 762,666,000 Total .................................................................. 355,672 $ 125.89 300,000 11,439 153.81 7,400 $ 122.03 (1) The total number of shares purchased during the periods indicated includes shares purchased as part of publicly announced programs and shares deemed to have been received from employees who exercised stock options by attesting to previously acquired common shares in satisfaction of the exercise price or shares received from employees upon the vesting of restricted stock awards in satisfaction of applicable tax withholding obligations, as is permitted under M&T’s stock-based compensation plans. (2) On July 19, 2016, M&T announced a program to purchase up to $1.15 billion of its common stock through June 30, 2017. Item 6. Selected Financial Data. See cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Corporate Profile and Significant Developments M&T Bank Corporation (“M&T”) is a bank holding company headquartered in Buffalo, New York with consolidated assets of $123.4 billion at December 31, 2016. The consolidated financial information presented herein reflects M&T and all of its subsidiaries, which are referred to collectively as “the Company.” M&T’s wholly owned bank subsidiaries are M&T Bank and Wilmington Trust, National Association (“Wilmington Trust, N.A.”). M&T Bank, with total assets of $122.6 billion at December 31, 2016, is a New York-chartered commercial bank with 799 domestic banking offices in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, and the District of Columbia, a full- 46 46 service commercial banking office in Ontario, Canada, and an office in the Cayman Islands. M&T Bank and its subsidiaries offer a broad range of financial services to a diverse base of consumers, businesses, professional clients, governmental entities and financial institutions located in their markets. Lending is largely focused on consumers residing in the states noted above and on small and medium size businesses based in those areas, although loans are originated through offices in other states and in Ontario, Canada. Certain lending activities are also conducted in other states through various subsidiaries. Trust and other fiduciary services are offered by M&T Bank and through its wholly owned subsidiary, Wilmington Trust Company. Other subsidiaries of M&T Bank include: M&T Real Estate Trust, a commercial mortgage lender; M&T Realty Capital Corporation, a multifamily commercial mortgage lender; M&T Securities, Inc., which provides brokerage, investment advisory and insurance services; Wilmington Trust Investment Advisors, Inc., which serves as an investment advisor to the Wilmington Funds, a family of proprietary mutual funds, and other funds and institutional clients; and M&T Insurance Agency, Inc., an insurance agency. Wilmington Trust, N.A. is a national bank with total assets of $3.7 billion at December 31, 2016. Wilmington Trust, N.A. and its subsidiaries offer various trust and wealth management services. Wilmington Trust, N.A. also offered selected deposit and loan products on a nationwide basis, largely through telephone, Internet and direct mail marketing techniques. On November 1, 2015, M&T completed its acquisition of Hudson City Bancorp, Inc. (“Hudson City”). Immediately following completion of the merger, Hudson City Savings Bank merged with and into M&T Bank. Pursuant to the merger agreement, M&T paid cash consideration of $2.1 billion and issued 25,953,950 shares of M&T common stock in exchange for Hudson City shares outstanding at the time of acquisition. Assets acquired totaled approximately $36.7 billion, including $19.0 billion of loans (predominantly residential real estate loans) and $7.9 billion of investment securities. Liabilities assumed aggregated $31.5 billion, including $17.9 billion of deposits and $13.2 billion of borrowings. Immediately following the acquisition, the Company restructured its balance sheet by selling $5.8 billion of investment securities obtained in the acquisition and repaying $10.6 billion of borrowings assumed in the transaction. The common stock issued added $3.1 billion to M&T’s common shareholders’ equity. In connection with the acquisition, the Company recorded $1.1 billion of goodwill and $132 million of core deposit intangible asset. The acquisition of Hudson City expanded the Company’s presence in New Jersey, Connecticut and New York. Net acquisition and integration-related expenses (included herein as merger-related expenses) associated with the Hudson City acquisition totaled $22 million after tax-effect, or $.14 of diluted earnings per common share during 2016 and $61 million after tax-effect, or $.44 of diluted earnings per common share in 2015. There were no merger-related expenses in 2014. Critical Accounting Estimates The Company’s significant accounting policies conform with generally accepted accounting principles (“GAAP”) and are described in note 1 of Notes to Financial Statements. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain of the critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company’s reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. Some of the more significant areas in which management of the Company applies critical assumptions and estimates include the following:  Accounting for credit losses — The allowance for credit losses represents the amount that in management’s judgment appropriately reflects credit losses inherent in the loan and lease portfolio as of the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating losses inherent in the loan and lease portfolio, assumptions and judgment are applied to measure amounts and timing of expected future cash flows, collateral values and other 47 47 factors used to determine the borrowers’ abilities to repay obligations. Historical loss trends are also considered, as are economic conditions, industry trends, portfolio trends and borrower-specific financial data. In accounting for loans acquired at a discount that is, in part, attributable to credit quality which are initially recorded at fair value with no carry- over of an acquired entity’s previously established allowance for credit losses, the cash flows expected at acquisition in excess of estimated fair value are recognized as interest income over the remaining lives of the loans. Subsequent decreases in the expected principal cash flows require the Company to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in expected cash flows result first in the recovery of any applicable allowance for credit losses and then in the recognition of additional interest income over the remaining lives of the loans. Changes in the circumstances considered when determining management’s estimates and assumptions could result in changes in those estimates and assumptions, which may result in adjustment of the allowance or, in the case of loans acquired at a discount, increases in interest income in future periods. A detailed discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein under the heading “Provision for Credit Losses” and in note 5 of Notes to Financial Statements.  Valuation methodologies — Management of the Company applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as trading assets, most investment securities, and residential real estate loans held for sale and related commitments. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations, capitalized servicing assets, pension and other postretirement benefit obligations, estimated residual values of property associated with leases, and certain derivative and other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, costs of servicing and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations, financial condition or disclosures of fair value information. In addition to valuation, the Company must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of income. Examples include investment securities, other investments, mortgage servicing rights, goodwill, core deposit and other intangible assets, among others. Specific assumptions and estimates utilized by management are discussed in detail herein in management’s discussion and analysis of financial condition and results of operations and in notes 1, 3, 4, 7, 8, 12, 18, 19 and 20 of Notes to Financial Statements. Commitments, contingencies and off-balance sheet arrangements — Information regarding the Company’s commitments and contingencies, including guarantees and contingent liabilities arising from litigation, and their potential effects on the Company’s results of operations is included in note 21 of Notes to Financial Statements. In addition, the Company is routinely subject to examinations from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and  48 48 judgment used to record tax-related assets or liabilities have been appropriate. Should tax laws change or the tax authorities determine that management’s assumptions were inappropriate, the result and adjustments required could have a material effect on the Company’s results of operations. Information regarding the Company’s income taxes is presented in note 13 of Notes to Financial Statements. The recognition or de-recognition in the Company’s consolidated financial statements of assets and liabilities held by so- called variable interest entities is subject to the interpretation and application of complex accounting pronouncements or interpretations that require management to estimate and assess the relative significance of the Company’s financial interests in those entities and the degree to which the Company can influence the most important activities of the entities. Information relating to the Company’s involvement in such entities and the accounting treatment afforded each such involvement is included in note 19 of Notes to Financial Statements. Overview The Company recorded net income during 2016 of $1.32 billion or $7.78 of diluted earnings per common share, up 22% and 8%, respectively, from $1.08 billion or $7.18 of diluted earnings per common share in 2015. Basic earnings per common share also increased 8% to $7.80 in 2016 from $7.22 in 2015. Net income in 2014 totaled $1.07 billion, while diluted and basic earnings per common share were $7.42 and $7.47, respectively. The after-tax impacts of merger-related expenses associated with the 2015 acquisition of Hudson City were $22 million ($36 million pre-tax) or $.14 of diluted earnings per common share and $61 million ($97 million pre-tax) or $.44 of diluted earnings per common share in 2016 and 2015, respectively. There were no merger-related expenses in 2014. Expressed as a rate of return on average assets, net income in each of 2016 and 2015 was 1.06%, compared with 1.16% in 2014. The return on average common shareholders’ equity was 8.16% in 2016, 8.32% in 2015 and 9.08% in 2014. The Hudson City transaction was accounted for using the acquisition method of accounting and, accordingly, the results of operations acquired in such transaction have been included in the Company’s financial results for the final two months of 2015 and all twelve months of 2016. The acquired operations added to the Company’s average earning assets, net interest income and non- interest expenses. Taxable-equivalent net interest income aggregated $3.50 billion in 2016, $2.87 billion in 2015 and $2.70 billion in 2014. Average earning assets increased $21.4 billion, or 23%, in 2016 as compared with 2015 due predominantly to higher average balances of loans and leases of $17.8 billion, principally due to the full-year impact of the Hudson City acquisition, and interest-bearing deposits at banks of $3.1 billion. Loans associated with Hudson City totaled $19.0 billion on the acquisition date, consisting of approximately $234 million of commercial real estate loans, $18.6 billion of residential real estate loans and $162 million of consumer loans. Offsetting the impact of higher earning assets was a three basis point (hundredths of one percent) narrowing of the net interest margin, or taxable-equivalent net interest income expressed as a percentage of average earning assets, from 3.14% in 2015 to 3.11% in 2016. Lower yields on investment securities and an increase in rates on interest-bearing deposits, reflecting the impact of time deposits in the former Hudson City markets, led to that narrowing. Average earning assets grew $9.5 billion, or 12%, in 2015 as compared with 2014 due to higher balances of loans and leases of $6.2 billion and investment securities of $2.9 billion. Loans and investment securities obtained in the acquisition of Hudson City added approximately $3.1 billion and $409 million, respectively, to average earning assets in 2015. Offsetting the impact of higher earning assets was a 17 basis point narrowing of the net interest margin from 3.31% in 2014. Lower yields on investment securities and loans and leases outstanding led to that narrowing. 49 49 The provision for credit losses increased 12% to $190 million in 2016 from $170 million in 2015. The provision in 2015 was 37% higher than $124 million in 2014. As of the acquisition date, the pre-merger Hudson City allowance for credit losses was eliminated in acquisition accounting and as provided for by GAAP, a $21 million provision for credit losses was recorded in 2015 for incurred credit losses in connection with the $18.3 billion of loans acquired at a premium that were not individually identifiable as impaired at the acquisition date. Net charge-offs were $157 million in 2016, compared with $134 million in 2015 and $121 million in 2014. Net charge-offs as a percentage of average loans and leases were .18% in 2016 and .19% in each of 2015 and 2014. Other income totaled $1.83 billion in each of 2016 and 2015, compared with $1.78 billion in 2014. Higher gains recognized on sales of investment securities and higher trading account and foreign exchange gains in 2016 were offset by a gain in 2015 on the sale of the Company’s trade processing business. During 2016, the Company sold all of its collateralized debt obligations with an amortized cost of $28 million held in the available-for-sale investment securities portfolio, resulting in a $30 million gain. Those securities, which had been obtained in previous acquisitions, were sold in response to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) commonly referred to as the “Volcker Rule.” There were no significant gains or losses on investment securities during 2015 or 2014. In 2015, the Company sold its trade processing business within the retirement services division of its Institutional Client Services business and recognized a $45 million gain. The Hudson City transaction did not have a significant impact on other income. The increase in other income in 2015 as compared with 2014 was largely due to higher commercial mortgage banking revenues, loan syndication fees and the gain on the sale of the trade processing business, partially offset by lower trust income associated with the divested business, decreased residential mortgage banking revenues and a decline in service charges on deposit accounts. Other expense increased 8% to $3.05 billion in 2016 from $2.82 billion in 2015. Other expense totaled $2.69 billion in 2014. Included in those amounts are expenses considered by M&T to be “nonoperating” in nature, consisting of amortization of core deposit and other intangible assets of $43 million, $26 million, and $34 million in 2016, 2015 and 2014, respectively, and merger-related expenses of $36 million and $76 million in 2016 and 2015, respectively. Exclusive of those nonoperating expenses, noninterest operating expenses aggregated $2.97 billion in 2016, compared with $2.72 billion in 2015 and $2.66 billion in 2014. The increase in such expenses in 2016 as compared with 2015 reflects the full-year impact of the Hudson City acquisition and higher costs for salaries and employee benefits and FDIC assessments. In addition to the impact of Hudson City, the increase in salaries and employee benefits expense was largely attributable to higher medical benefit plan expenses and annual merit increases for employees. The rise in noninterest operating expenses from 2014 to 2015 was largely due to higher costs for salaries and employee benefits and charitable contributions, partially offset by lower professional services costs. In addition to the impact of Hudson City, the increase in salaries and employee benefits was largely attributable to annual merit increases for employees and higher pension expense. Following the realized gains on sales of investment securities, the Company made cash contributions to The M&T Charitable Foundation of $30 million in 2016, while in 2015 the Company made cash contributions to that foundation of $46 million following the realization of the gain on the sale of its trade processing business. The Company also made cash contributions of $18 million to The M&T Charitable Foundation in 2014. The efficiency ratio measures the relationship of operating expenses to revenues. The Company’s efficiency ratio, or noninterest operating expenses (as previously defined) divided by the sum of taxable-equivalent net interest income and noninterest income (exclusive of gains and losses from bank investment securities), was 56.1% in 2016, compared with 58.0% and 59.3% in 2015 and 2014, respectively. The calculations of the efficiency ratio are presented in table 2. 50 50 On June 29, 2016, M&T announced that the Federal Reserve did not object to M&T’s revised 2016 Capital Plan. That capital plan includes the repurchase of up to $1.15 billion of common shares during the four-quarter period starting on July 1, 2016 and an increase in the quarterly common stock dividend in the first quarter of 2017 of up to $.05 per share to $.75 per share. M&T may also continue to pay dividends and interest on other equity and debt instruments included in regulatory capital, including preferred stock, trust preferred securities and subordinated debt that were outstanding at December 31, 2015, consistent with the contractual terms of those instruments. Dividends are subject to declaration by M&T’s Board of Directors. Furthermore, on July 19, 2016, M&T’s Board of Directors authorized a new stock repurchase program to repurchase up to $1.15 billion of shares of M&T’s common stock subject to all applicable regulatory limitations, including those set forth in M&T’s 2016 Capital Plan. Table 1 EARNINGS SUMMARY Dollars in millions Increase (Decrease)(a)            2015 to 2016 2014 to 2015 Amount % Amount % 2016 2015 2014 2013 2012 2011 to 2016 Compound Growth Rate 5 Years $ 727.5 23 $ 214.8 7 Interest income(b) ........................................ $3,922.8 $3,195.3 $2,980.5 $2,982.3 $ 2,968.1 47.8 17 Interest expense ............................................ 284.1 343.2 167.0 6 Net interest income(b) .................................. 3,496.8 2,867.0 2,700.1 2,698.2 2,624.9 185.0 204.0 46.0 37 Less: provision for credit losses ................... 97.7 30 629.8 22 20.0 12 170.0 328.3 280.4 124.0 190.0 426.0 7% 1 8 (7 ) 30.4 — (29.4 ) (2 ) — — Gain (loss) on bank investment securities(c) ............................................... 30.3 — — 46.7 45.8 3 Other income ................................................ 1,795.7 1,825.1 1,779.3 1,818.5 1,715.1 (47.8 ) — 4 Less: 74.1 5 150.5 12 386.2 23 144.6 10 (11.1) (1 ) Salaries and employee benefits .............. 1,623.6 1,549.5 1,405.0 1,355.2 1,314.6 Other expense ........................................ 1,423.8 1,273.4 1,284.5 1,232.7 1,155.2 33.3 2 Income before income taxes ......................... 2,085.4 1,699.2 1,665.9 1,790.5 1,618.4 Less: 2.5 10 148.3 25 .9 3 19.0 3 Taxable‐equivalent adjustment(b) .......... Income taxes .......................................... 27.0 743.3 24.5 595.0 23.7 576.0 25.0 26.4 627.0 562.5 6 3 10 1 13 $ 235.4 22 $ 13.4 1 Net income ................................................... $1,315.1 $1,079.7 $1,066.2 $1,138.5 $ 1,029.5 9% (a) Changes were calculated from unrounded amounts. (b) Interest income data are on a taxable-equivalent basis. The taxable-equivalent adjustment represents additional income taxes that would be due if all interest income were subject to income taxes. This adjustment, which is related to interest received on qualified municipal securities, industrial revenue financings and preferred equity securities, is based on a composite income tax rate of approximately 39%. Includes other-than-temporary impairment losses, if any. (c) Supplemental Reporting of Non-GAAP Results of Operations As a result of business combinations and other acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $4.7 billion at each of December 31, 2016 and 2015 and $3.6 billion at December 31, 2014. Included in such intangible assets was goodwill of $4.6 billion at each of December 31, 2016 and 2015 and $3.5 billion at December 31, 2014. Amortization of core deposit and other intangible assets, after tax effect, totaled $26 million, $16 million and $21 million during 2016, 2015 and 2014, respectively. 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 51 51                    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. Those merger-related expenses generally consist of professional services and other temporary help fees associated with the actual or planned conversion of systems and/or integration of operations; costs related to branch and office consolidations; costs related to termination of existing contractual arrangements to purchase various services; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; severance; incentive compensation costs; travel costs; and printing, supplies and other costs of completing the transactions and commencing operations in new markets and offices. Those expenses totaled $36 million ($22 million after-tax) in 2016 and $76 million ($48 million after-tax) in 2015. Also considered as a merger-related expense in 2015 was a provision for credit losses of $21 million. GAAP provides that an allowance for credit losses associated with probable incurred losses on loans acquired at a premium be recognized. Given the recognition of such losses above and beyond the impact of forecasted losses used in determining the fair value of acquired loans, the Company considered that provision to be a merger-related expense. There were no merger-related expenses in 2014. Although “net operating income” as defined by M&T is not a GAAP measure, M&T’s management believes that this information helps investors understand the effect of acquisition activity in reported results. Net operating income was $1.36 billion in 2016, compared with $1.16 billion in 2015 and $1.09 billion in 2014. Diluted net operating earnings per common share were $8.08 in 2016, $7.74 in 2015 and $7.57 in 2014. Net operating income expressed as a rate of return on average tangible assets was 1.14% in 2016, compared with 1.18% in 2015 and 1.23% in 2014. Net operating income represented a return on average tangible common equity of 12.25% in 2016, 13.00% in 2015 and 13.76% in 2014. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in table 2. 52 52 Table 2 RECONCILIATION OF GAAP TO NON-GAAP MEASURES Income statement data Dollars in thousands, except per share Net income Net income ............................................................................................................................................................................ $ Amortization of core deposit and other intangible assets(a) ................................................................................................... Merger-related expenses(a) ................................................................................................................................................... Net operating income .................................................................................................................................................... $ Earnings per common share Diluted earnings per common share ....................................................................................................................................... $ Amortization of core deposit and other intangible assets(a) ................................................................................................... Merger-related expenses(a) ................................................................................................................................................... Diluted net operating earnings per common share ......................................................................................................... $ 2016 2015 2014 1,315,114 $ 1,079,667 $ 16,150 60,820 1,362,692 $ 1,156,637 $ 25,893 21,685 1,066,246 20,657 — 1,086,903 7.78 $ .16 .14 8.08 $ 7.18 $ .12 .44 7.74 $ 7.42 .15 — 7.57 Other expense Other expense ........................................................................................................................................................................ $ Amortization of core deposit and other intangible assets ....................................................................................................... Merger-related expenses ........................................................................................................................................................ Noninterest operating expense ....................................................................................................................................... $ 3,047,485 $ 2,822,932 $ (26,424 ) (75,976 ) 2,969,117 $ 2,720,532 $ (42,613 ) (35,755 ) 2,689,474 (33,824 ) — 2,655,650 Merger-related expenses Salaries and employee benefits .............................................................................................................................................. $ Equipment and net occupancy ............................................................................................................................................... Outside data processing and software .................................................................................................................................... Advertising and marketing .................................................................................................................................................... Printing, postage and supplies ............................................................................................................................................... Other costs of operations ....................................................................................................................................................... Other expense................................................................................................................................................................ Provision for credit losses ...................................................................................................................................................... Total .............................................................................................................................................................................. $ 5,334 $ 1,278 1,067 10,522 1,482 16,072 35,755 — 35,755 $ 51,287 $ 3 785 79 504 23,318 75,976 21,000 96,976 $ — — — — — — — — — Efficiency ratio Noninterest operating expense (numerator) ........................................................................................................................... $ 2,969,117 $ 2,720,532 $ 2,655,650 Taxable-equivalent net interest income .................................................................................................................................. Other income ......................................................................................................................................................................... Less: Gain (loss) on bank investment securities ..................................................................................................................... Denominator ......................................................................................................................................................................... $ 3,496,849 1,825,996 30,314 2,867,050 1,825,037 (130 ) 5,292,531 $ 4,692,217 $ 2,700,088 1,779,273 — 4,479,361 Efficiency ratio ...................................................................................................................................................................... 56.10 % 57.98 % 59.29 % Balance sheet data In millions Average assets Average assets ....................................................................................................................................................................... $ Goodwill ............................................................................................................................................................................... Core deposit and other intangible assets ................................................................................................................................ Deferred taxes ....................................................................................................................................................................... Average tangible assets ................................................................................................................................................. $ Average common equity Average total equity .............................................................................................................................................................. $ Preferred stock ...................................................................................................................................................................... Average common equity ............................................................................................................................................... Goodwill ............................................................................................................................................................................... Core deposit and other intangible assets ................................................................................................................................ Deferred taxes ....................................................................................................................................................................... Average tangible common equity .................................................................................................................................. $ At end of year Total assets Total assets ............................................................................................................................................................................ $ Goodwill ............................................................................................................................................................................... Core deposit and other intangible assets ................................................................................................................................ Deferred taxes ....................................................................................................................................................................... Total tangible assets ...................................................................................................................................................... $ Total common equity Total equity ........................................................................................................................................................................... $ Preferred stock ...................................................................................................................................................................... Undeclared dividends — cumulative preferred stock ............................................................................................................. Common equity, net of undeclared cumulative preferred dividends ....................................................................................... Goodwill ............................................................................................................................................................................... Core deposit and other intangible assets ................................................................................................................................ Deferred taxes ....................................................................................................................................................................... Total tangible common equity ....................................................................................................................................... $ (a) After any related tax effect. 124,340 $ (4,593 ) (117 ) 46 119,676 $ 101,780 $ (3,694 ) (45 ) 16 98,057 $ 16,419 $ (1,297 ) 15,122 (4,593 ) (117 ) 46 10,458 $ 13,228 $ (1,232 ) 11,996 (3,694 ) (45 ) 16 8,273 $ 123,449 $ (4,593 ) (98 ) 39 118,797 $ 122,788 $ (4,593 ) (140 ) 54 118,109 $ 16,487 $ (1,232 ) (3 ) 15,252 (4,593 ) (98 ) 39    10,600    $ 16,173 $ (1,232 ) (2 ) 14,939 (4,593 ) (140 ) 54    10,260    $ 92,143 (3,525 ) (50 ) 15 88,583 12,097 (1,192 ) 10,905 (3,525 ) (50 ) 15 7,345 96,686 (3,525 ) (35 ) 11 93,137 12,336 (1,231 ) (3 ) 11,102 (3,525 ) (35 ) 11 7,553 53 53 Net Interest Income/Lending and Funding Activities Taxable-equivalent net interest income aggregated $3.50 billion in 2016, up 22% from $2.87 billion in 2015. That growth was predominantly attributable to higher average earning assets in 2016, partially offset by a three basis point narrowing of the net interest margin to 3.11% in 2016 from 3.14% in 2015. The higher level of average earning assets reflected the full-year impact of assets obtained in the acquisition of Hudson City on November 1, 2015. Average earning assets rose $21.4 billion or 23% to $112.6 billion in 2016 reflecting higher average loans and leases of $17.8 billion. The narrowing of the margin reflected higher rates paid on interest-bearing deposits, including the impact of time deposits in the former Hudson City markets. Average loans and leases increased 25% to $88.6 billion in 2016 from $70.8 billion in 2015. The most significant factors contributing to that increase were the residential real estate loans obtained in the Hudson City acquisition and growth in the commercial real estate loan and commercial loan and lease portfolios. Reflecting average balances of loans obtained in the Hudson City transaction of $16.3 billion in 2016 and $3.1 billion in 2015, average residential real estate loans increased $13.0 billion to $24.5 billion in 2016 from $11.5 billion in the previous year. Included in average residential real estate loans were loans held for sale of $354 million in 2016 and $415 million in 2015. Average commercial loans and leases increased $1.5 billion or 8% to $21.4 billion in 2016 from $19.9 billion in 2015. Commercial real estate loans averaged $30.9 billion in 2016, up 9% or $2.6 billion from $28.3 billion in 2015. Average consumer loans rose $638 million or 6% to $11.8 billion in 2016 from $11.2 billion in the prior year, predominantly due to growth in average automobile loan balances. Taxable-equivalent net interest income increased 6% to $2.87 billion in 2015 from $2.70 billion in 2014. That improvement was the result of higher average earning assets in 2015, including $3.7 billion of average earning assets obtained in the acquisition of Hudson City. Average earning assets rose 12% to $91.2 billion in 2015 from $81.7 billion in 2014. That growth, however, was partially offset by a 17 basis point narrowing of the net interest margin to 3.14% in 2015 from 3.31% in 2014. The narrowing reflected lower average yields on investment securities and loans and leases outstanding. Average loans and leases rose $6.2 billion or 10% to $70.8 billion in 2015 from $64.7 billion in 2014, due in part to $3.1 billion of average loans obtained in the acquisition of Hudson City. Including the impact of the acquired loan balances, average balances of residential real estate loans increased 31% or $2.7 billion to $11.5 billion in 2015 from $8.7 billion in 2014. Included in that portfolio were loans held for sale, which averaged $415 million in 2015 and $403 million 2014. Commercial loan and lease balances averaged $19.9 billion in 2015, $1.0 billion or 5% higher than $18.9 billion in 2014. Average balances of commercial real estate loans increased 7% or $1.8 billion to $28.3 billion in 2015 from $26.5 billion in 2014. Average consumer loans totaled $11.2 billion in 2015, up $584 million or 6% from $10.6 billion in 2014, reflecting growth in average balances of automobile loans. 54 54 Table 3 Assets Earning assets Loans and leases, net of unearned discount(a) AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES 2016 2015 2014 2013 2012 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate (Average balance in millions of dollars; interest in thousands of dollars) Commercial, financial, etc. ........................ $ 21,397 $ 736,240 Real estate — commercial ......................... 30,915 1,277,196 Real estate — consumer ............................ 24,463 958,521 Consumer .................................................. 11,841 538,144 Total loans and leases, net .................. 88,616 3,510,101 45,516 8,846 3.44 % 4.06 3.92 4.54 3.96 .51 19,899 638,199 28,276 1,193,271 11,458 468,790 11,203 499,650 70,836 2,799,910 15,252 5,775 3.21 % 18,867 4.16 4.09 4.46 3.95 .26 624,487 26,461 1,142,939 368,632 8,719 480,877 10,618 64,665 2,616,935 13,361 5,342 3.31 % 17,736 4.26 4.23 4.53 4.05 .25 628,154 26,083 1,198,400 418,095 10,136 510,962 11,098 65,053 2,755,611 5,201 2,139 3.54 % 16,336 4.53 4.12 4.60 4.24 .24 606,495 24,907 1,138,723 421,516 9,727 559,253 11,732 62,702 2,725,987 1,221 528 3.71 % 4.50 4.33 4.77 4.35 .23 — 85 3 1,442 .86 1.71 34 86 35 1,247 .10 1.44 89 76 64 1,381 .07 1.81 128 78 114 1,482 .09 1.91 4 96 21 1,394 .55 1.45 Interest-bearing deposits at banks ...................... Federal funds sold and agreements to resell securities ........................................................ Trading account ................................................ Investment securities(b) .................................... U.S. Treasury and federal agencies ............ 14,025 332,926 Obligations of states and political subdivisions ............................................ Other ......................................................... 3,839 29,006 Total investment securities ................. 15,009 365,771 Total earning assets ........................... 112,556 3,922,833 90 894 2.37 13,514 336,873 2.49 10,543 304,178 2.88 5,123 165,879 3.24 4,538 150,500 3.32 4.24 3.24 2.44 3.49 143 799 6,391 35,599 14,456 378,863 91,187 3,195,307 4.46 4.45 2.62 3.50 8,115 166 36,485 800 11,509 348,778 81,681 2,980,519 4.89 4.56 3.03 3.65 9,999 194 44,019 1,298 6,615 219,897 74,013 2,982,305 5.15 3.39 3.32 4.03 11,638 220 77,315 2,211 6,969 239,453 70,299 2,968,076 5.29 3.50 3.44 4.22 (976 ) Allowance for credit losses ............................... Cash and due from banks .................................. 1,273 Other assets ....................................................... 11,487 Total assets ........................................ $ 124,340 Liabilities and Shareholders’ Equity Interest-bearing liabilities Interest-bearing deposits (935 ) 1,242 10,286 101,780 Savings and interest-checking deposits ...... $ 52,194 87,704 Time deposits ............................................ 12,253 102,841 797 Deposits at Cayman Islands office ............. Total interest-bearing deposits ........... 64,646 191,342 Short-term borrowings ...................................... 3,625 Long-term borrowings ...................................... 10,252 231,017 Total interest-bearing liabilities ......... 75,792 425,984 894 199 Noninterest-bearing deposits ............................. 30,160 1,969 Other liabilities ................................................. Total liabilities .......................................... 107,921 Shareholders’ equity ......................................... 16,419 Total liabilities and shareholders’ equity ... $ 124,340 .11 .58 .28 .15 .31 2.47 .55 .17 .84 .40 .30 .41 2.25 .56 43,885 4,641 216 48,742 548 46,140 27,059 615 73,814 1,677 10,217 252,766 59,507 328,257 27,324 1,721 88,552 13,228 101,780 (923 ) 1,277 10,108 92,143 41,508 3,290 327 45,125 215 7,492 52,832 25,715 1,499 80,046 12,097 92,143 46,869 15,515 699 63,083 101 217,247 280,431 .11 .47 .21 .14 .05 2.90 .53 (932 ) 1,380 9,201 83,662 37,662 4,045 496 42,203 390 4,941 47,534 23,721 1,685 72,940 10,722 83,662 56,235 26,439 1,018 83,692 430 199,983 284,105 .15 .65 .21 .20 .11 4.05 .60 (922 ) 1,384 9,222 79,983 34,254 5,347 605 40,206 839 5,527 46,572 21,761 1,947 70,280 9,703 79,983 69,354 46,102 1,130 116,586 1,286 225,297 343,169 .20 .86 .19 .29 .15 4.08 .74 Net interest spread ............................................. Contribution of interest-free funds .................... Net interest income/margin on earning assets .... $ 3,496,849 2.93 .18 3.11 % 2,867,050 2.95 .19 3.14 % 2,700,088 3.12 .19 3.31 % 2,698,200 3.43 .22 3.65 % 2,624,907 3.48 .25 3.73 % 5 5 (a) (b) Includes nonaccrual loans. Includes available-for-sale investment securities at amortized cost. 5 5 Table 4 summarizes average loans and leases outstanding in 2016 and percentage changes in the major components of the portfolio over the past two years. Table 4 AVERAGE LOANS AND LEASES (Net of unearned discount) Percent Increase (Decrease) from 2016 (In millions) 2015 to 2016 2014 to 2015 Commercial, financial, etc. .................................................. Real estate – commercial ..................................................... Real estate – consumer ......................................................... Consumer Automobile ...................................................................... Home equity lines and loans ........................................... Other ................................................................................ Total consumer ........................................................... Total ....................................................................... $ 21,397 30,915 24,463 2,740 5,788 3,313 11,841 $ 88,616 8 % 9 114 24 (2 ) 8 6 25 % 5% 7 31 32 (2) 7 6 10% Commercial loans and leases, excluding loans secured by real estate, totaled $22.6 billion at December 31, 2016, representing 25% of total loans and leases. Table 5 presents information on commercial loans and leases as of December 31, 2016 relating to geographic area, size, borrower industry and whether the loans are secured by collateral or unsecured. Of the $22.6 billion of commercial loans and leases outstanding at the end of 2016, approximately $20.0 billion, or 88%, were secured, while 40%, 25% and 23% were granted to businesses in New York State, Pennsylvania and the Mid-Atlantic area (which includes Delaware, Maryland, New Jersey, Virginia, West Virginia and the District of Columbia), respectively. The Company provides financing for leases to commercial customers, primarily for equipment. Commercial leases included in total commercial loans and leases at December 31, 2016 aggregated $1.3 billion, of which 48% were secured by collateral located in New York State, 16% were secured by collateral in Pennsylvania and another 15% were secured by collateral in the Mid-Atlantic area. 56 56 Table 5 COMMERCIAL LOANS AND LEASES, NET OF UNEARNED DISCOUNT (Excludes Loans Secured by Real Estate) December 31, 2016 New York Pennsylvania Mid- Atlantic(a) Other Total Total    Percent of Automobile dealerships .................... $ 1,684 Manufacturing................................... 1,735 Services ............................................. 1,297 Wholesale ......................................... 964 Health services .................................. 562 Financial and insurance .................... 675 Real estate investors ......................... 736 Transportation, communications, utilities ........................................... 338 Retail ................................................. 255 Construction ...................................... 386 Public administration ........................ 176 Agriculture, forestry, fishing, etc. ..... 29 Other ................................................. 143 Total .................................................. $ 8,980 Percent of total .................................. 40% Percent of dollars outstanding 83% Secured ............................................. 10 Unsecured ......................................... Leases ............................................... 7 Total .................................................. 100% Percent of dollars outstanding by  size of loan 23% Less than $1 million .......................... 24 $1 million to $5 million .................... 15 $5 million to $10 million .................. 16 $10 million to $20 million ................ 8 $20 million to $30 million ................ 7 $30 million to $50 million ................ 7 Greater than $50 million ................... Total .................................................. 100% (Dollars in millions) $ 567 569 1,223 494 644 318 336 304 289 247 36 49 110 $5,186 $ 921 525 269 164 74 200 122 317 113 54 1 — 4 $2,764 $ 4,075 3,921 3,660 2,160 1,570 1,545 1,399 1,383 975 950 281 219 472 $ 22,610 18% 17 16 10 7 7 6 6 5 4 1 1 2 100% $ 903 1,092 871 538 290 352 205 424 318 263 68 141 215 $ 5,680 25% 23% 12% 100 % 80% 16 4 100% 86% 10 4 100% 78% 12 10 100% 82 % 12 6 100 % 18% 22 21 17 9 6 7 100% 25% 19 15 19 7 8 7 100% 8% 21 22 22 12 10 5 100% 20 % 22 17 17 9 8 7 100 % (a) Includes Delaware, Maryland, New Jersey, Virginia, West Virginia and the District of Columbia. International loans included in commercial loans and leases totaled $228 million and $191 million at December 31, 2016 and 2015, respectively. Included in such loans were $95 million and $64 million, respectively, of loans at M&T Bank’s commercial banking office in Ontario, Canada. The remaining international loans are predominantly to domestic companies with foreign operations. Loans secured by real estate, including outstanding balances of home equity loans and lines of credit which the Company classifies as consumer loans, represented approximately 69% of the loan 57 57                                     and lease portfolio during 2016, compared with 64% in 2015 and 2014. At December 31, 2016, the Company held approximately $33.5 billion of commercial real estate loans, $22.6 billion of consumer real estate loans secured by one-to-four family residential properties (including $414 million of loans originated for sale) and $5.6 billion of outstanding balances of home equity loans and lines of credit, compared with $29.2 billion, $26.3 billion and $6.0 billion, respectively, at December 31, 2015. The decrease in the residential real estate loans reflects pay downs of loans obtained in the Hudson City acquisition. Included in commercial real estate loans at December 31, 2016 and 2015 were construction loans of $8.0 billion and $5.7 billion, respectively, including amounts due from builders and developers of residential real estate aggregating $1.9 billion and $1.6 billion at December 31, 2016 and 2015, respectively. Commercial real estate loans also included loans held for sale totaling $643 million and $39 million at December 31, 2016 and 2015, respectively. Commercial real estate loans originated by the Company include fixed-rate instruments with monthly payments and a balloon payment of the remaining unpaid principal at maturity, in many cases five years after origination. For borrowers in good standing, the terms of such loans may be extended by the customer for an additional five years at the then-current market rate of interest. The Company also originates fixed-rate commercial real estate loans with maturities of greater than five years, generally having original maturity terms of approximately seven to ten years, and adjustable- rate commercial real estate loans. Adjustable-rate commercial real estate loans represented approximately 72% of the commercial real estate loan portfolio at the 2016 year-end. Table 6 presents commercial real estate loans by geographic area, type of collateral and size of the loans outstanding at December 31, 2016. New York City area commercial real estate loans totaled $9.4 billion at December 31, 2016. The $8.0 billion of investor-owned commercial real estate loans in the New York City area were largely secured by multifamily residential properties, retail space and office space. The Company’s experience has been that office, retail and service-related properties tend to demonstrate more volatile fluctuations in value through economic cycles and changing economic conditions than do multifamily residential properties. Approximately 33% of the aggregate dollar amount of New York City area loans were for loans with outstanding balances of $10 million or less, while loans of more than $50 million made up approximately 17% of the total. 58 58 Table 6 COMMERCIAL REAL ESTATE LOANS, NET OF UNEARNED DISCOUNT December 31, 2016 Investor-owned Permanent finance by property type New York State New York City Other Penn- sylvania Mid- Atlantic(a) (Dollars in millions) Other Percent of Total Total Office .............................................. $ 1,406 Apartments/Multifamily ................. 1,707 Retail/Service ................................. 1,514 848 Hotel ............................................... 231 Industrial/Warehouse ...................... 43 Health facilities ............................... 205 Other ............................................... Total permanent ........................ 5,954 $ 906 719 550 380 219 110 35 2,919 $ 568 372 448 252 357 21 14 2,032 $ 1,297 772 1,059 667 252 71 24 4,142 $ 438 970 468 279 315 12 15 2,497 $ 4,615 4,540 4,039 2,426 1,374 257 293 17,544 Construction/Development Commercial Construction ................................ Land/Land development .............. 935 461 Residential builder and developer Construction ................................ Land/Land development .............. Total construction/ development .......................... 2,067 Total investor-owned ............................. 8,021 Owner-occupied by industry(b) 662 9 Health services ................................ Other services ................................. Retail .............................................. Automobile dealerships .................. Wholesale ....................................... Manufacturing ................................ Real estate investors ....................... Other ............................................... 483 211 138 178 82 71 17 157 Total owner-occupied ............... 1,337 Total commercial real estate .................. $ 9,358 647 32 1 14 603 67 1,524 185 827 88 4,536 833 106 33 198 262 386 251 1,353 569 694 3,613 809 2,841 2,169 6,311 1,552 4,049 7,291 24,835 529 460 181 175 64 218 40 180 1,847 $ 5,460 486 251 228 245 142 156 24 228 1,760 $ 4,601 787 795 351 179 292 155 52 351 2,962 $ 9,273 327 71 96 184 52 29 2 4 765 $ 4,814 2,612 1,788 994 961 632 629 135 920 8,671 $ 33,506 8% 5 3 3 2 2 — 3 26% 100% 14% 13 12 7 4 1 1 52% 14% 2 4 2 22% 74% Percent of total ...................................... 28 % 16% 14% 28% 14 % 100 % Percent of dollars outstanding by size of loan Less than $1 million .............................. $1 million to $5 million ......................... $5 million to $10 million ....................... $10 million to $30 million ..................... $30 million to $50 million ..................... $50 million to $100 million ................... Greater than $100 million ...................... Total ...................................................... 3 % 16 14 34 16 16 1 100 % 17% 31 19 27 5 1 — 100% 15% 26 20 26 8 5 — 100% 11% 21 16 29 12 11 — 100% 10 % 14 17 37 10 9 3 100 % 10 % 21 17 31 11 9 1 100 % (a) (b) Includes Delaware, Maryland, New Jersey, Virginia, West Virginia and the District of Columbia. Includes $727 million of construction loans 59 59 Commercial real estate loans secured by properties located in other parts of New York State, Pennsylvania and the Mid-Atlantic area tend to have a greater diversity of collateral types and include a significant amount of lending to customers who use the mortgaged property in their trade or business (owner-occupied). Approximately 67% of the aggregate dollar amount of commercial real estate loans in New York State secured by properties located outside of the New York City area were for loans with outstanding balances of $10 million or less. Of the outstanding balances of commercial real estate loans in Pennsylvania and the Mid-Atlantic area, approximately 61% and 48%, respectively, were for loans with outstanding balances of $10 million or less. Commercial real estate loans secured by properties located outside of Pennsylvania, the Mid- Atlantic area and New York State comprised 14% of total commercial real estate loans as of December 31, 2016. Commercial real estate construction and development loans made to investors presented in table 6 totaled $7.3 billion at December 31, 2016, or 8% of total loans and leases. Approximately 95% of those construction loans had adjustable interest rates. Included in such loans at the 2016 year- end were $1.9 billion of loans to builders and developers of residential real estate properties. Information about the credit performance of the Company’s loans to builders and developers of residential real estate properties is included herein under the heading “Provision For Credit Losses.” The remainder of the commercial real estate construction loan portfolio was comprised of loans made for various purposes, including the construction of office buildings, multifamily residential housing, retail space and other commercial development. M&T Realty Capital Corporation, a commercial real estate lending subsidiary of M&T Bank, participates in the Delegated Underwriting and Servicing (“DUS”) program of Fannie Mae, pursuant to which commercial real estate loans are originated in accordance with terms and conditions specified by Fannie Mae and sold. Under this program, loans are sold with partial credit recourse to M&T Realty Capital Corporation. The amount of recourse is generally limited to one-third of any credit loss incurred by the purchaser on an individual loan, although in some cases the recourse amount is less than one- third of the outstanding principal balance. The Company’s maximum credit risk for recourse associated with sold commercial real estate loans was approximately $2.8 billion and $2.5 billion at December 31, 2016 and 2015, respectively. There have been no material losses incurred as a result of those recourse arrangements. Commercial real estate loans held for sale at December 31, 2016 and 2015 aggregated $643 million and $39 million, respectively. At December 31, 2016 and 2015, commercial real estate loans serviced by the Company for other investors were $11.8 billion and $11.0 billion, respectively. Those serviced loans are not included in the Company’s consolidated balance sheet. In January 2017, M&T Realty Capital Corporation purchased commercial mortgage banking servicing rights and other assets which increased commercial real estate loans serviced for others by $2.7 billion. The purchase price and assets acquired were not material to the Company’s consolidated financial position. Real estate loans secured by one-to-four family residential properties were $22.6 billion at December 31, 2016, including approximately 34% secured by properties located in New York State, 7% secured by properties located in Pennsylvania, 29% secured by properties in New Jersey and 11% secured by properties located in other Mid-Atlantic areas. At December 31, 2016, $414 million of residential real estate loans had been originated for sale, compared with $353 million at December 31, 2015. The Company’s portfolio of alternative (“Alt-A”) residential real estate loans (referred to as “limited documentation loans”) held for investment decreased by $686 million to $3.6 billion at December 31, 2016 from $4.3 billion at December 31, 2015. A portfolio of limited documentation loans was acquired with the Hudson City transaction which totaled $3.3 billion and $4.0 billion at December 31, 2016 and 2015, respectively. Alt-A loans represent loans that at origination typically included some form of limited borrower documentation requirements as compared with more traditional residential real estate loans. Hudson City loans that were eligible for limited documentation processing were available in amounts up to 65% of the lower of the appraised 60 60 value or purchase price of the property. Hudson City discontinued its limited documentation loan program in January 2014. Loans in the Company’s Alt-A portfolio prior to the Hudson City transaction were originated by the Company prior to 2008. Loans to individuals to finance the construction of one-to-four family residential properties totaled $21 million at December 31, 2016 and $34 million at December 31, 2015, or less than .1% of total loans and leases at each of those dates. Information about the credit performance of the Company’s residential real estate loans is included herein under the heading “Provision For Credit Losses.” Consumer loans comprised approximately 13% of total loans and leases at each of December 31, 2016 and 2015. Outstanding balances of home equity loans and lines of credit represent the largest component of the consumer loan portfolio. Such balances represented approximately 6% of total loans and leases at December 31, 2016 and 7% at December 31, 2015. No other consumer loan product represented at least 4% of loans outstanding at December 31, 2016. Approximately 39% of home equity loans and lines of credit outstanding at December 31, 2016 were secured by properties in New York State, 26% in Maryland, 21% in Pennsylvania and 3% in New Jersey. Outstanding automobile loan balances rose to $2.9 billion at December 31, 2016 from $2.5 billion at December 31, 2015. That increase reflects continued consumer demand for motor vehicles. Table 7 presents the composition of the Company’s loan and lease portfolio at the end of 2016, including outstanding balances to businesses and consumers in New York State, Pennsylvania, the Mid-Atlantic area and other states. Approximately 39% of total loans and leases at December 31, 2016 were to New York State customers, while 16% and 30% were to Pennsylvania and the Mid- Atlantic area customers, respectively. Table 7 LOANS AND LEASES, NET OF UNEARNED DISCOUNT December 31, 2016 New Outstandings York (In millions) Percent of Dollars Outstanding Penn- sylvania Maryland Mid-Atlantic New Jersey Other(a) Other Real estate Residential ................................. $ 22,591 Commercial ............................... 33,506 Total real estate ..................... 56,097 Commercial, financial, etc. ............ 21,337 Consumer Home equity lines and loans ..... Automobile ................................ Other secured or guaranteed ...... Other unsecured ......................... 5,641 2,944 2,842 719 Total consumer ..................... 12,146 Total loans........................ 89,580 1,273 Total loans and leases ...... $ 90,853 Commercial leases ......................... 34% 7% 14 44 40% 11% 39% 26% 6% 12 10% 13% 29 % 5 % 6 10 15 % 8 % 5 % 6 % 39% 21% 21 28 21 11 22 39 32% 19% 39% 16% 48% 16% 39% 16% 26% 9 7 24 17% 11% 9% 11% 3 % 10 % 7 13 7 7 1 11 5 % 10 % 11 % 8 % 3 % 3 % 11 % 8 % 19% 14 16% 11% 1% 22 47 3 17% 15% 21% 15% (a) Includes Delaware, Virginia, West Virginia and the District of Columbia. 61 61 The investment securities portfolio averaged $15.0 billion in 2016, up from $14.5 billion and $11.5 billion in 2015 and 2014, respectively. The investment securities portfolio is largely comprised of residential mortgage-backed securities, debt securities issued by municipalities, trust preferred securities issued by certain financial institutions, and shorter-term U.S. Treasury and federal agency notes. When purchasing investment securities, the Company considers its liquidity position and its overall interest-rate risk profile as well as the adequacy of expected returns relative to risks assumed, including prepayments. The Company manages its investment securities portfolio, in part, to satisfy the requirements of the Liquidity Coverage Ratio (“LCR”) that became effective in January 2016. In September 2014, various federal banking regulators adopted final rules (“Final LCR Rule”) implementing a U.S. version of the Basel Committee’s LCR including the modified version applicable to bank holding companies, including M&T, with $50 billion in total consolidated assets that are not “advanced approaches” institutions. The LCR is intended to ensure that banks hold a sufficient amount of “high quality liquid assets” to cover the anticipated net cash outflows during a hypothetical acute 30-day stress scenario. For additional information concerning the LCR rules, refer to Part I, Item 1 of this Form 10-K under the heading “Liquidity.” 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. The Hudson City acquisition added approximately $7.9 billion to the investment securities portfolio on the November 1, 2015 acquisition date. As noted earlier, immediately following the acquisition, the Company restructured its balance sheet by selling $5.8 billion of those securities. During the third and fourth quarters of 2016, the Company sold the collateralized debt obligations that had been held in the available-for-sale investment securities portfolio for a gain of approximately $30 million. Purchases of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities totaled $1.8 billion in 2016, $3.5 billion in 2015 and $5.2 billion in 2014. Purchases of U.S. Treasury notes totaled $1.7 billion in 2016, while purchases in 2015 or 2014 were not significant. The amounts of investment securities held by the Company are influenced by such factors as demand for loans, which generally yield more than investment securities, ongoing repayments, the levels of deposits, and management of liquidity (including the LCR) and balance sheet size and resulting capital ratios. The Company regularly reviews its investment securities for declines in value below amortized cost that might be characterized as “other than temporary.” There were no other-than-temporary impairment charges recognized in 2016, 2015 or 2014. Based on management’s assessment of future cash flows associated with individual investment securities as of December 31, 2016, the Company concluded that declines in value below amortized cost associated with the investment securities portfolio were temporary in nature. 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 20 of Notes to Financial Statements. Other earning assets include interest-bearing deposits at the Federal Reserve Bank of New York and other banks, trading account assets and federal funds sold. Those other earning assets in the aggregate averaged $8.9 billion in 2016, $5.9 billion in 2015 and $5.5 billion in 2014. Interest- bearing deposits at banks averaged $8.8 billion in 2016, compared with $5.8 billion and $5.3 billion in 2015 and 2014, respectively. The higher levels of average interest-bearing deposits at banks in 2016 when compared with 2015 and 2014 resulted largely from the Company’s decision to maintain higher balances at the Federal Reserve Bank of New York rather than reinvesting in other highly liquid assets due to the interest rate environment. The most significant source of funding for the Company is core deposits. The Company considers noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and time deposits of $250,000 or less 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 62 62 comparable maturities. Average core deposits totaled $92.2 billion in 2016, up from $74.2 billion in 2015 and $69.1 billion in 2014. The Hudson City acquisition added approximately $17.0 billion of core deposits on November 1, 2015, including $9.7 billion of time deposits, $6.6 billion of savings deposits and $691 million of noninterest-bearing deposits. The higher average core deposits in 2016 as compared with 2015 and in 2015 as compared with 2014 were predominantly reflective of the impact of the merger with Hudson City. Funding provided by core deposits represented 82% of average earning assets in 2016, compared with 81% and 85% in 2015 and 2014, respectively. Table 8 summarizes average core deposits in 2016 and percentage changes in the components of such deposits over the past two years. Core deposits totaled $93.1 billion and $89.3 billion at December 31, 2016 and 2015, respectively. Table 8 AVERAGE CORE DEPOSITS Percent Increase (Decrease) from 2016 (In millions) 2015 to 2016 2014 to 2015 Savings and interest-checking deposits ........................ Time deposits ............................................................... Noninterest-bearing deposits ........................................ Total ........................................................................ $51,093 10,969 30,160 $92,222 19 % 167 10 24 % 6% 40 6 7% The Company also receives funding from other deposit sources, including branch-related time deposits over $250,000, deposits associated with the Company’s Cayman Islands office, and brokered deposits. Time deposits over $250,000, excluding brokered deposits, averaged $1.2 billion in 2016, $501 million in 2015 and $366 million in 2014. The higher level of such deposits in 2016 was due to the full-year impact of deposits obtained in the acquisition of Hudson City. Cayman Islands office deposits averaged $199 million in 2016, $216 million in 2015 and $327 million in 2014. Brokered time deposits averaged $59 million in 2016, compared with $37 million in 2015 and $4 million in 2014. The Company also had brokered savings and interest-bearing transaction accounts that averaged $1.1 billion in each of 2016, 2015 and 2014. Additional amounts of Cayman Islands office 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 Bank of New York and others as sources of funding. Short-term borrowings represent borrowing arrangements that at the time they were entered into had a contractual maturity of less than one year. Average short-term borrowings were $894 million in 2016, $548 million in 2015 and $215 million in 2014. The higher levels of such borrowings in 2016 and 2015 were predominantly due to short-term borrowings from the Federal Home Loan Bank (“FHLB”) of New York assumed in the Hudson City acquisition. Those short-term fixed-rate borrowings matured throughout 2016. There were no short-term borrowings from the Federal Home Loan Banks in 2014. Also included in short-term borrowings were unsecured federal funds borrowings, which generally mature on the next business day, that averaged $151 million, $138 million and $156 million in 2016, 2015 and 2014, respectively. Overnight federal funds borrowings totaled $112 million at December 31, 2016 and $99 million at December 31, 2015. 63 63 Long-term borrowings averaged $10.3 billion in 2016, $10.2 billion in 2015 and $7.5 billion in 2014. M&T Bank has a Bank Note Program whereby M&T Bank may offer unsecured senior and subordinated notes. Only unsecured senior notes have been issued under that program, of which $5.2 billion and $5.5 billion were outstanding at December 31, 2016 and 2015, respectively. Average balances of outstanding notes issued under that program were $5.3 billion in each of 2016 and 2015, compared with $2.9 billion in 2014. During 2014, M&T Bank issued $550 million of three-year floating rate, $1.25 billion of three-year fixed rate and $1.4 billion of five-year fixed rate notes. During 2015, M&T Bank issued $1.5 billion of fixed rate notes of which $750 million mature in 2020 and $750 million mature in 2025. During 2016, a $300 million floating rate note issued in 2013 matured. There were no issuances of borrowings under the Bank Note Program in 2016. The proceeds from the issuances of borrowings under the Bank Note Program have been predominantly utilized to purchase high quality liquid assets that meet the requirements of the LCR. Also included in average long-term borrowings were amounts borrowed from the Federal Home Loan Banks of New York, Atlanta and Pittsburgh of $1.2 billion in each of 2016 and 2015 and $692 million in 2014, and subordinated capital notes of $1.5 billion in each of 2016 and 2015 and $1.6 billion in 2014. During 2014, M&T Bank borrowed approximately $1.1 billion from the FHLB of New York. Junior subordinated debentures associated with trust preferred securities that were included in average long- term borrowings were $515 million in 2016, $605 million in 2015 and $889 million in 2014. In accordance with its 2015 capital plan, on April 15, 2015 M&T redeemed the junior subordinated debentures associated with the $310 million of trust preferred securities of M&T Capital Trusts I, II and III. Those borrowings had a weighted-average interest rate of 8.24%. Additional information regarding junior subordinated debentures, as well as information regarding contractual maturities of long-term borrowings, is provided in note 9 of Notes to Financial Statements. Also included in long- term borrowings were agreements to repurchase securities, which averaged $1.8 billion in 2016, $1.5 billion in 2015 and $1.4 billion during 2014. Agreements to repurchase securities assumed in connection with the Hudson City acquisition totaled $6.9 billion at November 1, 2015. Immediately following the November 1, 2015 Hudson City acquisition date the balance sheet was restructured and $6.4 billion of the assumed repurchase agreements were repaid. During 2016, $800 million of repurchase agreements matured. The agreements held at December 31, 2016 totaled $1.1 billion and have various repurchase dates through 2020, however, the contractual maturities of the underlying securities extend beyond such repurchase dates. The Company has utilized interest rate swap agreements to modify the repricing characteristics of certain components of long-term debt. As of December 31, 2016, interest rate swap agreements were used to hedge approximately $900 million of outstanding fixed rate long-term borrowings. Further information on interest rate swap agreements is provided in note 18 of Notes to Financial Statements. Changes in the composition of the Company’s earning assets and interest-bearing liabilities, as discussed 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 2.93% in 2016, compared with 2.95% in 2015 and 3.12% in 2014. The yield on the Company’s earning assets declined one basis point to 3.49% in 2016 from 3.50% in 2015, while the rate paid on interest-bearing liabilities increased one basis point to .56% in 2016 from .55% in 2015. As compared with 2015, the narrowing of the net interest spread reflects the ongoing impact of the low interest rate environment on the yields earned on investment securities, higher rates paid on interest-bearing deposits (largely associated with time deposits obtained in the Hudson City acquisition) and higher amounts of relatively low yielding balances held at the Federal Reserve Bank of New York. The yield on earning assets declined 15 basis points in 2015 from 3.65% in 2014, while the rate paid on interest-bearing liabilities increased two basis points in 2015 from .53% in 2014. The narrowing of the net interest spread in 2015 as compared with 2014 also reflected the impact of the low interest rate environment on the yields earned on investment 64 64 securities and loans, higher average balances of investment securities and long-term borrowings, and the higher level of deposits held at the Federal Reserve Bank of New York. 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 $36.8 billion in 2016, compared with $31.7 billion in 2015 and $28.8 billion in 2014. The increases in average net interest- free funds in 2016 and 2015 reflect higher balances of noninterest-bearing deposits and shareholders’ equity. Noninterest-bearing deposits averaged $30.2 billion in 2016, $27.3 billion in 2015 and $25.7 billion in 2014. In connection with the acquisition of Hudson City, the Company added noninterest- bearing deposits of $691 million at the acquisition date. In addition to the impact of the Hudson City acquisition, growth in noninterest-bearing deposits in 2016 reflects an increase in commercial and trust customer deposits. The growth from 2014 to 2015 reflected an increase in commercial customer deposits. Shareholders’ equity averaged $16.4 billion, $13.2 billion and $12.1 billion in 2016, 2015 and 2014, respectively. The rise in shareholders’ equity from 2014 to 2016 reflected $3.1 billion of common equity issued in connection with the acquisition of Hudson City, as well as net retained earnings. Goodwill and core deposit and other intangible assets averaged $4.7 billion in 2016, $3.7 billion in 2015 and $3.6 billion in 2014. Goodwill of $1.1 billion and core deposit intangible of $132 million resulted from the Hudson City acquisition. The cash surrender value of bank owned life insurance averaged $1.7 billion in each of 2016, 2015 and 2014. Increases in the cash surrender value of bank owned life insurance 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 .18% in 2016 and .19% in each of 2015 and 2014. Reflecting the changes to the net interest spread and the contribution of net interest-free funds as described herein, the Company’s net interest margin was 3.11% in 2016, 3.14% in 2015 and 3.31% in 2014. 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 interest-bearing liabilities. Periodic settlement amounts arising from these agreements are reflected in 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 and $1.4 billion at December 31, 2016 and 2015, respectively. Under the terms of those interest rate swap agreements, the Company received payments based on the outstanding notional amount at fixed rates and made payments at variable rates. Those interest rate swap agreements were designated as fair value hedges of certain fixed rate long-term borrowings. The $500 million decline in the notional amount reflects the expiration of a hedge transaction upon conversion of $500 million of fixed rate long-term borrowings to a floating rate. There were no interest rate swap agreements designated as cash flow hedges at those respective dates. 65 65 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. The amounts of hedge ineffectiveness recognized in 2016, 2015 and 2014 were not material to the Company’s consolidated results of operations. The estimated aggregate fair value of interest rate swap agreements designated as fair value hedges represented gains of approximately $12 million at December 31, 2016 and $44 million at December 31, 2015. The fair values of such interest rate 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 December 31, 2016 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 $5 million of collateral with the Company. Additional information about interest rate swap agreements and the items being hedged is included in note 18 of Notes to Financial Statements. 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 interest rates paid or received on those swap agreements are presented in table 9. Table 9 Increase (decrease) in: Interest income ................... $ Interest expense .................. Net interest income/margin ................. $ INTEREST RATE SWAP AGREEMENTS 2016 Year Ended December 31 2015 2014 Amount Rate(a) Amount Rate(a) Amount Rate(a) (Dollars in thousands) — —% $ (.05) (36,866) — —% $ (.07) (44,219) — —% (.09) (44,996 ) 36,866 Average notional amount ........ $ 1,357,650 Rate received(b) ...................... Rate paid(b) ............................. 4.39% 1.64% .04% $ 44,219 $1,412,340 .04% $ 44,996 $ 1,400,000 .06% 4.42% 1.28% 4.42% 1.19% (a) Computed as a percentage of average earning assets or interest-bearing liabilities. (b) Weighted-average rate paid or received on interest rate swap agreements in effect during year. Provision for Credit Losses The Company maintains an allowance for credit losses that in management’s judgment appropriately reflects 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 was $190 million in 2016, compared with $170 million in 2015 and $124 million in 2014. Net charge-offs of loans were $157 million in 2016, $134 million in 2015 and $121 million in 2014. Net charge-offs as a percentage of average loans and leases outstanding were .18% in 2016, compared 66 66 with .19% in each of 2015 and 2014. A summary of the Company’s loan charge-offs, provision and allowance for credit losses is presented in table 10 and in note 5 of Notes to Financial Statements. Table 10 LOAN CHARGE-OFFS, PROVISION AND ALLOWANCE FOR CREDIT LOSSES Allowance for credit losses beginning balance ................................................. $955,992 $919,562 $916,676 $ 925,860 $ 908,290 Charge-offs during year 2016 2015 2014 (Dollars in thousands) 2013 2012 Commercial, financial, leasing, etc. ... 59,244 60,983 58,943 Real estate — construction ................. 1,882 Real estate — mortgage ..................... 30,801 26,382 33,527 Consumer ........................................... 141,073 107,787 84,390 Total charge-offs............................ 231,255 198,373 178,742 3,221 137 109,329 41,148 9,137 27,687 49,079 58,572 85,965 103,348 253,510 230,755 Recoveries during year Commercial, financial, leasing, etc. ... 30,167 30,284 22,188 6,308 Real estate — construction ................. 4,725 4,062 Real estate — mortgage ..................... 11,124 7,626 14,640 Consumer ........................................... 28,907 20,585 16,075 Total recoveries ............................. 74,260 64,803 57,628 Net charge-offs ........................................ 156,995 133,570 121,114 Provision for credit losses ....................... 190,000 170,000 124,000 Allowance related to loans sold or securitized ............................................ Allowance for credit losses ending balance ................................................. $988,997 $955,992 $919,562 $ 916,676 $ 925,860 Net charge-offs as a percent of: 11,773 11,375 3,693 18,800 13,718 8,847 26,035 20,410 70,326 44,325 183,184 186,430 185,000 204,000 (11,000 ) — — — — Provision for credit losses .................. Average loans and leases, net of unearned discount ............................ Allowance for credit losses as a percent of loans and leases, net of unearned discount, at year-end ............................ 82.63% 78.57% 97.67% 99.02 % 91.39% .18% .19% .19% .28 % .30% 1.09% 1.09% 1.38% 1.43 % 1.39% Loans acquired in connection with acquisition transactions subsequent to 2008 were recorded at fair value with no carry-over of any previously recorded allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans and discounting those cash flows at then-current interest rates. For acquired loans where fair value was less than outstanding principal as of the acquisition date and the resulting discount was due, at least in part, to credit deterioration, the excess of expected cash flows over the carrying value of the loans is recognized as interest income over the lives of the loans. The difference between contractually required payments and the cash flows expected to be collected is referred to as the nonaccretable balance and is not recorded on the consolidated balance sheet. The nonaccretable balance reflects estimated future credit losses and other contractually required payments that the 67 67 Company does not expect to collect. The Company regularly evaluates the reasonableness of its cash flow projections associated with such loans, including its estimates of lifetime principal losses. Any decreases to the expected cash flows require the Company to evaluate the need for an additional allowance for credit losses and could lead to charge-offs of loan balances. Any significant increases in expected cash flows result in additional interest income to be recognized over the then-remaining lives of the loans. The carrying amount of loans acquired at a discount subsequent to 2008 and accounted for based on expected cash flows was $1.8 billion and $2.5 billion at December 31, 2016 and 2015, respectively. The decrease in such loans was largely attributable to payments received. The nonaccretable balance related to remaining principal losses associated with loans acquired at a discount as of December 31, 2016 and 2015 is presented in table 11. During each of the last three years, based largely on improving economic conditions and borrower repayment performance, the Company’s estimates of cash flows expected to be generated by loans acquired at a discount and accounted for based on expected cash flows improved, resulting in increases in the accretable yield. In 2016, estimated cash flows expected to be generated by acquired loans increased by $50 million, or approximately 2%. That improvement reflected a lowering of estimated principal losses by approximately $33 million, primarily due to a $19 million decrease in expected principal losses in the commercial real estate loan portfolios, as well as interest and other recoveries. In 2015, excluding expected cash flows on the purchased impaired loans acquired from Hudson City, estimated cash flows expected to be generated increased by $77 million, or approximately 3%. That improvement reflected a lowering of estimated principal losses by approximately $58 million, primarily due to a $42 million decrease in expected principal losses in the commercial real estate loan portfolios, as well as interest and other recoveries. Similarly, in 2014 the estimates of cash flows expected to be generated increased by approximately 2%, or $98 million. That improvement also reflected a lowering of estimated principal losses, largely driven by a $47 million decrease in expected principal losses that was predominantly in the acquired commercial real estate loan portfolios. Table 11 NONACCRETABLE BALANCE — PRINCIPAL Remaining Balance December 31, December 31, 2016 2015 (In thousands) Commercial, financial, leasing, etc. ............................................................... $ Commercial real estate ................................................................................... Residential real estate ..................................................................................... Consumer ....................................................................................................... 4,794 $ 10,806 39,867 48,173 59,657 113,478 11,275 17,952 Total .......................................................................................................... $ 115,593 $ 190,409 For acquired loans where the fair value exceeded the outstanding principal balance, the resulting premium is recognized as a reduction of interest income over the lives of the loans. Immediately following the acquisition date and thereafter, an allowance for credit losses is recorded for incurred losses inherent in the portfolio, consistent with the accounting for originated loans and leases. The carrying amount of Hudson City loans acquired at a premium totaled $14.2 billion and $17.8 billion at December 31, 2016 and December 31, 2015, respectively. In addition to the impact of estimated credit losses included in the determination of fair value of those loans at the acquisition date, a $21 million provision for credit losses was recorded in the fourth quarter of 2015 for incurred 68 68 losses inherent in those loans at that time. GAAP does not allow the credit loss component of the net premium associated with those loans to be bifurcated and accounted for as a nonaccreting balance as is the case with purchased impaired loans and other loans acquired at a discount. Despite the fact that the determination of aggregate fair value reflects the impact of expected credit losses, GAAP provides that incurred losses in a portfolio of loans acquired at a premium be recognized even though in a relatively homogenous portfolio of residential mortgage loans the specific loans to which the losses relate cannot be individually identified at the acquisition date. Subsequent to the acquisition date, incurred losses associated with those loans are evaluated using methods consistent with those applied to originated loans and such losses are considered by management in evaluating the Company’s allowance for credit losses. Nonaccrual loans aggregated $920 million at December 31, 2016, compared with $799 million at each of December 31, 2015 and 2014. As a percentage of total loans and leases outstanding, nonaccrual loans represented 1.01%, .91% and 1.20% at the end of 2016, 2015 and 2014, respectively. The increase in nonaccrual loans since the 2015 year-end reflected the normal migration of previously performing residential real estate loans obtained in the acquisition of Hudson City that subsequently became over 90 days past due in 2016 and, as such, were not identifiable as purchased impaired as of the acquisition date. Those nonaccrual loans totaled $190 million at December 31, 2016. Following the acquisition accounting provisions of GAAP, Hudson City-related loans classified as nonaccrual were not significant at December 31, 2015. Accruing loans past due 90 days or more (excluding loans acquired at a discount) totaled $301 million or .33% of total loans and leases at December 31, 2016, compared with $317 million or .36% at December 31, 2015 and $245 million or .37% at December 31, 2014. Those amounts included loans guaranteed by government-related entities of $283 million, $276 million and $218 million at December 31, 2016, 2015 and 2014, respectively. Such guaranteed loans obtained in the acquisition of Hudson City aggregated $49 million and $44 million at December 31, 2016 and 2015, respectively. Guaranteed loans also 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 that are guaranteed by government-related entities totaled $224 million at December 31, 2016, $221 million at December 31, 2015 and $196 million at December 31, 2014. The remaining accruing loans past due 90 days or more not guaranteed by government-related entities were loans considered to be with creditworthy borrowers that were in the process of collection or renewal. A summary of nonperforming assets and certain past due, renegotiated and impaired loan data and credit quality ratios is presented in table 12. 69 69 Table 12 NONPERFORMING ASSET AND PAST DUE, RENEGOTIATED AND IMPAIRED LOAN DATA December 31 2016 2015 2014 (Dollars in thousands) 2013 2012 Nonaccrual loans .................................................. $ 920,015 $ 799,409 $799,151 $ 874,156 $ 1,013,176 Real estate and other foreclosed assets ................. 63,635 66,875 104,279 139,206 Total nonperforming assets ................................... $1,059,221 $ 994,494 $862,786 $ 941,031 $ 1,117,455 195,085 Accruing loans past due 90 days or more(a) ......... $ 300,659 $ 317,441 $245,020 $ 368,510 $ 358,397 Government guaranteed loans included in totals above: Nonaccrual loans ............................................. $ Accruing loans past due 90 days or more ........ 40,610 $ 282,659 276,285 47,052 $ 69,095 $ 63,647 $ 57,420 217,822 297,918 316,403 Renegotiated loans ................................................ $ 190,374 $ 182,865 $202,633 $ 257,092 $ 271,971 Accruing loans acquired at a discount past due 90 days or more(b) ...................................... $ Purchased impaired loans(c): 68,473 $110,367 $ 130,162 $ 166,554 61,144 $ Outstanding customer balance ......................... $ 927,446 $1,204,004 $369,080 $ 579,975 $ 828,571 197,737 330,792 447,114 Carrying amount .............................................. 578,032 768,329 Nonaccrual loans to total loans and leases, net of unearned discount .................................... Nonperforming assets to total net loans and leases and real estate and other foreclosed assets .................................................................. Accruing loans past due 90 days or more(a) to total loans and leases, net of unearned discount .............................................................. 1.01% .91% 1.20% 1.36 % 1.52% 1.16% 1.13% 1.29% 1.47 % 1.68% .33% .36% .37% .58 % .54% (a) Excludes loans acquired at a discount. Predominantly residential real estate loans. (b) Loans acquired at a discount that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately. (c) Accruing loans acquired at a discount that were impaired at acquisition date and recorded at fair value. Purchased impaired loans are loans obtained in acquisition transactions subsequent to 2008 that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all contractually required principal and interest payments. Those loans were impaired at the date of acquisition, were recorded at estimated fair value and were 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 aggregated $578 million at December 31, 2016, or .6% of total loans. Of that amount, $512 million related to the Hudson City acquisition. Purchased impaired loans totaled $768 million at December 31, 2015, of which $658 million related to the acquisition of Hudson City. Accruing loans acquired at a discount past due 90 days or more are loans that could not be specifically identified as impaired as of the acquisition date, but were recorded at estimated fair value as of such date. Such loans aggregated $61 million at December 31, 2016 and $68 million at December 31, 2015. 70 70 The Company modified the terms of select loans in an effort to assist borrowers. If the borrower was experiencing financial difficulty and a concession was granted, the Company considered such modifications as troubled debt restructurings. Loan modifications included such actions as the extension of loan maturity dates 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 level of the allowance for credit losses. Information about modifications of loans that are considered troubled debt restructurings is included in note 4 of Notes to Financial Statements. Residential real estate loans modified under specified loss mitigation programs prescribed by government guarantors have not been included in renegotiated loans because the loan guarantee remains in full force and, accordingly, the Company has not granted a concession with respect to the ultimate collection of the original loan balance. Such loans totaled $171 million and $147 million at December 31, 2016 and December 31, 2015, respectively. Charge-offs of commercial loans and leases, net of recoveries, aggregated $29 million in 2016, $31 million in 2015 and $37 million in 2014. Included in net charge-offs of commercial loans and leases in 2016 were $12 million of loans to a commercial maintenance services provider with operations in New Jersey and Pennsylvania, $12 million of loans to a multi-regional manufacturer of refractory brick and other castable products and recoveries of $7 million of a previously charged-off loan to an audio visual service provider. In 2015, the Company recovered $10 million relating to a relationship with a motor vehicle-related parts wholesaler. Commercial loans and leases in nonaccrual status were $261 million at December 31, 2016, $242 million at December 31, 2015 and $177 million at December 31, 2014. The December 31, 2016 balances for the largest individual commercial loans placed in nonaccrual status during 2016 were $41 million with a provider of building facility services and other specialty services to clients located throughout the United States and $26 million with the manufacturer of refractory brick and other castable products noted above. The balances for the largest individual commercial loans placed in nonaccrual status during 2015 were $22 million with the commercial maintenance service provider noted above and $15 million with a multi-regional automobile rental agency. Net recoveries of previously charged-off commercial real estate loans during 2016 were $2 million, compared with net charge-offs of commercial real estate loans during 2015 and 2014 of $7 million and $3 million, respectively. Reflected in those amounts were net recoveries of $4 million in 2016 and $2 million in each of 2015 and 2014 of loans to residential real estate builders and developers. Commercial real estate loans classified as nonaccrual aggregated $211 million at December 31, 2016, compared with $224 million at December 31, 2015 and $239 million at December 31, 2014. The decrease in such nonaccrual loans since December 31, 2014 was due, in part, to improving economic conditions. Nonaccrual commercial real estate loans included construction-related loans of $35 million, $45 million and $97 million at the end of 2016, 2015 and 2014, respectively. Those nonaccrual construction loans included loans to residential builders and developers of $17 million at December 31, 2016, $28 million at December 31, 2015 and $72 million at December 31, 2014. Information about the location of nonaccrual and charged-off loans to residential real estate builders and developers as of and for the year ended December 31, 2016 is presented in table 13. 71 71 Table 13 RESIDENTIAL BUILDER AND DEVELOPER LOANS, NET OF UNEARNED DISCOUNT December 31, 2016 Nonaccrual Outstanding Balances(b) Balances Percent of Outstanding Balances Year Ended December 31, 2016 Net Charge-offs (Recoveries) Percent of Average Outstanding Balances Balances (Dollars in thousands) 1,557 New York ....................................... $ 691,558 $ 13,456 Pennsylvania .................................. 141,675 2,139 Mid-Atlantic(a) .............................. 465,340 Other ............................................... 636,973 1,197 Total ............................................... $1,935,546 $ 18,349 .23 % $ 9.50 .46 .19 .95 % $ 640 (256 ) (3,956 ) .09 % (.19) (.86) — — (3,572 ) (.19)% (a) (b) Includes Delaware, Maryland, New Jersey, Virginia, West Virginia and the District of Columbia. Includes approximately $13 million of loans not secured by real estate, of which approximately $2 million are in nonaccrual status. Residential real estate loan net charge-offs totaled $18 million in 2016, $9 million in 2015 and $13 million in 2014. Residential real estate loans in nonaccrual status at December 31, 2016 were $336 million, compared with $215 million and $258 million at December 31, 2015 and 2014, respectively. The increase in residential real estate loans classified as nonaccrual in 2016 as compared with 2015 reflects the normal migration of previously performing loans obtained in the acquisition of Hudson City that subsequently became more than 90 days delinquent in 2016. Such nonaccrual residential real estate loans aggregated $190 million at December 31, 2016. Those loans could not be identified as purchased impaired loans at the acquisition date because the borrowers were making loan payments at the time and the loans were not recorded at a discount. Following the acquisition accounting provisions of GAAP, Hudson City-related nonaccrual residential real estate loans were not significant at December 31, 2015. The decline in residential real estate loans classified as nonaccrual in 2015 as compared to 2014 reflected improved repayment performance by customers. Net charge-offs of limited documentation first mortgage loans aggregated $4 million in 2016, $1 million in 2015 and $4 million in 2014. Nonaccrual limited documentation first mortgage loans were $107 million at December 31, 2016 (including $70 million obtained in the acquisition of Hudson City), compared with $62 million and $78 million at December 31, 2015 and 2014, respectively. Residential real estate loans past due 90 days or more and accruing interest (excluding loans acquired at a discount) totaled $281 million (including $49 million obtained in the acquisition of Hudson City) at December 31, 2016, $284 million (including $44 million obtained in the acquisition of Hudson City) at December 31, 2015 and $216 million at December 31, 2014. A substantial portion of such amounts related to guaranteed loans repurchased from government-related entities. Information about the location of nonaccrual and charged-off residential real estate loans as of and for the year ended December 31, 2016 is presented in table 14. 72 72                      Table 14 SELECTED RESIDENTIAL REAL ESTATE-RELATED LOAN DATA December 31, 2016 Nonaccrual Year Ended December 31, 2016 Net Charge-offs (Recoveries)          Percent of Average Outstanding Residential mortgages: New York ......................................................................... Pennsylvania .................................................................... Maryland .......................................................................... New Jersey ....................................................................... Other Mid-Atlantic(a) ...................................................... Other ................................................................................ Total ................................................................................. Residential construction loans: New York ......................................................................... Pennsylvania .................................................................... Maryland .......................................................................... New Jersey ....................................................................... Other Mid-Atlantic(a) ...................................................... Other ................................................................................ Total ................................................................................. Limited documentation first mortgages: New York ......................................................................... Pennsylvania .................................................................... Maryland .......................................................................... New Jersey ....................................................................... Other Mid-Atlantic(a) ...................................................... Other ................................................................................ Total ................................................................................. First lien home equity loans and lines of credit: New York ......................................................................... Pennsylvania .................................................................... Maryland .......................................................................... New Jersey ....................................................................... Other Mid-Atlantic(a) ...................................................... Other ................................................................................ Total ................................................................................. Junior lien home equity loans and lines of credit: New York ......................................................................... Pennsylvania .................................................................... Maryland .......................................................................... New Jersey ....................................................................... Other Mid-Atlantic(a) ...................................................... Other ................................................................................ Total ................................................................................. Limited documentation junior lien: Outstanding Balances $ 6,217,663 1,607,986 1,255,781 5,148,844 1,070,176 3,695,680 $ 18,996,130 $ $ 6,041 1,809 1,981 1,363 3,226 6,921 21,341 $ 1,519,579 76,104 45,010 1,387,841 39,131 505,776 $ 3,573,441 $ 1,290,237 828,004 682,629 45,460 208,765 20,808 $ 3,075,903 $ 909,908 364,548 797,779 128,782 314,046 41,864 $ 2,556,927 New York ......................................................................... Pennsylvania .................................................................... Maryland .......................................................................... New Jersey ....................................................................... Other Mid-Atlantic(a) ...................................................... Other ................................................................................ Total ................................................................................. $ $ 826 334 1,388 385 651 4,735 8,319 Balances Balances Percent of Outstanding Balances (Dollars in thousands) $ 68,044 16,454 17,573 50,376 14,227 61,687 $ 228,361 $ $ 13 376 — — 120 372 881 $ 36,048 7,656 2,942 31,938 2,567 25,422 $ 106,573 $ 16,060 9,714 6,776 573 1,653 1,401 $ 36,177 $ 25,022 4,769 9,435 1,242 3,054 1,791 $ 45,313 $ $ — — — — — 325 325 1.09% 1.02 1.40 .98 1.33 1.67 1.20% $ 4,027 1,999 2,069 3,008 652 2,108 $ 13,863 .22% $ 20.79 — — 3.70 5.38 4.13% $ 4 33 — — — 12 49 2.37% 10.06 6.54 2.30 6.56 5.03 2.98% $ 1,426 120 125 293 (221 ) 2,358 $ 4,101 1.24% 1.17 .99 1.26 .79 6.73 1.18% $ 2,109 1,263 429 — 5 1 $ 3,807 2.75% 1.31 1.18 .96 .97 4.28 1.77% $ 5,399 2,302 4,146 718 222 574 $ 13,361 —% — — — — 6.86 3.91% $ $ 1 — 62 (1 ) — 85 147 (a) Includes Delaware, Virginia, West Virginia and the District of Columbia. Balances .06% .11 .16 .05 .06 .05 .07% .06% .96 — — — .14 .18% .09% .14 .26 .02 (.52) .42 .10% .16% .15 .06 — .01 .01 .12% .57% .60 .48 .58 .07 1.37 .50% .15% — 3.96 (.32) — 1.70 1.66% 73 73         Net charge-offs of consumer loans during 2016 aggregated $112 million, compared with $87 million in 2015 and $68 million in 2014. During 2016, the Company accelerated the charge off of consumer loans associated with customers who were either deceased or had filed for bankruptcy that, in accordance with GAAP, had previously been considered when determining the level of the allowance for credit losses and were charged-off following the Company’s normal charge-off procedures to the extent the loans subsequently became delinquent. Charge-offs of such loans totaled $32 million in 2016 and included $22 million of loan balances with a current payment status at the time of charge-off. The increase from 2014 to 2015 reflected a $20 million charge-off of a single personal usage loan obtained in a previous acquisition. Included in net charge-offs of consumer loans were: automobile loans of $32 million in 2016, $12 million in 2015 and $14 million in 2014; recreational vehicle loans of $24 million, $12 million and $13 million during 2016, 2015 and 2014, respectively; and home equity loans and lines of credit secured by one-to-four family residential properties of $17 million in 2016, $15 million in 2015 and $19 million in 2014. Nonaccrual consumer loans were $112 million at December 31, 2016, compared with $118 million and $125 million at December 31, 2015 and 2014, respectively. Included in nonaccrual consumer loans at the 2016, 2015 and 2014 year-ends were: automobile loans of $19 million, $17 million and $18 million, respectively; recreational vehicle loans of $7 million, $9 million and $11 million, respectively; and outstanding balances of home equity loans and lines of credit of $82 million, $84 million and $89 million, respectively. Information about the location of nonaccrual and charged-off home equity loans and lines of credit as of and for the year ended December 31, 2016 is presented in table 14. Information about past due and nonaccrual loans as of December 31, 2016 and 2015 is also included in note 4 of Notes to Financial Statements. Real estate and other foreclosed assets totaled $139 million at December 31, 2016, compared with $195 million at December 31, 2015 and $64 million at December 31, 2014. The higher levels of real estate and other foreclosed assets in 2016 and 2015 as compared with 2014 reflect residential real estate properties associated with the Hudson City acquisition, which aggregated $84 million and $126 million at December 31, 2016 and 2015, respectively. Gains or losses resulting from sales of real estate and other foreclosed assets were not material in 2016, 2015 or 2014. At December 31, 2016, the Company’s holding of residential real estate-related properties comprised approximately 93% of foreclosed assets. Management determined 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 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 the 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 residential real estate values on the Company’s portfolio of loans to residential real estate builders and developers and other loans secured by residential real estate; (ii) the concentrations of commercial real estate loans in the Company’s loan portfolio; (iii) 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; (iv) the expected repayment performance associated with the Company’s first and second lien loans secured by residential real estate, including loans obtained in the acquisition of Hudson City that were not classified as purchased impaired; 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. 74 74 Management cautiously and conservatively evaluated the allowance for credit losses as of December 31, 2016 in light of: (i) residential real estate values and the level of delinquencies of loans secured by residential real estate; (ii) economic conditions in the markets served by the Company; (iii) slower growth in private sector employment in upstate New York and central Pennsylvania than in other regions served by the Company and nationally; (iv) the significant subjectivity involved in commercial real estate valuations; and (v) the amount of loan growth experienced by the Company. While there has been general improvement in economic conditions, concerns continue to exist about the strength and sustainability of such improvements; the volatile nature of global commodity and export markets, including the impact international economic conditions could have on the U.S. economy; Federal Reserve positioning of monetary policy; and continued stagnant population growth in the upstate New York and central Pennsylvania regions (approximately 55% of the Company’s loans and leases are to customers in New York State and Pennsylvania). The Company utilizes a loan grading system which is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. Criticized commercial loans and commercial real estate loans totaled $2.4 billion at December 31, 2016 and $2.1 billion at December 31, 2015. Largely reflecting loans to manufacturers and vehicle dealers, increases in criticized loan balances since December 31, 2015 included approximately $66 million of commercial real estate loans and $231 million of commercial loans. Approximately 98% of loan balances added to the criticized category during 2016 were less than 90 days past due and 97% had a current payment status. Given payment performance, amount of supporting collateral, and, in certain instances, the existence of loan guarantees, the Company still expects to collect the full outstanding principal balance on most of these loans. Loan officers in different geographic locations with the support of the Company’s credit department personnel are responsible to continuously review and reassign loan grades to pass and criticized loans based on their detailed knowledge of individual borrowers and their judgment of the impact on such borrowers resulting from changing conditions in their respective regions. At least annually, updated financial information is obtained from commercial borrowers associated with pass grade loans and additional analysis is performed. On a quarterly basis, the Company’s centralized credit department reviews all criticized commercial loans and commercial real estate loans greater than $1 million to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. For criticized nonaccrual loans, additional meetings are held with loan officers and their managers, workout specialists and senior management to discuss each of the relationships. In analyzing criticized loans, 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 other factors, and the Company’s potential courses of action are reviewed. To the extent that these 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 “criticized,” 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 75 75 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 credit department. Accordingly, for real estate collateral securing larger commercial loans 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’s loss identification and estimation techniques make reference to loan performance and house price data in specific areas of the country where collateral securing the Company’s residential real estate loans is 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 that are generally obtained shortly after a loan becomes nonaccrual. Loans to consumers that file for bankruptcy are generally charged off to estimated net collateral value shortly after the Company is notified of such filings. At December 31, 2016, approximately 55% of the Company’s home equity portfolio consisted of first lien loans and lines of credit. Of the remaining junior lien loans in the portfolio, approximately 70% (or approximately 32% of the aggregate home equity portfolio) consisted of junior lien loans that were behind a first lien mortgage loan that was not owned or serviced by the Company. To the extent known by the Company, if a senior lien loan would be on nonaccrual status because of payment delinquency, even if such senior lien loan was not owned by the Company, the junior lien loan or line that is owned by the Company is placed on nonaccrual status. At December 31, 2016, the balance of junior lien loans and lines that were in nonaccrual status solely as a result of first lien loan performance was $12 million, compared with $22 million at December 31, 2015. In monitoring the credit quality of its home equity portfolio for purposes of determining the allowance for credit losses, the Company reviews delinquency and nonaccrual information and considers recent charge-off experience. When evaluating individual home equity loans and lines of credit for charge off, if the Company does not know the amount of the remaining first lien mortgage loan (typically because the Company does not own or service the first lien loan), the Company assumes that the first lien mortgage loan has had no principal amortization since the origination of the junior lien loan. Similarly, data used in estimating incurred losses for purposes of determining the allowance for credit losses also assumes no reductions in outstanding principal of first lien loans since the origination of the junior lien loan. Home equity line of credit terms vary but such lines are generally originated with an open draw period of ten years followed by an amortization period of up to twenty years. At December 31, 2016, approximately 84% of all outstanding balances of home equity lines of credit related to lines that were still in the draw period, the weighted-average remaining draw periods were approximately five years, and approximately 19% were making contractually allowed payments that do not include any repayment of principal. Factors that influence the Company’s credit loss experience include overall economic conditions affecting businesses and consumers, generally, but also residential and commercial real estate valuations, in particular, given the size of the Company’s real estate loan portfolios. Commercial real estate valuations can be highly subjective, as they are based upon many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, interest rates, and, in many cases, the results of operations of businesses and other occupants of the real property. Similarly, residential real estate valuations can be impacted by housing trends, the availability of financing at reasonable interest rates, and general economic conditions affecting consumers. 76 76 In determining 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. In quantifying incurred losses, the Company considers the factors and uses the techniques described herein and in note 5 of Notes to Financial Statements. For purposes of determining the level of the allowance for credit losses, the Company segments its loan and lease portfolio by loan type. The amount of specific loss components in the Company’s loan and lease portfolios is determined through a loan-by-loan analysis of commercial loans and commercial real estate loans in nonaccrual status. Measurement of the specific loss components is typically based on expected future cash flows, collateral values or other factors that may impact the borrower’s ability to pay. Losses associated with residential real estate loans and consumer loans are generally determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s credit department. These forecasts give consideration to overall borrower repayment performance and current geographic region changes in collateral values using third party published historical price indices or automated valuation methodologies. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a junior lien position. Approximately 45% of the Company’s home equity portfolio consists of junior lien loans and lines of credit. Except for consumer loans and residential real estate loans that are considered smaller balance homogeneous loans and are evaluated collectively and loans obtained at a discount in acquisition transactions, the Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more and has been placed in nonaccrual status. Those impaired loans are evaluated for specific loss components. 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. Loans less than 90 days delinquent are deemed to have a minimal delay in payment and are generally not considered to be impaired. Loans acquired in connection with acquisition transactions subsequent to 2008 were recorded at fair value with no carry- over of any previously recorded allowance for credit losses. Determining the fair value of the acquired loans required estimating cash flows expected to be collected on the loans and discounting those cash flows at then-current interest rates. For loans acquired at a discount, the impact of estimated future credit losses represents the predominant difference between contractually required payments and the cash flows expected to be collected. Subsequent decreases to those expected cash flows require the Company to evaluate the need for an additional allowance for credit losses and could lead to charge- offs of acquired loan balances. The inherent base level loss components of the Company’s allowance for credit losses are generally determined by applying loss factors to specific loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. The Company utilizes a loan grading system which is applied to all commercial loans and commercial real estate loans. As previously described, 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 credit department to ensure consistency and strict adherence to the prescribed standards. Loan balances utilized in the inherent base level loss component computations exclude loans and leases for which specific allocations are maintained. 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 77 77 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. In determining the allowance for credit losses, management also gives consideration to such factors as customer, industry and geographic concentrations, as well as national and local economic conditions, including: (i) the comparatively poorer economic conditions and unfavorable business climate in many market regions served by the Company, including upstate New York and central Pennsylvania, that result in such regions generally experiencing significantly poorer economic growth and vitality as compared with much of the rest of the country; (ii) portfolio concentrations regarding loan type, collateral type and geographic location, in particular the large concentrations of commercial real estate loans secured by properties in the New York City area and other areas of New York State; and (iii) risk associated with the Company’s portfolio of consumer loans, in particular automobile loans, which generally have higher rates of loss than other types of collateralized loans. The inherent base level loss components related to residential real estate loans and consumer loans are generally determined by applying loss factors to portfolio balances after consideration of payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates for loans secured by residential real estate, including home equity loans and lines of credit, are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors as previously described. In evaluating collateral, the Company relies on internally and externally prepared valuations. Residential real estate valuations are usually based on sales of comparable properties in the respective location. Commercial real estate valuations also refer to sales of comparable properties but oftentimes are based on calculations that utilize many assumptions and, as a result, can be highly subjective. Specifically, commercial real estate values can be significantly affected over relatively short periods of time by changes in business climate, economic conditions and interest rates, and, in many cases, the results of operations of businesses and other occupants of the real property. Additionally, management is aware that there is oftentimes a delay in the recognition of credit quality changes in loans and, as a result, in changes to assigned loan grades due to time delays in the manifestation and reporting of underlying events that impact credit quality. Accordingly, loss estimates derived from the inherent base level loss component computation are adjusted for current national and local economic conditions and trends. The Federal Reserve stated in December 2016 that the U.S. economic recovery had continued and activity is expected to expand at a moderate pace, with further improvement in labor market conditions. Economic indicators in the most significant market regions served by the Company also showed improvement in 2016. For example, in 2016, average private sector employment in areas served by the Company was 1.7% above year-ago levels, but trailed the 2.0% U.S. average growth rate. Private sector employment increased 0.4% in upstate New York, 1.0% in areas of Pennsylvania served by the Company, 1.7% in New Jersey, 2.1% in Maryland, 2.6% in Greater Washington D.C. and 3.0% in the State of Delaware. In New York City, private sector employment increased by 2.4% in 2016. Nevertheless, the U.S. economy remains susceptible to slow global economic growth, a strong U.S. dollar and its impact on trade, and international market turbulence. The specific loss components and the inherent base level loss components together comprise the total base level or “allocated” allowance for credit losses. Such allocated portion of the allowance represents management’s assessment of losses existing in specific larger balance loans that are reviewed in detail by management and pools of other loans that are not individually analyzed. In addition, the Company has always provided an inherent unallocated portion of the allowance that is intended to recognize probable losses that are not otherwise identifiable. The inherent unallocated allowance includes management’s subjective determination of amounts necessary for such things as 78 78 the possible use of imprecise estimates in determining the allocated portion of the allowance and other risks associated with the Company’s loan portfolio which may not be specifically allocable. A comparative allocation of the allowance for credit losses for each of the past five year-ends is presented in table 15. Amounts were allocated to specific loan categories based on information available to management at the time of each year-end assessment and using the methodology described herein. Variations in the allocation of the allowance by loan category as a percentage of those loans reflect changes in management’s estimate of specific loss components and inherent base level loss components, including the impact of delinquencies and nonaccrual loans. As described in note 5 of Notes to Financial Statements, loans considered impaired aggregated $761 million and $781 million at December 31, 2016 and December 31, 2015, respectively. The allocated portion of the allowance for credit losses related to impaired loans totaled $83 million at December 31, 2016 and $90 million at December 31, 2015. The unallocated portion of the allowance for credit losses was equal to .09% of gross loans outstanding at each of December 31, 2016 and 2015. Considering the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management deliberately remained cautious and conservative in establishing the overall allowance for credit losses. Given the Company’s high concentration of real estate loans and considering the other factors already discussed herein, management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable. Furthermore, the Company’s allowance is general in nature and is available to absorb losses from any loan or lease category. Additional information about the allowance for credit losses is included in note 5 of Notes to Financial Statements. Table 15 ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES TO LOAN CATEGORIES December 31 2016 2015 2014 (Dollars in thousands) 2013 2012 Commercial, financial, leasing, etc. ........ $330,833 $300,404 $288,038 $ 273,383 $ 246,759 403,634 425,908 Real estate ............................................... 423,846 399,069 369,837 164,644 179,418 Consumer ................................................ 156,288 178,320 186,033 75,015 73,775 Unallocated ............................................. 78,030 78,199 75,654 Total ................................................... $988,997 $955,992 $919,562 $ 916,676 $ 925,860 As a Percentage of Gross Loans  and Leases Outstanding Commercial, financial, leasing, etc. ........ Real estate ............................................... Consumer ................................................ 1.45% .75 1.29 1.46% .72 1.54 1.47% 1.02 1.70 1.45 % 1.15 1.60 1.37% 1.14 1.55 Management believes that the allowance for credit losses at December 31, 2016 appropriately reflected credit losses inherent in the portfolio as of that date. The allowance for credit losses was $989 million or 1.09% of total loans and leases at December 31, 2016, compared with $956 million or 1.09% at December 31, 2015 and $920 million or 1.38% at December 31, 2014. The ratio of the allowance to total loans and leases at each respective year-end reflects the impact of loans obtained in acquisition transactions subsequent to 2008 that have been recorded at estimated fair value. As noted earlier, GAAP prohibits any carry-over of an allowance for credit losses for acquired loans recorded at fair value. However, for loans acquired at a premium, GAAP provides that an allowance 79 79 for credit losses be recognized for incurred losses inherent in the portfolio. The decline in the ratio of the allowance to total loans and leases at December 31, 2016 and December 31, 2015 as compared with December 31, 2014 reflects the impact of loans (predominantly residential real estate loans) obtained in the acquisition of Hudson City. The level of the allowance reflects management’s evaluation of the loan and lease portfolio using the methodology and considering the factors as described herein. Should the various credit factors considered by management in establishing the allowance for credit losses change and should management’s assessment of losses inherent in the loan portfolios also change, the level of the allowance as a percentage of loans could increase or decrease in future periods. The ratio of the allowance for credit losses to nonaccrual loans at the end of 2016, 2015 and 2014 was 107%, 120% and 115%, respectively. Given the Company’s general position as a secured lender and its practice of charging-off loan balances when collection is deemed doubtful, that ratio and changes in that ratio are generally not an indicative measure of the adequacy of the Company’s allowance for credit losses, nor does management rely upon that ratio in assessing the adequacy of the Company’s allowance for credit losses. The level of the allowance reflects management’s evaluation of the loan and lease portfolio as of each respective date. In establishing the allowance for credit losses, management follows the methodology described herein, including taking a conservative view of borrowers’ abilities to repay loans. The establishment of the allowance is extremely subjective and requires management to make many judgments about borrower, industry, regional and national economic health and performance. In order to present examples of the possible impact on the allowance from certain changes in credit quality factors, the Company assumed the following scenarios for possible deterioration of credit quality:        For consumer loans and leases considered smaller balance homogenous loans and evaluated collectively, a 50 basis point increase in loss factors; For residential real estate loans and home equity loans and lines of credit, also considered small balance homogenous loans and evaluated collectively, a 15% increase in estimated inherent losses; and For commercial loans and commercial real estate loans, a migration of loans to lower-ranked risk grades resulting in a 30% increase in the balance of classified credits in each risk grade. For possible improvement in credit quality factors, the scenarios assumed were: For consumer loans and leases, a 20 basis point decrease in loss factors; For residential real estate loans and home equity loans and lines of credit, a 10% decrease in estimated inherent losses; and For commercial loans and commercial real estate loans, a migration of loans to higher- ranked risk grades resulting in a 5% decrease in the balance of classified credits in each risk grade. The scenario analyses resulted in an additional $83 million that could be identifiable under the assumptions for credit deterioration, whereas under the assumptions for credit improvement a $27 million reduction could occur. These examples are only a few of numerous reasonably possible scenarios that could be utilized in assessing the sensitivity of the allowance for credit losses based on changes in assumptions and other factors. The Company had no concentrations of credit extended to any specific industry that exceeded 10% of total loans at December 31, 2016, however residential real estate loans comprised approximately 25% of the loan portfolio. Outstanding loans to foreign borrowers aggregated $292 million at December 31, 2016, or .3% of total loans and leases. 80 80 Other Income Other income totaled $1.83 billion in each of 2016 and 2015, compared with $1.78 billion in 2014. The impact of gains recognized on sales of collateralized debt obligations and from higher trading account and foreign exchange gains in 2016 were offset by the impact of a $45 million gain recognized in 2015 on the sale of the Company’s trade processing business within the retirement services division. The Hudson City transaction did not have a significant impact on other income in 2015 or 2016. The increase in other income from 2014 to 2015 included higher commercial mortgage banking revenues and the aforementioned gain from the sale of the trade processing business that was largely offset by lower trust income associated with that divested business. Mortgage banking revenues aggregated $374 million in 2016, $376 million in 2015 and $363 million in 2014. Mortgage banking revenues are comprised of both residential and commercial mortgage banking activities. The Company’s involvement in commercial mortgage banking activities includes the origination, sales and servicing of loans under the multifamily loan programs of Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development. Residential mortgage banking revenues, consisting of realized gains from sales of residential real estate loans and loan servicing rights, unrealized gains and losses on residential real estate loans held for sale and related commitments, residential real estate loan servicing fees, and other residential real estate loan-related fees and income, were $255 million in 2016, $281 million in 2015 and $287 million in 2014. The decline in residential mortgage banking revenues from 2014 to 2015 and from 2015 to 2016 predominantly reflects a decrease in revenues associated with servicing residential real estate loans for others. New commitments to originate residential real estate loans to be sold declined 11% to approximately $3.1 billion in 2016, from $3.5 billion in 2015. Such commitments aggregated $3.2 billion in 2014. Realized gains from sales of residential real estate loans and loan servicing rights and recognized net unrealized gains or losses attributable to residential real estate loans held for sale, commitments to originate loans for sale and commitments to sell loans aggregated to a gain of $71 million in 2016, compared with gains of $74 million in 2015 and $75 million in 2014. The Company is contractually obligated to repurchase previously sold 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 purchasers for losses incurred or may repurchase certain loans. The Company reduces residential mortgage banking revenues for losses related to its obligations to loan purchasers. The amount of those charges varies 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. Residential mortgage banking revenues during 2016 and 2014 were each reduced by approximately $4 million, compared with $5 million in 2015, related to the actual or anticipated settlement of repurchase obligations. Loans held for sale that were secured by residential real estate aggregated $414 million and $353 million at December 31, 2016 and 2015, respectively. Commitments to sell residential real estate loans and commitments to originate residential real estate loans for sale at pre-determined rates totaled $777 million and $479 million, respectively, at December 31, 2016, $687 million and $489 million, respectively, at December 31, 2015 and $717 million and $432 million, respectively, at December 31, 2014. Net recognized unrealized gains on residential real estate loans held for sale, commitments to sell loans and commitments to originate loans for sale were $15 million at December 31, 2016, $16 million at December 31, 2015 and $19 million at December 31, 2014. Changes in such net unrealized gains are recorded in mortgage banking revenues and resulted in net decreases in revenue of $3 million and $1 million in 2015 and 2014, respectively. The aggregate impact of changes in net unrealized gains was less than $1 million in 2016. Revenues from servicing residential real estate loans for others were $183 million in 2016, $206 million in 2015 and $212 million in 2014. Residential real estate loans serviced for others aggregated 81 81 $53.2 billion at December 31, 2016, $61.7 billion a year earlier and $67.2 billion at December 31, 2014 and included certain small-balance commercial real estate loans. Reflected in residential real estate loans serviced for others were loans sub-serviced for others of $30.4 billion, $37.8 billion and $42.1 billion at December 31, 2016, 2015 and 2014, respectively. Revenues earned for sub-servicing loans totaled $98 million in 2016, compared with $116 million in each of 2015 and 2014. The contractual servicing rights associated with loans sub-serviced by the Company were predominantly held by affiliates of Bayview Lending Group LLC (“BLG”). Information about the Company’s relationship with BLG and its affiliates is included in note 24 of Notes to Financial Statements. Capitalized servicing rights consist largely of servicing associated with loans sold by the Company. Capitalized residential mortgage servicing assets totaled $117 million at December 31, 2016, compared with $118 million and $111 million at December 31, 2015 and 2014, respectively. Additional information about the Company’s capitalized residential mortgage servicing assets, including information about the calculation of estimated fair value, is presented in note 7 of Notes to Financial Statements. Commercial mortgage banking revenues totaled $119 million in 2016, $95 million in 2015 and $76 million in 2014. Included in such amounts were revenues from loan origination and sales activities of $76 million in 2016, $53 million in 2015 and $41 million in 2014. The rise in such revenues from 2015 to 2016 was due to higher origination volumes. Commercial real estate loans originated for sale to other investors totaled approximately $2.9 billion in 2016, compared with $2.0 billion in 2015 and $1.5 billion in 2014. Loan servicing revenues aggregated $43 million in 2016, $42 million in 2015 and $35 million in 2014. Capitalized commercial mortgage servicing assets were $104 million at December 31, 2016, $84 million at December 31, 2015 and $73 million at December 31, 2014. Commercial real estate loans serviced for other investors totaled $11.8 billion at December 31, 2016, $11.0 billion at December 31, 2015 and $11.3 billion at December 31, 2014, and included $2.8 billion, $2.5 billion and $2.4 billion, respectively, of loan balances for which investors had recourse to the Company if such balances are ultimately uncollectible. Commitments to sell commercial real estate loans and commitments to originate commercial real estate loans for sale aggregated $713 million and $70 million, respectively, at December 31, 2016, $96 million and $58 million, respectively, at December 31, 2015 and $520 million and $212 million, respectively, at December 31, 2014. Commercial real estate loans held for sale were $643 million, $39 million and $308 million at December 31, 2016, 2015 and 2014, respectively. The higher balances at December 31, 2016 and 2014 reflect loans originated later in the year that had not yet been delivered to investors. Service charges on deposit accounts totaled $419 million in 2016, compared with $421 million in 2015 and $428 million in 2014. The lower levels of fees since 2014 resulted from declines in consumer service charges, particularly overdraft fees. Trust income includes fees related to two significant businesses. The Institutional Client Services (“ICS”) business provides a variety of trustee, agency, investment management and administrative services for corporations and institutions, investment bankers, corporate tax, finance and legal executives, and other institutional clients who: (i) use capital markets financing structures; (ii) use independent trustees to hold retirement plan and other assets; and (iii) need investment and cash management services. The Wealth Advisory Services (“WAS”) business helps high net worth clients grow their wealth, protect it, and transfer it to their heirs. A comprehensive array of wealth management services are offered, including asset management, fiduciary services and family office services. Trust income totaled to $472 million in 2016, compared with $471 million in 2015 and $508 million in 2014. Revenues associated with the ICS business were approximately $230 million in 2016, $220 million in 2015 and $244 million in 2014. The increase in ICS revenue in 2016 when compared to the prior year was the result of stronger sales activities and higher fees earned from money-market funds, partially offset by lower retirement services revenues. The decline in ICS 82 82 revenue in 2016 and 2015 as compared with 2014 reflects the April 2015 divestiture of the trade processing business within the retirement services division. Revenues related to that business reflected in trust income (in the ICS business) during 2015 and 2014 were approximately $9 million and $34 million, respectively. After considering related expenses, including the portion of those revenues paid to sub-advisors, net income attributable to the sold business during those years was not material to the consolidated results of operations of the Company. The sale resulted in an after-tax gain in 2015 of $23 million ($45 million pre-tax) that was recorded in “other revenues from operations” in the consolidated statement of income. Revenues attributable to WAS totaled approximately $212 million, $218 million and $224 million in 2016, 2015 and 2014, respectively. Total trust assets, which include assets under management and assets under administration, were $210.6 billion at December 31, 2016, compared with $199.2 billion at December 31, 2015. Trust assets under management aggregated $70.7 billion and $66.7 billion at December 31, 2016 and 2015, respectively. Additional trust income from investment management activities were $30 million, $33 million and $40 million in 2016, 2015 and 2014, respectively. That income largely relates to fees earned from retail customer investment accounts and from an affiliated investment manager. Assets managed by that affiliated manager totaled $7.3 billion and $7.1 billion at December 31, 2016 and December 31, 2015, respectively. The Company’s trust income from that affiliate was not material during 2016 or 2015. The Company’s proprietary mutual funds held assets of $10.9 billion and $12.2 billion at December 31, 2016 and 2015, respectively. Brokerage services income, which includes revenues from the sale of mutual funds and annuities and securities brokerage fees, aggregated $63 million in 2016, $65 million in 2015 and $67 million in 2014. Trading account and foreign exchange activity resulted in gains of $41 million in 2016, $31 million in 2015 and $30 million in 2014. The higher level of such gains in 2016 as compared with 2015 resulted largely from higher activity related to interest rate swap transactions executed on behalf of commercial customers and higher gains associated with foreign exchange activities. As compared with 2014, higher activity in 2015 related to interest rate swap transactions executed on behalf of commercial customers was largely offset by decreased market values of trading account assets held in connection with deferred compensation arrangements and lower gains associated with foreign exchange activities. The Company enters into interest rate and foreign exchange contracts with customers who need such services and concomitantly enters into offsetting trading positions with third parties to minimize the risks involved with these types of transactions. Information about the notional amount of interest rate, foreign exchange and other contracts entered into by the Company for trading account purposes is included in note 18 of Notes to Financial Statements and herein under the heading “Liquidity, Market Risk, and Interest Rate Sensitivity.” The Company realized net gains from sales of investment securities of $30 million in 2016. There were no significant gains or losses on investment securities in 2015 or 2014. During 2016, the Company sold all of its collateralized debt obligations that had been held in the available-for-sale investment securities portfolio and that had been obtained through the acquisition of other banks. In total, securities with an amortized cost of $28 million were sold. Divestiture of the majority of those securities would have been required prior to July 21, 2017 in accordance with the provisions of the Volcker Rule. There were no other-than-temporary impairment losses in 2016, 2015 or 2014. Each reporting period the Company reviews its investment securities for other-than-temporary impairment. For equity securities, the Company considers various factors to determine if the decline in value is other than temporary, including the duration and extent of the decline in value, the factors contributing to the decline in fair value, including the financial condition of the issuer as well as the conditions of the industry in which it operates, and the prospects for a recovery in fair value of the equity security. For debt securities, the Company analyzes the creditworthiness of the issuer or reviews the credit performance of the underlying collateral supporting the bond. For debt securities backed by pools of loans, such as privately issued mortgage-backed securities, the Company 83 83 estimates the cash flows of the underlying loan collateral using forward-looking assumptions for default rates, loss severities and prepayment speeds. Estimated collateral cash flows are then utilized to estimate bond-specific cash flows to determine the ultimate collectibility of the bond. If the present value of the cash flows indicates that the Company should not expect to recover the entire amortized cost basis of a bond or if the Company intends to sell the bond or it more likely than not will be required to sell the bond before recovery of its amortized cost basis, an other-than-temporary impairment loss is recognized. If an other-than-temporary impairment loss is deemed to have occurred, the investment security’s cost basis is adjusted, as appropriate for the circumstances. Additional information about other-than-temporary impairment considerations is included herein under the heading “Capital.” Other revenues from operations aggregated $426 million in 2016, compared with $463 million in 2015 and $383 million in 2014. The decline in other revenues from operations in 2016 as compared to 2015 was largely due to the $45 million gain from the sale of the trade processing business in 2015 and lower letter of credit and credit-related fees (largely loan syndication fees), partially offset by higher merchant discount and credit card fees. The increase in 2015 as compared with 2014 reflected that $45 million gain from the sale of the trade processing business, $15 million of gains from the sale of equipment previously leased to commercial customers and higher loan syndication fees. Included in other revenues from operations were the following significant components. Letter of credit and other credit-related fees totaled $120 million, $134 million and $129 million in 2016, 2015 and 2014, respectively. The decrease from 2015 to 2016 was largely due to a decline in loan syndication fees. Revenues from merchant discount and credit card fees were $111 million in 2016, $105 million in 2015 and $96 million in 2014. The continued trend of higher revenues since 2014 was largely attributable to increased transaction volumes related to merchant activity and usage of the Company’s credit card products. Tax-exempt income earned from bank owned life insurance, which includes increases in the cash surrender value of life insurance policies and benefits received, aggregated $54 million in 2016, compared with $53 million in 2015 and $50 million in 2014. Insurance-related sales commissions and other revenues totaled $43 million in 2016, compared with $38 million in 2015 and $42 million in 2014. Automated teller machine usage fees aggregated $14 million in each of 2016 and 2015 and $15 million in 2014. Gains from sales of equipment previously leased to commercial customers were $8 million in 2016, $17 million in 2015 and $2 million in 2014. M&T’s share of the operating losses of BLG recognized using the equity method of accounting was $11 million in 2016, compared with $14 million and $17 million in 2015 and 2014, respectively. Those amounts are reflected in “other revenues from operations.” The operating losses of BLG in the respective years reflect provisions for losses associated with securitized loans and other loans held by BLG and loan servicing and other administrative costs. However, as a result of past securitization activities, BLG is entitled to cash flows from mortgage assets that it owns or that are owned by its affiliates and is also entitled to receive distributions from affiliates that provide asset management and other services. Accordingly, the Company believes that BLG is capable of realizing positive cash flows that could be available for distribution to its owners, including M&T, despite a lack of positive GAAP-earnings from its core mortgage activities. Information about the Company’s relationship with BLG and its affiliates is included in note 24 of Notes to Financial Statements. Other Expense Other expense aggregated $3.05 billion in 2016, compared to $2.82 billion in 2015 and $2.69 billion in 2014. Included in those amounts are expenses considered to be “nonoperating” in nature consisting of amortization of core deposit and other intangible assets of $43 million, $26 million and $34 million in 2016, 2015 and 2014, respectively, and merger-related expenses of $36 million and $76 84 84 million in 2016 and 2015, respectively. There were no merger-related expenses during 2014. Exclusive of those nonoperating expenses, noninterest operating expenses aggregated $2.97 billion in 2016, $2.72 billion in 2015 and $2.66 billion in 2014. The most significant factors contributing to the increase from 2015 to 2016 were costs associated with the operations obtained in the Hudson City acquisition, higher salaries and employee benefits expenses and increased FDIC assessments. The rise in such expenses in 2015 as compared with 2014 was largely attributable to costs associated with the operations obtained in the Hudson City acquisition, higher costs for salaries and employee benefits and increased contributions to The M&T Charitable Foundation, partially offset by lower professional services costs. In 2016, salaries and employee benefits expense aggregated $1.62 billion, compared with $1.55 billion and $1.40 billion in 2015 and 2014, respectively. The higher level of expenses in 2016 reflects the full-year impact of the additional employees formerly associated with Hudson City as well as annual merit increases and incentive compensation costs. There were $51 million of merger-related expenses included in salaries and employee benefits expense in 2015 predominantly related to severance for former Hudson City employees. Excluding that $51 million, the higher expense level in 2015 as compared with 2014 was largely attributable to the impact of annual merit increases, higher pension and incentive compensation costs, and the impact of the additional employees formerly associated with Hudson City. Stock-based compensation totaled $65 million in each of 2016 and 2014 and $67 million in 2015. Reflecting employees associated with the operations obtained from Hudson City, the number of full-time equivalent employees were 16,593 and 16,979 at December 31, 2016 and 2015, respectively, compared with 15,312 at December 31, 2014. The Company provides pension and other postretirement benefits (including a retirement savings plan) for its employees. Expenses related to such benefits totaled $94 million in 2016, $100 million in 2015 and $63 million in 2014. The Company sponsors both defined benefit and defined contribution pension plans. Pension benefit expense for those plans was $52 million in 2016, $63 million in 2015 and $28 million in 2014. Included in those amounts are $25 million in 2016, $23 million in 2015 and $22 million in 2014 for a defined contribution pension plan that the Company began on January 1, 2006. The decrease in pension and other postretirement benefits expense in 2016 as compared to 2015 reflects a $15 million decrease in amortization of actuarial losses accumulated in the defined benefit pension plans. The increase in pension and other postretirement benefits expense in 2015 as compared with 2014 was largely reflective of a $31 million increase in such amortization. No contributions were required or made to the qualified defined benefit pension plan in 2016, 2015, or 2014. The determination of pension expense and the recognition of net pension assets and liabilities for defined benefit pension plans requires management to make various assumptions that can significantly impact the actuarial calculations related thereto. Those assumptions include the expected long-term rate of return on plan assets, the rate of increase in future compensation levels and the discount rate. Changes in any of those assumptions will impact the Company’s pension expense. The expected long-term rate of return assumption is determined by taking into consideration asset allocations, historical returns on the types of assets held and current economic factors. Returns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns. The discount rate used by the Company to determine the present value of the Company’s future benefit obligations reflects specific market yields for a hypothetical portfolio of highly rated corporate bonds that would produce cash flows similar to the Company’s benefit plan obligations and the level of market interest rates in general as of the year- end. Other factors used to estimate the projected benefit obligations include actuarial assumptions for turnover rate, retirement age and disability rate. Those other factors do not tend to change significantly over time. The Company reviews its pension plan assumptions annually to ensure that such assumptions are reasonable and adjusts those assumptions, as necessary, to reflect changes in future expectations. The Company utilizes actuaries and others to aid in that assessment. 85 85 The Company’s 2016 pension expense for its defined benefit plans was determined using the following assumptions: a long-term rate of return on assets of 6.50%; a rate of future compensation increase of 4.37%; and a discount rate of 4.25%. To demonstrate the sensitivity of pension expense to changes in the Company’s pension plan assumptions, 25 basis point increases in: the rate of return on plan assets would have resulted in a decrease in pension expense of $4 million; the rate of increase in compensation would have resulted in an increase in pension expense of $500,000; and the discount rate would have resulted in a decrease in pension expense of $6 million. Decreases of 25 basis points in those assumptions would have resulted in similar changes in amount, but in the opposite direction from the changes presented in the preceding sentence. The accounting guidance for defined benefit pension plans reflects the long-term nature of benefit obligations and the investment horizon of plan assets, and has the effect of reducing expense volatility related to short-term changes in interest rates and market valuations. Actuarial gains and losses include the impact of plan amendments, in addition to various gains and losses resulting from changes in assumptions and investment returns which are different from that which was assumed. As of December 31, 2016, the Company had cumulative unrecognized actuarial losses of approximately $461 million that could result in an increase in the Company’s future pension expense depending on several factors, including whether such losses at each measurement date exceed ten percent of the greater of the projected benefit obligation or the market-related value of plan assets. In accordance with GAAP, net unrecognized gains or losses that exceed that threshold are required to be amortized over the expected service period of active employees, and are included as a component of net pension cost. Amortization of those net unrealized losses had the effect of increasing the Company’s pension expense by approximately $30 million in 2016, $45 million in 2015 and $14 million in 2014. The decrease in the cumulative unrecognized actuarial losses from $494 million at December 31, 2015 reflects the aforementioned amortization of unrealized losses in 2016. GAAP requires an employer to recognize in its balance sheet as an asset or liability the overfunded or underfunded status of a defined benefit postretirement plan, measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. Gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit cost, are to be recognized as a component of other comprehensive income. As of December 31, 2016, the combined benefit obligations of the Company’s defined benefit postretirement plans exceeded the fair value of the assets of such plans by approximately $475 million. Of that amount, $270 million was related to non-qualified pension and other postretirement benefit plans that are generally not funded until benefits are paid. In the Company’s qualified defined benefit pension plan, the projected benefit obligation exceeded the fair value of assets by approximately $205 million as of December 31, 2016 and $218 million as of December 31, 2015. Higher asset balances at December 31, 2016 contributed to that change in funded status. The Company was required to have a net pension and postretirement benefit liability for the pension and other postretirement benefit plans that was equal to $475 million at December 31, 2016. Accordingly, as of December 31, 2016 the Company recorded an additional postretirement benefit adjustment of $450 million. After applicable tax effect, that adjustment reduced accumulated other comprehensive income (and thereby shareholders’ equity) by $273 million. The result of this was a year-over-year decrease of $40 million to the additional minimum postretirement benefit liability from $490 million recorded at December 31, 2015. After applicable tax effect, the $40 million decrease in the additional required liability adjustment increased other comprehensive income in 2016 by $24 million from the prior year-end amount of $297 million. In determining the benefit obligation for defined benefit postretirement plans the Company used a discount rate of 4.00% at December 31, 2016 and 4.25% at December 31, 2015. A 25 basis point decrease in the 86 86 assumed discount rate as of December 31, 2016 to 3.75% would have resulted in increases in the combined benefit obligations of all defined benefit postretirement plans (including pension and other plans) of $76 million (pre-tax impact). A 25 basis point increase in the assumed discount rate to 4.25% would have decreased the combined benefit obligations of all defined benefit postretirement plans by $72 million (pre-tax impact). Information about the Company’s pension plans, including significant assumptions utilized in completing actuarial calculations for the plans, is included in note 12 of Notes to Financial Statements. The Company also provides a retirement savings plan (“RSP”) that is a defined contribution plan in which eligible employees of the Company may defer up to 50% of qualified compensation via contributions to the plan. The Company makes an employer matching contribution in an amount equal to 75% of an employee’s contribution, up to 4.5% of the employee’s qualified compensation. RSP expense totaled $37 million in 2016, $34 million in 2015 and $32 million in 2014. Expenses associated with the defined benefit and defined contribution pension plans and the RSP aggregated $89 million in 2016, $97 million in 2015 and $60 million in 2014. Expenses associated with providing medical and other postretirement benefits were $5 million in 2016, $3 million in 2015 and $2 million 2014. Excluding the nonoperating expense items already noted, nonpersonnel operating expenses were $1.35 billion in 2016, compared with $1.22 billion in 2015 and $1.25 billion in 2014. The increase in nonpersonnel operating expenses in 2016 as compared with 2015 was largely due to costs associated with the operations obtained in the Hudson City acquisition and higher expenses for FDIC assessments, advertising and marketing, partially offset by lower charitable contributions. The decrease in nonpersonnel operating expenses in 2015 from 2014 was predominantly attributable to lower expenses for professional services and litigation-related costs, offset, in part, by higher charitable contributions of $28 million. Professional services costs related to BSA/AML activities, compliance, capital planning and stress testing, risk management and other operational initiatives were elevated throughout 2014. Litigation-related charges in 2014 were associated with pre- acquisition activities of M&T’s Wilmington Trust entities. Income Taxes The provision for income taxes was $743 million in 2016, $595 million in 2015 and $576 million in 2014. The effective tax rates were 36.1% in 2016, 35.5% in 2015 and 35.1% in 2014. The increase in the effective rate in 2016 from 2015 reflects the impact of generally recurring tax credits and other tax-exempt income being a smaller percentage of 2016’s higher income before income taxes. Income tax expense in 2015 reflected two largely offsetting items. The Company attributed $11 million of non-deductible goodwill to the basis of the trade processing business sold in April 2015, which reduced the recorded gain, but did not result in an income tax benefit. During the fourth quarter of 2015, the provision for income taxes was reduced by $5 million to reflect technology research credits related to 2011 through 2014 that were accepted by the Internal Revenue Service in December 2015. During the second quarter of 2014, the Company resolved with tax authorities previously uncertain tax positions associated with pre-acquisition activities of M&T’s Wilmington Trust entities, resulting in a reduction of the provision for income taxes of $8 million. Excluding that reduction of income tax expense, the effective tax rate for 2014 would have been 35.6%. The effective tax rate is affected by the level of income earned that is exempt from tax relative to the overall level of pre-tax income, the level of income allocated to the various state and local jurisdictions where the Company operates, because tax rates differ among such jurisdictions, and the impact of any large but infrequently occurring items. 87 87 The Company’s effective tax rate in future periods will be affected by the results of operations allocated to the various tax jurisdictions within which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company’s interpretations by any of various tax authorities that may examine tax returns filed by M&T or any of its subsidiaries. Information about amounts accrued for uncertain tax positions and a reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to pre-tax income is provided in note 13 of Notes to Financial Statements. International Activities Assets and revenues associated with international activities represent less than 1% of the Company’s consolidated assets and revenues. International assets included $292 million and $265 million of loans to foreign borrowers at December 31, 2016 and 2015, respectively. Deposits in the Company’s office in the Cayman Islands aggregated $202 million at December 31, 2016 and $170 million at December 31, 2015. The Company uses such deposits to facilitate customer demand and as an alternative to short-term borrowings when the costs of such deposits seem reasonable. Loans and deposits at M&T Bank’s commercial banking office in Ontario, Canada as of December 31, 2016 totaled $133 million and $50 million, respectively, compared with $95 million and $35 million, respectively, at December 31, 2015. The Company also offers trust-related services in Europe. Revenues from providing such services during 2016, 2015 and 2014 were approximately $25 million, $26 million and $31 million, respectively. Liquidity, Market Risk, and Interest Rate Sensitivity 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. The most significant source of funding for the Company is core deposits, which are generated from a large base of consumer, corporate and institutional customers. That customer base has, over the past several years, become more geographically diverse as a result of acquisitions and expansion of the Company’s businesses. Nevertheless, the Company faces competition in offering products and services from a large array of financial market participants, including banks, thrifts, mutual funds, securities dealers and others. Core deposits financed 83% of the Company’s earning assets at each of December 31, 2016 and 2014, compared with 81% at December 31, 2015. The Company supplements funding provided through core deposits with various short-term and long-term wholesale borrowings, including federal funds purchased and securities sold under agreements to repurchase, brokered deposits, Cayman Islands office deposits and longer-term borrowings. At December 31, 2016, M&T Bank had short-term and long-term credit facilities with the FHLBs aggregating $22.5 billion. Outstanding borrowings under FHLB credit facilities totaled $1.2 billion and $3.1 billion at December 31, 2016 and 2015, respectively. Such borrowings were secured by loans and investment securities. As a result of the Hudson City acquisition, the Company assumed $2.0 billion of short-term borrowings from the FHLB of New York. Such borrowings had fixed rates of interest and matured on various dates in 2016. M&T Bank had an available line of credit with the Federal Reserve Bank of New York that totaled approximately $11.2 billion at December 31, 2016. The amount of that line is dependent upon the balances of loans and securities pledged as collateral. There were no borrowings outstanding under such line of credit at December 31, 2016 or December 31, 2015. M&T Bank has a Bank Note Program whereby M&T 88 88 Bank may offer unsecured senior and subordinated notes. Only unsecured senior notes have been issued under that program. Those outstanding notes totaled $5.2 billion at December 31, 2016 and $5.5 billion at December 31, 2015. The proceeds of the issuances of borrowings under the Bank Note Program have been predominantly utilized to purchase high-quality liquid assets that meet the requirements of the LCR. From time to time, the Company has issued subordinated capital notes and junior subordinated debentures associated with trust preferred securities to provide liquidity and enhance regulatory capital ratios. However, pursuant to the Dodd-Frank Act, the Company’s junior subordinated debentures associated with trust preferred securities have been phased-out of the definition of Tier 1 capital. Effective January 1, 2015, 75% of such securities were excluded from the Company’s Tier 1 capital, and beginning January 1, 2016 all were excluded. The amounts excluded from Tier 1 capital are still includable in total capital. In accordance with its 2015 capital plan, in April 2015 M&T redeemed the junior subordinated debentures associated with the $310 million of trust preferred securities of M&T Capital Trusts I, II and III. Information about the Company’s borrowings is included in note 9 of Notes to Financial Statements. 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 totaled $112 million and $99 million at December 31, 2016 and 2015, respectively. In general, those borrowings were unsecured and matured on the next business day. In addition to satisfying customer demand, Cayman Islands office deposits may be used by the Company as an alternative to short-term borrowings. Cayman Islands office deposits totaled $202 million and $170 million at December 31, 2016 and 2015, respectively. The Company has also benefited from the placement of brokered deposits. The Company has brokered savings and interest-bearing checking deposit accounts which aggregated $1.2 billion at each of December 31, 2016 and 2015. Brokered time deposits were not a significant source of funding as of those dates. 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 estimated by attempting to measure the effect on available unsecured lines of credit, available capacity from secured borrowing sources and securitizable assets. Information about the credit ratings of M&T and M&T Bank is presented in table 16. Additional information regarding the terms and maturities of all of the Company’s short-term and long-term borrowings is provided in note 9 of Notes to Financial Statements. 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. 89 89 Table 16 DEBT RATINGS Moody’s Standard and Poor’s Fitch M&T Bank Corporation Senior debt ................................................................................. Subordinated debt ...................................................................... A3 A– A3 BBB+ M&T Bank Short-term deposits.................................................................... Prime-1 Aa2 Long-term deposits .................................................................... A2 Senior debt ................................................................................. A3 Subordinated debt ...................................................................... A-1 A A A– A A– F1 A+ A A– Certain customers of the Company obtain financing through the issuance of variable rate demand bonds (“VRDBs”). The VRDBs are generally enhanced by 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 account 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 $30 million at December 31, 2016 (all of which were remarketed in January 2017) and less than $1 million at December 31, 2015. The total amount of VRDBs outstanding backed by M&T Bank letters of credit was $1.3 billion and $1.7 billion at December 31, 2016 and 2015, respectively. M&T Bank also serves as remarketing agent for most of those bonds. Table 17 MATURITY DISTRIBUTION OF SELECTED LOANS(a) December 31, 2016 Demand 2017 2018 - 2021 After 2021 (In thousands) Commercial, financial, etc. .................................... $6,971,475 $3,616,703 $ 9,427,225 $ 1,092,732 41,223 3,324,793 4,225,443 439,580 Real estate — construction..................................... Total .................................................................. $7,012,698 $6,941,496 $13,652,668 $ 1,532,312 Floating or adjustable interest rates ........................ Fixed or predetermined interest rates ..................... Total .................................................................. (a) The data do not include nonaccrual loans. $12,015,298 $ 1,004,290 1,637,370 528,022 $13,652,668 $ 1,532,312 The Company enters into contractual obligations in the normal course of business that require future cash payments. The contractual amounts and timing of those payments as of December 31, 2016 are summarized in table 18. 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 90 90 in note 21 of Notes to Financial Statements. Table 18 summarizes the Company’s other commitments as of December 31, 2016 and the timing of the expiration of such commitments. Table 18 CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS December 31, 2016 Payments due for contractual obligations Less Than One Year One to Three Years Three to Five Years (In thousands) Over Five Years Total 201,927 6,789 $ 10,131,846 Time deposits ...................... $ 6,682,736 $2,226,615 $1,215,706 $ Deposits at Cayman Islands office .................... Federal funds purchased and agreements to repurchase securities......... 163,442 Long-term borrowings ......... 3,442,484 3,013,860 1,770,083 1,267,408 9,493,835 466,658 Operating leases .................. Other .................................... 206,609 Total .................................... $ 10,681,740 $5,467,138 $3,105,985 $1,409,454 $ 20,664,317 169,262 57,401 102,724 17,472 94,825 40,432 99,847 91,304 163,442 201,927 — — — — — — Other commitments 992,324 Commitments to extend credit ................................. $ 9,431,954 $6,831,786 $4,506,591 $4,261,231 $ 25,031,562 Standby letters of credit ....... 1,618,032 32,049 2,987,091 Commercial letters of credit ................................. Financial guarantees and indemnification contracts ........................... Commitments to sell real estate loans ....................... 1,444,354 — 1,489,237 Total .................................... $ 12,604,740 $8,195,717 $5,316,538 $6,479,198 $ 32,596,193 436,302 2,185,918 3,043,580 325,899 344,686 44,883 14,939 28,959 95,461 44,723 825 — — 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 that test, at December 31, 2016 approximately $627 million was available for payment of dividends to M&T from banking subsidiaries. Information regarding the long-term debt obligations of M&T is included in note 9 of Notes to Financial Statements. 91 91 Table 19 MATURITY AND TAXABLE-EQUIVALENT YIELD OF INVESTMENT SECURITIES December 31, 2016 Investment securities available for sale(a) U.S. Treasury and federal agencies One Year or Less One to Five Years Five to Ten Years Over Ten Years Total (Dollars in thousands) Carrying value .................................................. $155,828 $1,746,716 $ 1.04% Yield ................................................................. 1.16% — $ — — $ 1,902,544 1.05% — Obligations of states and political subdivisions Carrying value .................................................. Yield ................................................................. 584 6.31% 1,557 7.62% — — 1,500 6.28 % 3,641 6.85% Mortgage-backed securities(b) Government issued or guaranteed Carrying value ............................................. Yield ........................................................... Privately issued 598,628 2,533,948 3,564,284 2.31% 2.32% 2.32% 4,258,001 10,954,861 2.29% 2.25 % Carrying value ............................................. Yield ........................................................... 33 3.95% 11 4.43% — — — — 44 4.07% Other debt securities Carrying value .................................................. Yield ................................................................. 1,922 3.63% 2,269 4.56% 3,132 6.47% 111,193 2.45 % 118,516 2.58% Equity securities Carrying value .................................................. Yield ................................................................. — — — — — — — — 352,466 .91% Total investment securities available for sale Carrying value .................................................. Yield ................................................................. Investment securities held to maturity Obligations of states and political subdivisions 756,995 4,284,501 3,567,416 2.08% 1.80% 2.32% 4,370,694 13,332,072 2.08% 2.26 % Carrying value .................................................. Yield ................................................................. 24,533 34,073 4.66% 5.54% 2,252 6.56% — — 60,858 5.23% Mortgage-backed securities(b) Government issued or guaranteed Carrying value ............................................. Yield ........................................................... Privately issued 127,293 360,496 479,018 2.68% 2.68% 2.68% 1,266,366 2,233,173 2.66% 2.65 % Carrying value ............................................. Yield ........................................................... 5,878 4.77% 24,194 32,152 4.77% 4.76% 95,480 4.67 % 157,704 4.71% Other debt securities Carrying value .................................................. Yield ................................................................. — — — — — — 5,543 4.50 % 5,543 4.50% Total investment securities held to maturity Carrying value .................................................. Yield ................................................................. Other investment securities .................................... Total investment securities 157,704 418,763 513,422 3.07% — 3.03% — 1,367,389 2,457,278 2.86% 461,118 2.80 % — 2.82% — Carrying value .................................................. $914,699 $4,703,264 $4,080,838 $ 5,738,083 $ 16,250,468 2.14% 2.25% Yield ................................................................. 2.38% 2.39 % 1.91% (a) Investment securities available for sale are presented at estimated fair value. Yields on such securities are based on amortized cost. (b) Maturities are reflected based upon contractual payments due. Actual maturities are expected to be significantly shorter as a result of loan repayments in the underlying mortgage pools. 92 92 Table 20 MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT AND TIME DEPOSITS WITH BALANCES OF $100,000 OR MORE    December 31, 2016 (In thousands) Under 3 months ................................................................................................................. $ 968,051 3 to 6 months ..................................................................................................................... 668,465 6 to 12 months ................................................................................................................... 907,618 Over 12 months ................................................................................................................. 1,468,420 Total ............................................................................................................................. $ 4,012,554 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. Banking regulators have enacted the LCR rules requiring a banking company to maintain a minimum amount of liquid assets to withstand a standardized supervisory liquidity stress scenario. The effective date for those rules for the Company was January 1, 2016, subject to a phase- in period. The Company has taken steps as noted herein to enhance its liquidity and is in compliance with the phase-in requirements of the rules. 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 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 has entered into interest rate swap agreements to help manage exposure to interest rate risk. At December 31, 2016, the aggregate notional amount of interest rate swap agreements entered into for interest rate risk management purposes was $900 million. Information about interest rate swap agreements entered into for interest rate risk management purposes is included herein under the heading “Net Interest Income/Lending and Funding Activities” and in note 18 of Notes to Financial Statements. The Company’s Asset-Liability 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 93 93   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, projections of net interest income calculated under the varying interest rate scenarios are compared to a base interest rate scenario that is reflective of current interest rates. 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. Table 21 displays as of December 31, 2016 and 2015 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. Table 21 SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES Changes in interest rates Calculated Increase (Decrease) in Projected Net Interest Income December 31 2016 2015 (In thousands) +200 basis points ........................................................................................... $ 227,283 $ 243,958 +100 basis points ........................................................................................... 147,400 145,169 (99,603) -50 basis points .............................................................................................. (98,945 ) 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 increases in interest rates during a twelve- month period of 100 and 200 basis points, as compared with the assumed base scenario, as well as a gradual decrease of 50 basis points. In the declining rate scenario, the rate changes may be limited to lesser amounts such that interest rates remain positive on all points of the yield curve. In 2016, the Company suspended the -100 basis point scenario due to the persistent low level of interest rates. This scenario will be reinstated if and when interest rates rise sufficiently to make the analysis more meaningful. 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. Table 22 presents cumulative totals of net assets (liabilities) repricing on a contractual basis within the specified time frames, as adjusted for the impact of interest rate swap agreements entered 94 94 into for interest rate risk management purposes. Management believes that this measure does not appropriately depict interest rate risk since changes in interest rates do not necessarily affect all categories of earning assets and interest-bearing liabilities equally nor, as assumed in the table, on the contractual maturity or repricing date. Furthermore, this static presentation of interest rate risk fails to consider the effect of ongoing lending and deposit gathering activities, projected changes in balance sheet composition or any subsequent interest rate risk management activities the Company is likely to implement. Table 22 CONTRACTUAL REPRICING DATA December 31, 2016 Three Months or Less Four to Twelve Months One to Five Years (Dollars in thousands) After Five Years Total Loans and leases, net .............. $ 52,329,463 $ 5,830,801 $17,166,648 $15,526,504 $ 90,853,416 Investment securities .............. 9,649,847 16,250,468 855,044 Other earning assets ............... 5,087,011 5,087,787 Total earning assets .......... 58,271,518 25,176,351 112,191,671 4,811,227 — 21,977,875 934,350 776 6,765,927 — Savings and interest-checking deposits................................ 52,346,207 Time deposits ......................... 2,448,960 Deposits at Cayman Islands office ................................... 201,927 Total interest-bearing deposits ........................... 54,997,094 163,442 Short-term borrowings ........... Long-term borrowings ........... 3,082,764 Total interest-bearing liabilities ......................... 58,243,300 — 4,233,776 — 3,442,321 — 52,346,207 6,789 10,131,846 — — — 201,927 4,233,776 — 1,739,902 3,442,321 — 3,871,731 6,789 62,679,980 163,442 9,493,835 — 799,438 5,973,678 7,314,052 806,227 72,337,257 Interest rate swap agreements .......................... Periodic gap............................ $ Cumulative gap ...................... Cumulative gap as a % of total earning assets .............. 400,000 (900,000) — (871,782) $ 1,192,249 $15,163,823 $24,370,124 39,854,414 (871,782) 15,484,290 320,467 500,000 — (0.8)% 0.3% 13.8% 35.5 % 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 some of the Company’s investment securities. Information about the fair valuation of investment securities is presented herein under the heading “Capital” and in notes 3 and 20 of Notes to Financial Statements. The Company engages in limited trading account activities to meet the financial needs of customers and to fund the Company’s obligations under certain deferred compensation plans. Financial instruments utilized in trading account activities consist predominantly of interest rate contracts, such as swap agreements, and forward and futures contracts related to foreign currencies. The Company generally mitigates the foreign currency and interest rate risk associated with trading account activities by entering into offsetting trading positions that are also included in the trading account. The fair values of the offsetting trading account positions associated with interest rate 95 95 contracts and foreign currency and other option and futures contracts are presented in note 18 of Notes to Financial Statements. The amounts of gross and net trading account positions, as well as the type of trading account 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 account activities. The notional amounts of interest rate contracts entered into for trading account purposes totaled $21.6 billion at December 31, 2016 and $18.4 billion at December 31, 2015. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes were $471 million and $1.6 billion at December 31, 2016 and 2015, respectively. Although the notional amounts of these contracts are not recorded in the consolidated balance sheet, the fair values of all financial instruments used for trading account activities are recorded in the consolidated balance sheet. The fair values of all trading account assets and liabilities were $324 million and $174 million, respectively, at December 31, 2016 and $274 million and $161 million, respectively, at December 31, 2015. Included in trading account assets at December 31, 2016 and 2015 were $22 million and $24 million, respectively, of assets related to deferred compensation plans. 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 December 31, 2016 and 2015 were $26 million and $28 million, respectively, of liabilities related to deferred compensation plans. Changes in the balances of such liabilities due to the valuation of allocated investment options to which the liabilities are indexed are recorded in “other costs of operations” in the consolidated statement of income. Also included in trading account assets were investments in mutual funds and other assets that the Company was required to hold under terms of certain non-qualified supplemental retirement and other benefit plans that were assumed by the Company in various acquisitions. Those assets totaled $24 million and $33 million at December 31, 2016 and 2015, respectively. 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 account activities was not material, however, as previously noted, the Company is exposed to credit risk associated with counterparties to transactions related to the Company’s trading account activities. Additional information about the Company’s use of derivative financial instruments in its trading account activities is included in note 18 of Notes to Financial Statements. Capital Shareholders’ equity was $16.5 billion at December 31, 2016 and represented 13.35% of total assets, compared with $16.2 billion or 13.17% at December 31, 2015 and $12.3 billion or 12.76% at December 31, 2014. Included in shareholders’ equity was preferred stock with financial statement carrying values of $1.2 billion at December 31, 2016 and 2015. On October 28, 2016, M&T issued 50,000 shares of Series F Perpetual Fixed-to-Floating Rate Non-cumulative Preferred Stock, par value $1.00 per share and liquidation preference of $10,000 per share. Through October 31, 2026 holders of the Series F preferred stock are entitled to receive, only when, as and if declared by M&T’s Board of Directors, non-cumulative cash dividends at an annual rate of 5.125%, payable semi-annually in arrears. Subsequent to November 1, 2026 holders will be entitled to receive quarterly cash dividends at an annual rate of three-month London Interbank Offered Rate (“LIBOR”) plus 352 basis points. The Series F preferred stock may be redeemed at M&T’s option, in whole or in part, on any dividend payment date on or after November 1, 2026 or, in whole but not in part, at any time within 90 days following a regulatory capital treatment event whereby the full liquidation value of the shares no longer qualifies as Tier 1 capital. On December 15, 2016, M&T redeemed 50,000 shares of the 96 96 Series D Fixed Rate Non-cumulative Perpetual Preferred Stock, par value $1.00 per share and liquidation preference of $10,000 per share, having received the approval of the Federal Reserve to redeem such shares after issuing the Series F preferred stock. On February 11, 2014, M&T issued 350,000 shares of Series E Perpetual Fixed-to-Floating Rate Non-cumulative Preferred Stock, par value $1.00 per share and liquidation preference of $1,000 per share. Dividends, if and when declared, are paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month LIBOR plus 361 basis points. The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence. Further information concerning M&T’s preferred stock can be found in note 10 of Notes to Financial Statements. Common shareholders’ equity was $15.3 billion, or $97.64 per share, at December 31, 2016, compared with $14.9 billion, or $93.60 per share, at December 31, 2015 and $11.1 billion, or $83.88 per share, at December 31, 2014. In conjunction with the acquisition of Hudson City, M&T issued 25,953,950 common shares, which added $3.1 billion to common shareholders’ equity on November 1, 2015. Tangible equity per common share, which excludes goodwill and core deposit and other intangible assets and applicable deferred tax balances, was $67.85 at December 31, 2016, compared with $64.28 and $57.06 at December 31, 2015 and 2014, respectively. The Company’s ratio of tangible common equity to tangible assets was 8.92% at December 31, 2016, compared with 8.69% and 8.11% at December 31, 2015 and 2014, respectively. Reconciliations of total common shareholders’ equity and tangible common equity and total assets and tangible assets as of December 31, 2016, 2015 and 2014 are presented in table 2. During 2016, 2015 and 2014, the ratio of average total shareholders’ equity to average total assets was 13.21%, 13.00% and 13.13%, respectively. The ratio of average common shareholders’ equity to average total assets was 12.16%, 11.79% and 11.83% in 2016, 2015 and 2014, respectively. Shareholders’ equity reflects accumulated other comprehensive income or loss, which includes the net after-tax impact of unrealized gains or losses on investment securities classified as available for sale, unrealized losses on held-to-maturity securities for which an other-than-temporary impairment charge has been recognized, gains or losses associated with interest rate swap agreements designated as cash flow hedges, foreign currency translation adjustments and adjustments to reflect the funded status of defined benefit pension and other postretirement plans. Net unrealized losses on investment securities reflected in shareholders’ equity, net of applicable tax effect, were $16 million, or $.10 per common share, at December 31, 2016, compared with net unrealized gains of $48 million, or $.30 per common share, at December 31, 2015 and $127 million, or $.96 per common share, at December 31, 2014. Changes in unrealized gains and losses on investment securities are predominantly reflective of the impact of changes in interest rates on the values of such securities. Information about unrealized gains and losses as of December 31, 2016 and 2015 is included in note 3 of Notes to Financial Statements. Reflected in net unrealized losses at December 31, 2016 were pre-tax effect unrealized gains of $135 million on available-for-sale investment securities with an amortized cost of $4.5 billion and pre-tax effect unrealized losses of $141 million on securities with an amortized cost of $8.8 billion. The pre-tax effect unrealized losses reflect $17 million of losses on trust preferred securities issued by financial institutions having an amortized cost of $102 million and an estimated fair value of $85 million (generally considered Level 2 valuations). Further information concerning the Company’s valuations of available-for-sale investment securities is provided in note 20 of Notes to Financial Statements. As of December 31, 2016, based on a review of each of the securities in the investment securities portfolio, the Company concluded that the declines in the values of any securities containing an unrealized loss were temporary and that any additional other-than-temporary 97 97 impairment charges were not appropriate. During 2016, the Company sold all of its collateralized debt obligations held in the available-for-sale investment securities portfolio for a pre-tax gain of $30 million. Those securities had been obtained through the acquisition of other banks. Divestiture of the majority of the securities would have been required prior to July 21, 2017 in accordance with the Volcker Rule. As of December 31, 2016, the Company did not intend to sell nor is it anticipated that it would be required to sell any of its impaired securities, that is, where fair value is less than the cost basis of the security. The Company intends to continue to closely monitor the performance of its securities because changes in their underlying credit performance or other events could cause the cost basis of those securities to become other-than-temporarily impaired. However, because the unrealized losses on available-for-sale investment securities have generally already been reflected in the financial statement values for investment securities and shareholders’ equity, any recognition of an other-than-temporary decline in value of those investment securities would not have a material effect on the Company’s consolidated financial condition. Any other-than-temporary impairment charge related to held-to-maturity securities would result in reductions in the financial statement values for investment securities and shareholders’ equity. Additional information concerning fair value measurements and the Company’s approach to the classification of such measurements is included in note 20 of the Notes to Financial Statements. For additional information concerning the Volcker Rule, refer to Part I, Item 1 of this Form 10-K under the heading “Volcker Rule.” The Company assessed impairment losses on privately issued mortgage-backed securities in the held-to-maturity portfolio by performing internal modeling to estimate bond-specific cash flows considering recent performance of the mortgage loan collateral and utilizing assumptions about future defaults and loss severity. These bond-specific cash flows also reflect the placement of the bond in the overall securitization structure and the remaining subordination levels. In total, at December 31, 2016 and 2015, the Company had in its held-to-maturity portfolio privately issued mortgage-backed securities with an amortized cost basis of $158 million and $181 million, respectively, and a fair value of $121 million and $142 million, respectively. At December 31, 2016, 85% of the mortgage-backed securities were in the most senior tranche of the securitization structure with 25% being independently rated as investment grade. The mortgage-backed securities are generally collateralized by residential and small-balance commercial real estate loans originated between 2004 and 2008 and had a weighted-average credit enhancement of 16% at December 31, 2016, calculated by dividing the remaining unpaid principal balance of bonds subordinate to the bonds owned by the Company plus any overcollateralization remaining in the securitization structure by the remaining unpaid principal balance of all bonds in the securitization structure. All mortgage- backed securities in the held-to-maturity portfolio had a current payment status as of December 31, 2016. The weighted-average default percentage and loss severity assumptions utilized in the Company’s internal modeling were 30% and 79%, respectively. The Company has concluded that as of December 31, 2016, those privately issued mortgage-backed securities were not other-than- temporarily impaired. Nevertheless, it is possible that adverse changes in the future performance of mortgage loan collateral underlying such securities could impact the Company’s conclusions. Adjustments to reflect the funded status of defined benefit pension and other postretirement plans, net of applicable tax effect, reduced accumulated other comprehensive income by $273 million, or $1.75 per common share, at December 31, 2016, $297 million, or $1.86 per common share, at December 31, 2015 and $306 million, or $2.31 per common share, at December 31, 2014. Information about the funded status of the Company’s pension and other postretirement benefit plans is included in note 12 of Notes to Financial Statements. On June 29, 2016, M&T announced that the Federal Reserve did not object to M&T’s revised 2016 Capital Plan. That plan includes the repurchase of up to $1.15 billion of common shares during the four-quarter period starting on July 1, 2016 and an increase in the quarterly common stock dividend in the first quarter of 2017 of up to $.05 per share to $.75 per share. M&T may also 98 98 continue to pay dividends and interest on other equity and debt instruments included in regulatory capital, including preferred stock, trust preferred securities and subordinated debt that were outstanding at December 31, 2015, consistent with the contractual terms of those instruments. Dividends are subject to declaration by M&T’s Board of Directors. Furthermore, on July 19, 2016, M&T’s Board of Directors authorized a new stock repurchase program to repurchase up to $1.15 billion of shares of M&T’s common stock subject to all applicable regulatory limitations, including those set forth in M&T’s 2016 Capital Plan. During 2016, in accordance with the 2016 and 2015 Capital Plans, M&T repurchased 5,607,595 common shares for $641 million. The remaining amount of authorized common share repurchases pursuant to the 2016 Capital Plan at December 31, 2016 totaled $763 million, of which $538 million should be repurchased in the first quarter of 2017 and $225 million in the second quarter. The Company did not repurchase any shares of its common stock in 2015 or 2014. Cash dividends declared on M&T’s common stock totaled $442 million in 2016, compared with $375 million and $371 million in 2015 and 2014, respectively. Dividends per common share totaled $2.80 in each of 2016, 2015 and 2014. Dividends of $81 million in each of 2016 and 2015 and $76 million in 2014 were declared on preferred stock in accordance with the terms of each series. No dividends were declared in 2016 on the Series F preferred stock issued in October 2016. M&T and its subsidiary banks are required to comply with applicable capital adequacy standards established by the federal banking agencies. Pursuant to those regulations, the minimum capital ratios are as follows:     4.5% Common Equity Tier 1 (“CET1”) to risk-weighted assets (each as defined in the capital regulations); 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets (each as defined in the capital regulations); 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets (each as defined in the capital regulations); and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”), as defined in the capital regulations. In addition, capital regulations provide for the phase-in of a “capital conservation buffer” composed entirely of CET1 on top of these minimum risk-weighted asset ratios. When fully phased- in on January 1, 2019 the capital conservation buffer will be 2.5%. For 2016, the phase-in transition portion of that buffer was .625%. The regulatory capital amounts and ratios of M&T and its bank subsidiaries as of December 31, 2016 are presented in note 23 of Notes to Financial Statements. A detailed discussion of the regulatory capital rules is included in Part I, Item 1 of this Form 10-K under the heading “Capital Requirements.” The Company is also subject to the comprehensive regulatory framework applicable to bank and financial holding companies and their subsidiaries, which includes regular examinations by a number of federal regulators. Regulation of financial institutions such as M&T and its subsidiaries is intended primarily for the protection of depositors, the Deposit Insurance Fund of the FDIC and the banking and financial system as a whole, and generally is not intended for the protection of shareholders, investors or creditors other than insured depositors. Changes in laws, regulations and regulatory policies applicable to the Company’s operations can increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive environment in which the Company operates, all of which could have a material effect on the business, financial condition or results of operations of the Company and in M&T’s ability to pay dividends. For additional information concerning this comprehensive regulatory framework, refer to Part I, Item 1 of this Form 10-K. 99 99 On June 17, 2013, M&T and M&T Bank entered into a written agreement with the Federal Reserve Bank of New York. Under the terms of the agreement, M&T and M&T Bank were required to submit to the Federal Reserve Bank of New York a revised compliance risk management program designed to ensure compliance with the Bank Secrecy Act and anti-money-laundering laws and regulations (“BSA/AML”) and to take certain other steps to enhance their compliance practices. M&T and M&T Bank have since made substantial progress in implementing a BSA/AML program with significantly expanded scale and scope, as recognized by the Board of Governors of the Federal Reserve System in its Order approving M&T and M&T Bank’s applications to acquire Hudson City and Hudson City Savings Bank. M&T and M&T Bank are continuing to work towards the resolution of all outstanding issues in the written agreement. Fourth Quarter Results Net income during the fourth quarter of 2016 was $331 million, up 22% from $271 million in the year-earlier quarter. The final 2015 quarter reflected the impact of merger-related expenses associated with the acquisition of Hudson City. There were no merger-related expenses in the fourth quarter of 2016. Diluted and basic earnings per common share were each $1.98 in the final quarter of 2016, compared with diluted and basic earnings per common share of $1.65 in the year-earlier quarter. The annualized rates of return on average assets and average common shareholders’ equity for the fourth quarter of 2016 were 1.05% and 8.13%, respectively, compared with .93% and 7.22%, respectively, in the similar quarter of 2015. Net operating income totaled $336 million in the fourth quarter of 2016, compared with $338 million in the year-earlier quarter. Diluted net operating earnings per common share were $2.01 and $2.09 in the fourth quarters of 2016 and 2015, respectively. The annualized net operating returns on average tangible assets and average tangible common equity in the final quarter of 2016 were 1.10% and 11.93%, respectively, compared with 1.21% and 13.26%, respectively, in the corresponding 2015 quarter. Reconciliations of GAAP results with non-GAAP results for the quarterly periods of 2016 and 2015 are provided in table 24. Net interest income on a taxable-equivalent basis aggregated $883 million in the last quarter of 2016, 9% above $813 million recorded in the year-earlier period. That improvement was attributable to a 10% increase in average earning assets, which grew to $114.3 billion in the recent quarter from $103.6 billion in the fourth quarter of 2015. The growth in earning assets was largely the result of higher average loans, which rose to $90.0 billion in the fourth quarter of 2016, up $8.9 billion, or 11%, from $81.1 billion in the year-earlier quarter. Partially offsetting the favorable impact of the asset growth was a four basis point narrowing of the net interest margin to 3.08% in the recent quarter from 3.12% in 2015’s fourth quarter. Average commercial loan and lease balances were $21.9 billion in the recent quarter, up $1.7 billion or 8% from $20.2 billion in the fourth quarter of 2015. Commercial real estate loans averaged $32.8 billion in the fourth quarter of 2016, up $3.8 billion or 13% from $29.0 billion in the year-earlier quarter. The growth in commercial loans and commercial real estate loans reflects higher loan demand by customers. Included in the commercial real estate loan portfolio were average balances of loans held for sale of $524 million in the final 2016 quarter, compared with $145 million in the year-earlier period. Average residential real estate loans outstanding increased $2.7 billion to $23.1 billion in the recent quarter from $20.4 billion in the fourth quarter of 2015, reflecting the full-quarter impact of loans acquired in the Hudson City acquisition, net of loan repayments during 2016. Included in the residential real estate loan portfolio were average balances of loans held for sale of $410 million in the recent quarter, compared with $368 million in the fourth quarter of 2015. Consumer loans averaged $12.1 billion in the recent quarter, up $576 million, or 5%, from $11.5 billion in the final 2015 quarter. That increase was primarily due to higher average balances of automobile and recreational vehicle loans. Total loans and leases at December 31, 2016 rose $1.2 billion to $90.9 100 100 billion from $89.6 billion at September 30, 2016. That growth was predominantly attributable to an increase in outstanding commercial real estate loans. The net interest spread narrowed in the fourth quarter of 2016 to 2.88%, down six basis points from 2.94% in the last quarter of 2015. The yield on earning assets in the final 2016 quarter was 3.45%, down three basis points from the year-earlier quarter. That decline reflects the impact of higher average balances of relatively low-yielding interest- bearing deposits held at the Federal Reserve Bank of New York and lower yields on investment securities. The rate paid on interest-bearing liabilities in the fourth quarter of 2016 was .57%, up three basis points from .54% in the similar 2015 quarter. That increase was largely due to higher rates paid on interest-bearing deposits, in part associated with time deposits obtained in the Hudson City acquisition. The contribution of net interest-free funds to the Company’s net interest margin was .20% in the recent quarter, compared with .18% in the fourth 2015 quarter. As a result, the Company’s net interest margin narrowed to 3.08% in the final quarter of 2016 from 3.12% in the corresponding period of 2015. The provision for credit losses in the final quarter of 2016 was $62 million, compared with $58 million in the year-earlier period. A $21 million provision for credit losses was recorded in the fourth quarter of 2015, in accordance with GAAP, related to loans obtained in the acquisition of Hudson City that had a fair value in excess of outstanding principal. GAAP provides that an allowance for credit losses on such loans be recorded beyond the recognition of the fair value of the loans at the acquisition date. Net loan charge-offs were $49 million in the recent quarter, representing an annualized .22% of average loans and leases outstanding, compared with $36 million or .18% during the fourth quarter of 2015. Net charge-offs included: residential real estate loans of $5 million in the final 2016 quarter, compared with $2 million in 2015’s fourth quarter; net charge-offs of commercial real estate loans of $1 million in the recent quarter, compared with net recoveries of $2 million in the year-earlier quarter; net charge-offs of commercial loans of $17 million in the fourth quarter of 2016, compared with net recoveries of $3 million in year-earlier quarter; and net charge-offs of consumer loans of $26 million in the recently completed quarter, compared with $39 million 2015’s fourth quarter. Net charge-offs of commercial loans and leases in the fourth quarter of 2016 included a $12 million charge-off associated with a multi-regional manufacturer of refractory brick and other castable products. Reflected in net recoveries of previously charged-off commercial loans in the fourth quarter of 2015 were $10 million of recoveries from a motor vehicle-related parts wholesaler. Net charge-offs of consumer loans in the fourth quarter of 2015 included a $20 million charge-off associated with a personal usage loan obtained in a previous acquisition. Other income aggregated $465 million in the three-month period ended December 31, 2016, up from $448 million in the similar period of 2015. That improvement resulted predominantly from higher mortgage banking revenues and trust income. The $11 million rise in mortgage banking revenues includes higher commercial mortgage banking revenues of $9 million resulting from increased loan origination and sales activities. The $7 million increase in trust income was primarily the result of higher revenues in the ICS business reflecting increased fees earned from money-market funds and stronger sales activities. During the fourth quarter of 2016, other expense aggregated $769 million, compared with $786 million in the similar 2015 quarter. Included in such amounts are expenses considered to be “nonoperating” in nature consisting of amortization of core deposit and other intangible assets of $9 million and $10 million during the quarters ended December 31, 2016 and 2015, respectively, and merger-related expenses of $76 million in the fourth quarter of 2015. Exclusive of those nonoperating expenses, noninterest operating expenses were $760 million in the fourth quarter of 2016, compared with $701 million in the year-earlier quarter. The increased operating expenses in the recently completed quarter reflect the $30 million contribution to The M&T Charitable Foundation and higher expenses for salaries and employee benefits and FDIC assessments. The recent quarter increase in salaries and employee benefits resulted largely from higher incentive 101 101 compensation costs as compared with 2015’s fourth quarter. The Company’s efficiency ratio during the fourth quarters of 2016 and 2015 was 56.4% and 55.5%, respectively. Table 24 includes a reconciliation of other expense to noninterest operating expense and the calculation of the efficiency ratio for each of the quarters of 2016 and 2015. Segment Information In accordance with GAAP, the Company’s reportable segments have been determined based upon its 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 of Notes to Financial Statements. 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, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. During 2016, the Company revised its funds transfer pricing allocation related to borrowings and to the residential real estate loans obtained in the acquisition of Hudson City, retroactive to 2015. Accordingly, financial information for the Discretionary Portfolio segment and the “All Other” category for 2015 has been reclassified to conform to the current allocation methodology. Financial information about the Company’s segments, including the impact of the change noted above, is presented in note 22 of Notes to Financial Statements. The Business Banking segment provides a wide range of services to small businesses and professionals within markets served by the Company through the Company’s branch network, business banking centers and other delivery channels such as telephone banking, Internet banking and automated teller machines. Services and products offered by this segment include various business loans and leases, including loans guaranteed by the Small Business Administration, business credit cards, deposit products, and financial services such as cash management, payroll and direct deposit, merchant credit card and letters of credit. The Business Banking segment recorded net income of $93 million in 2016, compared with $99 million in 2015. That 5% decline was attributable to higher centrally-allocated costs largely associated with the acquired Hudson City operations, an increase in FDIC assessments of $3 million and higher personnel costs and advertising and marketing expenses of $2 million each, offset, in part, by a $15 million rise in net interest income and a $3 million decline in the provision for credit losses. The growth in net interest income reflected an increase in average outstanding deposit balances of $986 million. Net income for this segment also aggregated $99 million in 2014. Declines in 2015 in net interest income of $7 million and service charges on deposit accounts of $2 million were offset by a $3 million decrease in the provision for credit losses, due to lower net charge-offs, a $4 million increase in merchant discount and credit card fees and lower costs for FDIC assessments of $2 million. The decline in net interest income resulted from a narrowing of the net interest margin on deposits of 18 basis points offset, in part, by an increase in average outstanding deposit balances of $615 million. The Commercial Banking segment provides a wide range of credit products and banking services for middle-market and large commercial customers, mainly within the markets served by the Company. Services provided by this segment include commercial lending and leasing, letters of credit, deposit products, and cash management services. The Commercial Banking segment 102 102 contributed net income of $412 million in 2016, compared with $431 million in 2015. That decline was due to the following factors: lower letter of credit and other credit-related fees of $15 million, largely due to loan syndication fees; higher FDIC assessments of $13 million; an increase in the provision for credit losses of $10 million; lower gains on the sale of previously leased equipment of $9 million; an increase in personnel costs of $5 million; and higher allocated operating expenses associated with data processing, risk management and other support services provided to the Commercial Banking segment. Those unfavorable factors were largely offset by a $32 million rise in net interest income and a $4 million increase in corporate advisory fees. The higher net interest income resulted from higher average outstanding loan and deposit balances of $1.4 billion and $794 million, respectively. Net income for the Commercial Banking segment totaled $403 million in 2014. The 7% improvement in net income in 2015 as compared with 2014 resulted from: a $7 million rise in net interest income, reflecting growth in average outstanding loan and deposit balances of $1.3 billion and $569 million, respectively, partially offset by a narrowing of the net interest margin on loans and deposits of eight basis points and six basis points, respectively; increased gains from the sale of equipment previously leased to commercial customers of $15 million; higher credit- related and other fees of $8 million; and an $8 million decline in the provision for credit losses, reflecting a partial recovery of $10 million associated with a relationship with a motor vehicle-related parts wholesaler previously charged-off in 2013. The Commercial Real Estate segment provides credit and deposit services to its customers. Real estate securing loans in this segment is generally located in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, the District of Columbia and the western portion of the United States. Commercial real estate loans may be secured by apartment/multifamily buildings; office, retail and industrial space; or other types of collateral. Activities of this segment also include the origination, sales and servicing of commercial real estate loans through the Fannie Mae DUS program and other programs. Commercial real estate loans held for sale are included in this segment. Net income of the Commercial Real Estate segment aggregated $350 million in 2016, up 3% from $341 million in 2015. That improvement resulted from: a rise in net interest income of $30 million; higher mortgage banking revenues of $27 million, resulting from increased loan origination activities; and higher trading account and foreign exchange gains of $8 million, largely due to increased volumes of interest rate swap transactions executed by commercial customers. Those favorable factors were partially offset by increased FDIC assessments of $14 million, a $10 million rise in personnel-related expenses, a $5 million increase in the provision for credit losses and higher allocated operating expenses associated with data processing, risk management and other support services provided to the Commercial Real Estate segment. The higher net interest income was attributable to a $2.3 billion increase in average loan balances and a 19 basis point widening of the net interest margin on deposits, offset, in part, by a 22 basis point narrowing of the net interest margin on loans. Net income for this segment was $316 million in 2014. The 8% increase in net income in 2015 as compared with 2014 reflected increases in net interest income and mortgage banking revenues. The $23 million rise in net interest income resulted largely from increases in average outstanding loan and deposit balances of $1.4 billion and $393 million, respectively, partially offset by a narrowing of the net interest margin on deposits and loans of 11 basis points and six basis points, respectively. The increase in mortgage banking revenues of $13 million was largely reflective of an increase in loans originated for sale and higher servicing revenues. The Discretionary Portfolio segment includes investment and trading account securities, residential real estate loans (including those obtained in the Hudson City acquisition) and other assets; short-term and long-term borrowed funds; brokered deposits; and Cayman Islands office deposits. This segment also provides foreign exchange services to customers. The Discretionary Portfolio segment recorded net income of $164 million in 2016 and $59 million in 2015. Reflected 103 103 in 2016’s results were pre-tax investment securities gains of $30 million from the sale of the Company’s collateralized debt obligations. In addition to the investment securities gains, the improved performance of this segment in 2016 as compared with 2015 was due to a $248 million rise in net interest income, which reflects the impact of the acquisition of Hudson City. Those favorable factors were partially offset by increases of $25 million in the provision for credit losses and $16 million in FDIC assessments, and higher loan and other real estate servicing costs. Net income contributed by the Discretionary Portfolio segment totaled $48 million in 2014. The higher net income in 2015 as compared with 2014 reflected the impact of the residential real estate loans obtained in the November 1, 2015 acquisition of Hudson City. Partially offsetting the favorable impact of those loans on net interest income was a 27 basis point narrowing of the net interest margin on investment securities, resulting from the Company’s allocation of funding charges associated with those assets. A $9 million year-over-year decline in the provision for credit losses also contributed to the improvement in the segment’s net income. Those favorable factors were partially offset by higher loan servicing and other costs. The Residential Mortgage Banking segment originates and services residential mortgage loans and sells substantially all of those loans in the secondary market to investors or to the Discretionary Portfolio segment. In addition to the geographic regions served by or contiguous with the Company’s branch network, the Company maintains mortgage loan origination offices in several western states. The Company periodically purchases the rights to service loans and also sub-services residential real estate loans for others. Residential real estate loans held for sale are included in this segment. The Residential Mortgage Banking segment’s net income declined 10% to $80 million in 2016 from $89 million in 2015. That decline reflected lower revenues from servicing residential real estate loans for unaffiliated parties of $23 million, offset, in part, by a $7 million rise in net interest income and increased intersegment revenues. Net income for the Residential Mortgage Banking segment in 2015 was up 5% from $85 million in 2014. The improved performance in 2015 resulted from lower amortization of capitalized servicing rights of $19 million (reflecting lower prepayment trends), partially offset by increased professional services, personnel costs and centrally-allocated loan servicing expenses. The Retail Banking segment offers a variety of services to consumers through several delivery channels which include branch offices, automated teller machines, and telephone, mobile and Internet banking. The Company has branch offices in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia and the District of Columbia. Credit services offered by this segment include consumer installment loans, automobile loans (originated both directly and indirectly through dealers), home equity loans and lines of credit and credit cards. The segment also offers to its customers deposit products, including demand, savings and time accounts; investment products, including mutual funds and annuities; and other services. Net income for the Retail Banking segment was $275 million in 2016, up 3% from $268 million in 2015. An increase in net interest income of $157 million, predominantly due to the impact of deposits obtained in the acquisition of Hudson City, was largely offset by the following unfavorable factors: a $47 million rise in the provision for credit losses, including the accelerated partial charge-offs of $32 million recognized on loans for which the customer was either bankrupt or deceased; increases in expenses for personnel, equipment and net occupancy, and advertising and marketing of $45 million, $18 million and $11 million, respectively, that include the impact of the expanded operations associated with the acquisition of Hudson City; higher FDIC assessments of $10 million; and higher allocated operating expenses associated with data processing, risk management and other support services provided from centralized service areas. This segment’s net income declined 2% in 2015 from $273 million in 2014. An $8 million rise in net interest income, largely due to increases in average outstanding loan balances, and a $4 million decline in the provision for credit losses, largely due to lower net charge-offs, were more than offset by a $6 million decline in fees earned for 104 104 providing deposit account services, a $5 million decrease in servicing revenues related to securitized automobile loans, and higher operating expenses, including expenses associated with operations added in the Hudson City acquisition. The “All Other” category reflects other activities of the Company that are not directly attributable to the reported segments. Reflected in this category are the amortization of core deposit and other intangible assets resulting from the acquisitions of financial institutions, M&T’s share of the operating losses of BLG, merger-related expenses resulting from acquisitions and the net impact of the Company’s allocation methodologies for internal transfers for funding charges and credits associated with the earning assets and interest-bearing liabilities of the Company’s reportable segments, and the provision for credit losses. The “All Other” category also includes trust income of the Company that reflects the ICS and WAS business activities. The various components of the “All Other” category resulted in net losses of $58 million, $206 million and $158 million in 2016, 2015 and 2014, respectively. Reflected in 2015’s results was the $45 million pre-tax gain related to the sale of the trade processing business within the retirement services division. The improved performance in 2016 as compared with 2015 was predominantly due to the favorable impact from the Company’s allocation methodologies for internal transfers for funding charges and credits associated with earning assets and interest-bearing liabilities of the Company’s reportable segments and a $61 million decrease in merger-related expenses associated with the acquisition of Hudson City. The most significant factors contributing to the unfavorable performance in 2015 as compared with 2014 include: higher personnel-related expenses, including the impact of merger-related expenses and increased pension costs; a decline in trust income, predominantly due to the impact of the April 2015 sale of the trade processing business; and higher charitable contributions. Those unfavorable factors were offset, in part, by lower professional services costs, largely related to elevated 2014 costs associated with BSA/AML and other company-wide initiatives, the $45 million gain from the sale of the trade processing business, and the favorable impact from the Company’s allocation methodologies. Recent Accounting Developments A discussion of recent accounting developments is included in note 26 of Notes to Financial Statements. Forward-Looking Statements Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “prospects” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could,” or “may,” or by variations of such words or by similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Forward-looking statements speak only as of the date they are made and the Company assumes no duty to update forward-looking statements. Future Factors include changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity; prepayment speeds, loan originations, credit losses and market values of loans, collateral securing loans and other assets; sources of liquidity; common shares 105 105 outstanding; common stock price volatility; fair value of and number of stock-based compensation awards to be issued in future periods; the impact of changes in market values on trust-related revenues; legislation and/or regulation affecting the financial services industry as a whole, and M&T and its subsidiaries individually or collectively, including tax legislation or regulation; regulatory supervision and oversight, including monetary policy and capital requirements; changes in accounting policies or procedures as may be required by the FASB or regulatory agencies; increasing price and product/service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products/services; containing costs and expenses; governmental and public policy changes; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; the outcome of pending and future litigation and governmental proceedings, including tax-related examinations and other matters; continued availability of financing; financial resources in the amounts, at the times and on the terms required to support M&T and its subsidiaries’ future businesses; and material differences in the actual financial results of merger, acquisition and investment activities compared with M&T’s initial expectations, including the full realization of anticipated cost savings and revenue enhancements. These are representative of the Future Factors that could affect the outcome of the forward- looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic and political conditions, either nationally or in the states in which M&T and its subsidiaries do business, including interest rate and currency exchange rate fluctuations, changes and trends in the securities markets, and other Future Factors. 106 106 Table 23 QUARTERLY TRENDS Fourth Third Second First Fourth Third Second First 2016 Quarters 2015 Quarters Earnings and dividends Amounts in thousands, except per share Interest income (taxable-equivalent basis) ...................... $ 990,284 Interest expense .............................................................. 107,137 Net interest income ......................................................... 883,147 Less: provision for credit losses ...................................... 62,000 Other income .................................................................. 465,459 Less: other expense ........................................................ 769,103 Income before income taxes ........................................... 517,503 Applicable income taxes ................................................. 179,549 Taxable-equivalent adjustment ....................................... 7,383 Net income ..................................................................... $ 330,571 Net income available to common shareholders- diluted ......................................................................... $ 307,797 Per common share data 976,240 111,175 865,065 47,000 491,350 752,392 557,023 200,314 6,725 349,984 977,143 106,802 870,341 32,000 448,254 749,895 536,700 194,147 6,522 336,031 979,166 100,870 878,296 49,000 420,933 776,095 474,134 169,274 6,332 298,528 908,734 95,333 813,401 58,000 448,108 786,113 417,396 140,074 6,357 270,965 776,274 77,199 699,075 44,000 439,699 653,816 440,958 154,309 6,248 280,401 766,374 77,226 689,148 30,000 497,027 696,628 459,547 166,839 6,020 286,688 743,925 78,499 665,426 38,000 440,203 686,375 381,254 133,803 5,838 241,613 326,998 312,974 275,748 248,059 257,346 263,481 218,837 Basic earnings ........................................................ $ Diluted earnings ..................................................... Cash dividends ....................................................... $ 1.98 1.98 .70 2.10 2.10 .70 1.98 1.98 .70 1.74 1.73 .70 1.65 1.65 .70 1.94 1.93 .70 1.99 1.98 .70 1.66 1.65 .70 Average common shares outstanding Basic ...................................................................... 155,123 Diluted ................................................................... 155,700 155,493 156,026 157,802 158,341 158,734 159,181 150,027 150,718 132,630 133,376 132,356 133,116 132,049 132,769 Performance ratios, annualized Return on Average assets ........................................................ Average common shareholders’ equity ................... 1.05 % 8.13 % 1.12 % 8.68 % 1.09 % 8.38 % .97 % 7.44 % .93 % 7.22 % 1.13 % 8.93 % 1.18 % 9.37 % 1.02 % 7.99 % Net interest margin on average earning assets (taxable-equivalent basis) ............................................ Nonaccrual loans to total loans and leases, net of unearned discount.................................................... Net operating (tangible) results(a) Net operating income (in thousands) .............................. $ 336,095 Diluted net operating income per common share ............ 2.01 Annualized return on 1.01 % 3.08 % 3.05 % 3.13 % 3.18 % 3.12 % 3.14 % 3.17 % 3.17 % .93 % .96 % 1.00 % .91 % 1.15 % 1.17 % 1.18 % 355,929 2.13 350,604 2.07 320,064 1.87 337,613 2.09 282,907 1.95 290,341 2.01 245,776 1.68 Average tangible assets .......................................... Average tangible common shareholders’ equity ..... Efficiency ratio(b) .......................................................... Balance sheet data In millions, except per share Average balances 1.10 % 11.93 % 56.42 % 1.18 % 12.77 % 55.92 % 1.18 % 12.68 % 55.06 % 1.09 % 11.62 % 57.00 % 1.21 % 13.26 % 55.53 % 1.18 % 12.98 % 57.05 % 1.24 % 13.76 % 58.23 % 1.08 % 11.90 % 61.46 % Total assets(c) ........................................................ $ 125,734 Total tangible assets(c) ........................................... 121,079 Earning assets......................................................... 114,254 Investment securities .............................................. 15,417 Loans and leases, net of unearned discount ............ 89,977 Deposits ................................................................. 96,914 Common shareholders’ equity(c) ............................ 15,181 Tangible common shareholders’ equity(c) .............. 10,526 124,725 120,064 112,864 14,361 88,732 95,852 15,115 10,454 123,706 119,039 111,872 14,914 88,155 94,033 15,145 10,478 123,252 118,577 111,211 15,348 87,584 92,391 15,047 10,372 115,052 110,772 103,587 15,786 81,110 85,657 13,775 9,495 98,515 94,989 88,446 14,441 67,849 73,821 11,555 8,029 97,598 94,067 87,333 14,195 67,670 72,958 11,404 7,873 95,892 92,346 85,212 13,376 66,587 71,698 11,227 7,681 At end of quarter Total assets(c) ........................................................ $ 123,449 Total tangible assets(c) ........................................... 118,797 Earning assets......................................................... 112,192 Investment securities .............................................. 16,250 Loans and leases, net of unearned discount ............ 90,853 Deposits ................................................................. 95,494 Common shareholders’ equity, net of undeclared cumulative preferred dividends(c) ..... 15,252 Tangible common shareholders’ equity(c) .............. 10,600 97.64 Equity per common share ....................................... 67.85 Tangible equity per common share ......................... Market price per common share 126,841 122,183 115,293 14,734 89,646 98,137 123,821 119,157 112,057 14,963 88,522 94,650 124,626 119,955 113,005 15,467 87,872 94,215 122,788 118,109 110,802 15,656 87,489 91,958 97,797 94,272 87,807 14,495 68,540 72,945 97,080 93,552 86,990 14,752 68,131 72,630 98,378 94,834 87,959 14,393 67,099 73,594 15,106 10,448 97.47 67.42 15,237 10,573 96.49 66.95 15,120 10,449 95.00 65.65 14,939 10,260 93.60 64.28 11,687 8,162 87.67 61.22 11,433 7,905 85.90 59.39 11,294 7,750 84.95 58.29 High ....................................................................... $ 158.35 Low ........................................................................ 112.25 Closing ................................................................... 156.43 120.40 111.13 116.10 121.11 107.01 118.23 119.24 100.08 111.00 127.39 111.50 121.18 134.00 111.86 121.95 128.70 117.86 124.93 129.58 111.78 127.00 (a) (b) (c) Excludes amortization and balances related to goodwill and core deposit and other intangible assets and merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. A reconciliation of net income and net operating income appears in Table 24. Excludes impact of merger-related expenses and net securities transactions. The difference between total assets and total tangible assets, and common shareholders’ equity and tangible common shareholders’ equity, represents goodwill, core deposit and other intangible assets, net of applicable deferred tax balances. A reconciliation of such balances appears in Table 24. 107 107   Table 24 RECONCILIATION OF QUARTERLY GAAP TO NON-GAAP MEASURES Fourth Third Second First Fourth Third Second First 2016 Quarters 2015 Quarters 298,528 270,965 280,401 286,688 241,613 Income statement data Dollars in thousands, except per share Net income Net income ..................................................................... $ 330,571 349,984 336,031 Amortization of core deposit and other intangible assets(a) ....................................................................... Merger-related expenses(a) ............................................ 4,163 — Net operating income ............................................. $ 336,095 355,929 350,604 320,064 337,613 282,907 290,341 245,776 5,828 60,820 7,488 14,048 2,506 — 3,653 — 6,936 7,637 5,945 — 5,524 — Earnings per common share Diluted earnings per common share ................................ $ Amortization of core deposit and other intangible assets(a) ....................................................................... Merger-related expenses(a) ............................................ Diluted net operating earnings per common share .. $ 1.98 2.10 1.98 1.73 1.65 1.93 1.98 1.65 .03 — 2.01 .03 — 2.13 .04 .05 2.07 .05 .09 1.87 .04 .40 2.09 .02 — 1.95 .03 — 2.01 .03 — 1.68 Other expense Other expense ................................................................. $ 769,103 752,392 749,895 776,095 786,113 653,816 696,628 686,375 (6,793 ) Amortization of core deposit and other intangible assets — Merger-related expenses ................................................. Noninterest operating expense ................................ $ 760,014 742,605 725,884 740,614 700,561 649,726 690,663 679,582 (9,576 ) (75,976 ) (12,319 ) (23,162 ) (11,418 ) (12,593 ) (4,090 ) — (5,965 ) — (9,787 ) — (9,089 ) — Merger-related expenses Salaries and employee benefits ....................................... $ Equipment and net occupancy ........................................ Outside data processing and software ............................. Advertising and marketing ............................................. Printing, postage and supplies ........................................ Other costs of operations ................................................ Other expense......................................................... Provision for credit losses ............................................... Total ....................................................................... $ — — — — — — — — — — — — — — — — — — 60 339 352 6,327 545 4,970 12,593 — 12,593 5,274 939 715 4,195 937 11,102 23,162 — 23,162 51,287 3 785 79 504 23,318 75,976 21,000 96,976 — — — — — — — — — — — — — — — — — — — — — — — — — — — Efficiency ratio Noninterest operating expense (numerator) .................... $ 760,014 742,605 725,884 740,614 700,561 649,726 690,663 679,582 Taxable-equivalent net interest income ........................... 883,147 865,065 870,341 878,296 813,401 699,075 689,148 665,426 Other income .................................................................. 465,459 491,350 448,254 420,933 448,108 439,699 497,027 440,203 Less: Gain (loss) on bank investment securities .............. (98 ) Denominator .................................................................. $ 1,347,040 1,327,935 1,318,331 1,299,225 1,261,531 1,138,774 1,186,185 1,105,727 28,480 1,566 264 (22 ) (10 ) — 4 Efficiency ratio ............................................................... 56.42 % 55.92 % 55.06 % 57.00 % 55.53 % 57.05 % 58.23 % 61.46 % Balance sheet data In millions Average assets Average assets ................................................................ $ 125,734 124,725 123,706 123,252 115,052 (4,218 ) (4,593 ) Goodwill ........................................................................ (101 ) (102 ) Core deposit and other intangible assets ......................... 39 40 Deferred taxes ................................................................ Average tangible assets .......................................... $ 121,079 120,064 119,039 118,577 110,772 (4,593 ) (122 ) 48 (4,593 ) (112 ) 44 (4,593 ) (134 ) 52 98,515 (3,513 ) (20 ) 7 94,989 97,598 (3,514 ) (25 ) 8 94,067 Average common equity Average total equity ....................................................... $ Preferred stock ............................................................... Average common equity ........................................ Goodwill ........................................................................ Core deposit and other intangible assets ......................... Deferred taxes ................................................................ Average tangible common equity ........................... $ 16,673 (1,492 ) 15,181 (4,593 ) (102 ) 40 10,526 16,347 (1,232 ) 15,115 (4,593 ) (112 ) 44 10,454 16,377 (1,232 ) 15,145 (4,593 ) (122 ) 48 10,478 16,279 (1,232 ) 15,047 (4,593 ) (134 ) 52 10,372 15,007 (1,232 ) 13,775 (4,218 ) (101 ) 39 9,495 12,787 (1,232 ) 11,555 (3,513 ) (20 ) 7 8,029 12,636 (1,232 ) 11,404 (3,514 ) (25 ) 8 7,873 95,892 (3,525 ) (31 ) 10 92,346 12,459 (1,232 ) 11,227 (3,525 ) (31 ) 10 7,681 At end of quarter Total assets Total assets ..................................................................... $ 123,449 126,841 123,821 124,626 122,788 (4,593 ) (4,593 ) Goodwill ........................................................................ (140 ) (98 ) Core deposit and other intangible assets ......................... 54 39 Deferred taxes ................................................................ Total tangible assets ............................................... $ 118,797 122,183 119,157 119,955 118,109 (4,593 ) (117 ) 46 (4,593 ) (107 ) 42 (4,593 ) (128 ) 50 97,797 (3,513 ) (18 ) 6 94,272 97,080 (3,513 ) (22 ) 7 93,552 98,378 (3,525 ) (28 ) 9 94,834 Total common equity Total equity .................................................................... $ Preferred stock ............................................................... Undeclared dividends - cumulative preferred stock ........ Common equity, net of undeclared cumulative preferred dividends .............................................. Goodwill ........................................................................ Core deposit and other intangible assets ......................... Deferred taxes ................................................................ Total tangible common equity ................................ $ (a) After any related tax effect. 16,487 (1,232 ) (3 ) 16,341 (1,232 ) (3 ) 16,472 (1,232 ) (3 ) 16,355 (1,232 ) (3 ) 16,173 (1,232 ) (2 ) 12,922 (1,232 ) (3 ) 12,668 (1,232 ) (3 ) 12,528 (1,232 ) (2 ) 15,252 (4,593 ) (98 ) 39 10,600 15,106 (4,593 ) (107 ) 42 10,448 15,237 (4,593 ) (117 ) 46 10,573 15,120 (4,593 ) (128 ) 50 10,449 14,939 (4,593 ) (140 ) 54 10,260 11,687 (3,513 ) (18 ) 6 8,162 11,433 (3,513 ) (22 ) 7 7,905 11,294 (3,525 ) (28 ) 9 7,750 108 108 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Incorporated by reference to the discussion contained in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the captions “Liquidity, Market Risk, and Interest Rate Sensitivity” (including Table 21) and “Capital.” Item 8. Financial Statements and Supplementary Data. Financial Statements and Supplementary Data consist of the financial statements as indexed and presented below and Table 23 “Quarterly Trends” presented in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Index to Financial Statements and Financial Statement Schedules Report on Internal Control Over Financial Reporting ................................................................... Report of Independent Registered Public Accounting Firm .......................................................... Consolidated Balance Sheet — December 31, 2016 and 2015 ...................................................... Consolidated Statement of Income — Years ended December 31, 2016, 2015 and 2014 ............ Consolidated Statement of Comprehensive Income — Years ended December 31, 2016, 2015 and 2014 ..................................................................................................................................... Consolidated Statement of Cash Flows — Years ended December 31, 2016, 2015 and 2014 ..... Consolidated Statement of Changes in Shareholders’ Equity — Years ended December 31, 2016, 2015 and 2014 .................................................................................................................. Notes to Financial Statements ........................................................................................................ 110 111 112 113 114 115 116 117 109 109 Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting at M&T Bank Corporation and subsidiaries (“the Company”). Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 based on criteria described in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2016. The consolidated financial statements of the Company have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, that was engaged to express an opinion as to the fairness of presentation of such financial statements. PricewaterhouseCoopers LLP was also engaged to assess the effectiveness of the Company’s internal control over financial reporting. The report of PricewaterhouseCoopers LLP follows this report. M&T BANK CORPORATION ROBERT G. WILMERS Chairman of the Board and Chief Executive Officer Darren J. King Executive Vice President and Chief Financial Officer 110 110 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of M&T Bank Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity present fairly, in all material respects, the financial position of M&T Bank Corporation and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Buffalo, New York February 22, 2017 111 111 December 31 2016 2015 1,320,549 $ 5,000,638 323,867 1,368,040 7,594,350 273,783 13,332,072 12,242,671 2,457,278 2,859,709 M&T BANK CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet (Dollars in thousands, except per share) Assets Cash and due from banks ............................................................................................................ $ Interest-bearing deposits at banks ............................................................................................... Trading account .......................................................................................................................... Investment securities (includes pledged securities that can be sold or repledged of $1,203,473 at December 31, 2016; $2,136,712 at December 31, 2015) Available for sale (cost: $13,338,301 at December 31, 2016; $12,138,636 at December 31, 2015) .................................................................................. Held to maturity (fair value: $2,451,222 at December 31, 2016; $2,864,147 at December 31, 2015) .................................................................................... Other (fair value: $461,118 at December 31, 2016; $554,059 at December 31, 2015) ........................................................................................................... Total investment securities .............................................................................................. Loans and leases ......................................................................................................................... Unearned discount ................................................................................................................ Loans and leases, net of unearned discount .................................................................... Allowance for credit losses ................................................................................................... Loans and leases, net ....................................................................................................... Premises and equipment.............................................................................................................. Goodwill ..................................................................................................................................... Core deposit and other intangible assets ..................................................................................... Accrued interest and other assets ................................................................................................ 554,059 16,250,468 15,656,439 91,101,677 87,719,234 (229,735) 90,853,416 87,489,499 (955,992) 89,864,419 86,533,507 666,682 4,593,112 140,268 5,961,703 Total assets ...................................................................................................................... $ 123,449,206 $ 122,787,884 675,263 4,593,112 97,655 5,323,235 (988,997 ) (248,261 ) 461,118 Liabilities Noninterest-bearing deposits ....................................................................................................... $ 32,813,896 $ 29,110,635 52,346,207 49,566,644 Savings and interest-checking deposits ....................................................................................... 10,131,846 13,110,392 Time deposits .............................................................................................................................. Deposits at Cayman Islands office .............................................................................................. 170,170 95,493,876 91,957,841 Total deposits .................................................................................................................. 163,442 Federal funds purchased and agreements to repurchase securities .............................................. 150,546 — 1,981,636 Other short-term borrowings ....................................................................................................... 1,870,714 1,811,431 Accrued interest and other liabilities ........................................................................................... 9,493,835 10,653,858 Long-term borrowings ................................................................................................................ Total liabilities ................................................................................................................ 106,962,584 106,614,595 201,927 Shareholders' equity Preferred stock, $1.00 par, 1,000,000 shares authorized; Issued and outstanding: Liquidation preference of $1,000 per share: 731,500 shares at December 31, 2016 and December 31, 2015; Liquidation preference of $10,000 per share: 50,000 shares at December 31, 2016 and December 31, 2015 ............................................................. Common stock, $.50 par, 250,000,000 shares authorized, 159,945,678 shares issued at December 31, 2016; 159,563,512 shares issued at December 31, 2015 ............................... Common stock issuable, 32,403 shares at December 31, 2016; 2,364 36,644 shares at December 31, 2015 ........................................................................................ 6,680,768 Additional paid-in capital............................................................................................................ 8,430,502 Retained earnings ........................................................................................................................ (251,627) Accumulated other comprehensive income (loss), net ................................................................ — Treasury stock - common, at cost - 3,764,742 shares at December 31, 2016 .............................. Total shareholders’ equity ............................................................................................... 16,486,622 16,173,289 Total liabilities and shareholders’ equity ........................................................................ $ 123,449,206 $ 122,787,884 2,145 6,676,948 9,222,488 (294,636 ) (431,796 ) 1,231,500 79,973 1,231,500 79,782 See accompanying notes to financial statements. 112 112   M&T BANK CORPORATION AND SUBSIDIARIES Consolidated Statement of Income (In thousands, except per share) Interest income Loans and leases, including fees ....................................................... $ 3,485,050 $ 2,778,151 $ 2,596,586 Investment securities 2014 2016 Year Ended December 31 2015 Fully taxable ................................................................................ Exempt from federal taxes .......................................................... Deposits at banks .............................................................................. Other ................................................................................................. Total interest income.............................................................. 361,494 2,606 45,516 1,205 3,895,871 372,162 4,263 15,252 1,016 340,391 5,356 13,361 1,183 3,170,844 2,956,877 Interest expense Savings and interest-checking deposits ............................................ Time deposits .................................................................................... Deposits at Cayman Islands office .................................................... Short-term borrowings ...................................................................... Long-term borrowings ...................................................................... Total interest expense ............................................................ Net interest income ........................................................................... Provision for credit losses ................................................................. Net interest income after provision for credit losses ......................... Other income Mortgage banking revenues .............................................................. Service charges on deposit accounts ................................................. Trust income ..................................................................................... Brokerage services income ............................................................... Trading account and foreign exchange gains .................................... Gain (loss) on bank investment securities......................................... Other revenues from operations ........................................................ Total other income ................................................................. 87,704 102,841 797 3,625 231,017 425,984 3,469,887 190,000 3,279,887 373,697 419,102 472,184 63,423 41,126 30,314 426,150 1,825,996 46,140 27,059 615 1,677 252,766 328,257 46,869 15,515 699 101 217,247 280,431 2,842,587 2,676,446 124,000 2,672,587 2,552,446 170,000 375,738 420,608 470,640 64,770 30,577 (130 ) 462,834 362,912 427,956 508,258 67,212 29,874 — 383,061 1,825,037 1,779,273 Other expense 1,549,530 1,404,950 Salaries and employee benefits ......................................................... 269,299 Equipment and net occupancy .......................................................... 151,568 Outside data processing and software ............................................... 55,531 FDIC assessments ............................................................................. 47,111 Advertising and marketing ................................................................ 38,201 Printing, postage and supplies .......................................................... 33,824 Amortization of core deposit and other intangible assets ................. 688,990 Other costs of operations .................................................................. 2,822,932 2,689,474 Total other expense ................................................................ 1,674,692 1,642,245 Income before taxes .......................................................................... Income taxes ..................................................................................... 575,999 Net income ........................................................................................ $ 1,315,114 $ 1,079,667 $ 1,066,246 Net income available to common shareholders 1,623,600 295,141 172,389 105,045 87,137 39,546 42,613 682,014 3,047,485 2,058,398 743,284 272,539 164,133 52,113 59,227 38,491 26,424 660,475 595,025 Basic ...................................................................................... $ 1,223,459 $ 1,223,481 Diluted ................................................................................... 987,689 $ 987,724 978,531 978,581 Net income per common share Basic ...................................................................................... $ Diluted ................................................................................... 7.80 $ 7.78 7.22 $ 7.18 7.47 7.42 See accompanying notes to financial statements. 113 113 M&T BANK CORPORATION AND SUBSIDIARIES Consolidated Statement of Comprehensive Income (In thousands) Year Ended December 31 2015 2014 2016 Net income ........................................................................ $ 1,315,114 $ 1,079,667 $ 1,066,246 Other comprehensive income (loss), net of tax and reclassification adjustments: Net unrealized gains (losses) on investment 93,275 securities .................................................................... (96) Cash flow hedges adjustments ..................................... (2,607) Foreign currency translation adjustment ...................... (207,407) Defined benefit plans liability adjustments .................. Total other comprehensive loss ............................... (116,835) Total comprehensive income ................................... $ 1,272,105 $ 1,009,034 $ 949,411 (79,114 ) 796 (925 ) 8,610 (70,633 ) (64,406) (94) (2,614) 24,105 (43,009) See accompanying notes to financial statements. 114 114 M&T BANK CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows (In thousands) Cash flows from operating activities Net income ................................................................................................................................................................ $ 1,315,114 $ 1,079,667 $ 1,066,246 Adjustments to reconcile net income to net cash provided by operating activities 2014 2016 Year Ended December 31 2015 170,000 Provision for credit losses .................................................................................................................................. 99,019 Depreciation and amortization of premises and equipment ................................................................................ 49,906 Amortization of capitalized servicing rights ...................................................................................................... 26,424 Amortization of core deposit and other intangible assets ................................................................................... 396,596 Provision for deferred income taxes .................................................................................................................. 9,029 Asset write-downs ............................................................................................................................................. (67,759 ) Net gain on sales of assets ................................................................................................................................. (46,338 ) Net change in accrued interest receivable, payable ............................................................................................ (289,139 ) Net change in other accrued income and expense .............................................................................................. 323,330 Net change in loans originated for sale .............................................................................................................. Net change in trading account assets and liabilities ........................................................................................... (8,327 ) Net cash provided by operating activities .......................................................................................................... 1,183,411 1,742,408 190,000 106,996 50,982 42,613 174,013 21,036 (63,222 ) (12,282 ) 60,263 (665,649 ) (36,453 ) 124,000 96,496 68,410 33,824 92,848 6,593 (6,859 ) 15,163 (68,722 ) (350,581 ) 21,623 1,099,041 Cash flows from investing activities Proceeds from sales of investment securities Available for sale .............................................................................................................................................. Other ................................................................................................................................................................. 63,513 5,654,850 183,892 94,749 16 23,445 Proceeds from maturities of investment securities Available for sale .............................................................................................................................................. 2,309,208 2,392,331 662,959 Held to maturity ................................................................................................................................................ 609,080 998,413 468,999 Purchases of investment securities Available for sale .............................................................................................................................................. (3,562,711 ) (3,614,324 ) (29,431 ) Held to maturity ................................................................................................................................................ (99,317 ) Other ................................................................................................................................................................. Net increase in loans and leases ................................................................................................................................ (2,952,129 ) (2,326,744 ) Net (increase) decrease in interest-bearing deposits at banks..................................................................................... 2,593,712 6,445,451 (81,936 ) Capital expenditures, net ........................................................................................................................................... 448,271 Net (increase) decrease in loan servicing advances ................................................................................................... — (1,932,596 ) Acquisition of bank and bank holding company, net of cash acquired ...................................................................... 277,961 Other, net .................................................................................................................................................................. 10,876 (720,768 ) 7,714,282 Net cash provided (used) by investing activities ................................................................................................ (214,791 ) (1,808 ) (107,693 ) 170,141 (5,347,145 ) (21,283 ) (53,606 ) (2,421,162 ) (4,819,729 ) (73,161 ) (484,689 ) — 19,531 (11,710,371 ) Cash flows from financing activities 504,393 Net increase in deposits ............................................................................................................................................. 3,554,673 6,466,697 Net decrease in short-term borrowings ...................................................................................................................... (1,937,105 ) (2,167,405 ) (67,779 ) Proceeds from long-term borrowings ........................................................................................................................ — 1,500,000 4,345,478 Payments on long-term borrowings ........................................................................................................................... (1,119,898 ) (8,912,474 ) (426,275 ) — Purchases of treasury stock ....................................................................................................................................... (641,334 ) — (375,017 ) Dividends paid — common ....................................................................................................................................... (441,891 ) (371,199 ) (81,270 ) Dividends paid — preferred ...................................................................................................................................... (81,270 ) (70,234 ) — Redemption of Series D preferred stock .................................................................................................................... (500,000 ) — — Proceeds from issuance of preferred stock ................................................................................................................ 495,000 346,500 161,691 Other, net .................................................................................................................................................................. 69,766 88,565 (510,134 ) (9,462,007 ) Net cash provided (used) by financing activities ................................................................................................ 10,311,753 Net decrease in cash and cash equivalents ................................................................................................................. (5,317 ) (47,491 ) (299,577 ) 1,672,934 Cash and cash equivalents at beginning of year ......................................................................................................... 1,368,040 1,373,357 Cash and cash equivalents at end of year................................................................................................................... $ 1,320,549 $ 1,368,040 $ 1,373,357 Supplemental disclosure of cash flow information Interest received during the year ............................................................................................................................... $ 3,903,374 $ 3,134,311 $ 2,893,153 257,553 Interest paid during the year ...................................................................................................................................... 411,912 Income taxes paid during the year ............................................................................................................................. Supplemental schedule of noncash investing and financing activities Real estate acquired in settlement of loans ................................................................................................................ $ Acquisition of bank and bank holding company 498,951 276,866 400,329 378,660 124,033 $ 67,753 $ 43,821 Common stock issued ........................................................................................................................................ Common stock awards converted ...................................................................................................................... Fair value of Assets acquired (noncash)........................................................................................................................... Liabilities assumed ..................................................................................................................................... — 3,110,581 28,243 — — 36,567,632 — 31,496,212 — — — — Securitization of residential mortgage loans allocated to Available-for-sale investment securities ................................................................................................................ Capitalized servicing rights ................................................................................................................................... 24,233 248 65,023 646 134,698 1,760 See accompanying notes to financial statements. 115 115 M&T BANK CORPORATION AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders’ Equity Common Additional Preferred Common Stock Stock Stock Issuable Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss), Net Treasury Stock Total Dollars in thousands, except per share 2014 Balance — January 1, 2014 ................................. $ 881,500 65,258 — — Total comprehensive income ............................... — Preferred stock cash dividends ............................ — Issuance of Series E preferred stock .................... 350,000 — Exercise of 427,905 Series A stock warrants into 169,543 shares of common stock ............... Stock-based compensation plans: — 85 Compensation expense, net .......................... Exercises of stock options, net ..................... Stock purchase plan ...................................... Directors’ stock plan .................................... Deferred compensation plans, net, including dividend equivalents .................................. Other ............................................................ — — — — — — 128 633 43 7 3 — Common stock cash dividends - $2.80 per share ................................................................. — Balance — December 31, 2014 ........................... $ 1,231,500 66,157 2015 Total comprehensive income ............................... Acquisition of Hudson City Bancorp, Inc.: — — — 2,915 3,232,014 7,188,004 — 1,066,246 (75,878) — — (3,500) — — — (64,159 ) (116,835 ) — — — $11,305,532 949,411 — (75,878 ) — 346,500 — — (85) — — — — 45,306 122,476 9,545 1,658 — — — — — (307) — 345 1,747 (116) — — (371,137) 2,608 3,409,506 7,807,119 — — — — — — — — — — — — — — — — 45,434 123,109 9,588 1,665 (75 ) 1,747 — (180,994 ) — (371,137 ) — $12,335,896 — — 1,079,667 (70,633 ) — 1,009,034 Common stock issued ................................... Common stock awards converted ................. Preferred stock cash dividends ............................ Exercise of 2,315 Series A stock warrants into 904 shares of common stock...................... Stock-based compensation plans: Compensation expense, net .......................... Exercises of stock options, net ..................... Stock purchase plan ...................................... Directors’ stock plan .................................... Deferred compensation plans, net, including dividend equivalents .................................. Other ............................................................ — 12,977 — — — — — 3,097,604 28,243 — — — — — (81,270) — — — — — — — 155 438 45 7 2 — 1 — (1) — — — — 43,040 88,455 10,301 1,754 — — — — — (244) — 293 1,573 (102) — — (374,912) 2,364 6,680,768 8,430,502 — — — — — 3,110,581 28,243 — (81,270 ) — — — — — — — — — — — — — — — — 43,195 88,893 10,346 1,761 (51 ) 1,573 — (251,627 ) — (374,912 ) — $16,173,289 — Common stock cash dividends - $2.80 per share ................................................................. — Balance — December 31, 2015 ........................... $ 1,231,500 79,782 2016 — Total comprehensive income ............................... — Preferred stock cash dividends ............................ Redemption of Series D preferred stock .............. (500,000) Issuance of Series F preferred stock .................... 500,000 Exercise of 87,381 Series A stock warrants into 41,439 shares of common stock ................. Purchases of treasury stock .................................. Stock-based compensation plans: — — — — — — — — Compensation expense, net .......................... Exercises of stock options, net ..................... Stock purchase plan ...................................... Directors’ stock plan .................................... Deferred compensation plans, net, including dividend equivalents .................................. Other ............................................................ — — — — — — 169 18 — 2 2 — Common stock cash dividends - $2.80 per share ................................................................. — Balance — December 31, 2016 ........................... $ 1,231,500 79,973 — — — — — — — — — — — (4,750) — 16,132 (12,190) 275 535 (219) — 163 1,015 — 1,315,114 (81,270) — — — — (5,000) (43,009 ) — — — — 1,272,105 (81,270 ) — (500,000 ) — 495,000 — — — — — — — (93) — — 4,748 — (641,334) (2 ) (641,334 ) — 10,989 — 181,789 10,319 — 1,543 — 27,290 169,617 10,594 2,080 — — 150 — 3 1,015 — (441,765) 2,145 6,676,948 9,222,488 — — (441,765 ) (294,636 ) (431,796) $16,486,622 — See accompanying notes to financial statements. 116 116 M&T BANK CORPORATION AND SUBSIDIARIES Notes to Financial Statements 1. Significant accounting policies M&T Bank Corporation (“M&T”) is a bank holding company headquartered in Buffalo, New York. Through subsidiaries, M&T provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking, asset management, insurance and other financial services. Banking activities are largely focused on consumers residing in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia and the District of Columbia and on small and medium-size businesses based in those areas. Certain subsidiaries also conduct activities in other areas. The accounting and reporting policies of M&T and subsidiaries (“the Company”) are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting policies are as follows: Consolidation The consolidated financial statements include M&T and all of its subsidiaries. All significant intercompany accounts and transactions of consolidated subsidiaries have been eliminated in consolidation. The financial statements of M&T included in note 25 report investments in subsidiaries under the equity method. Information about some limited purpose entities that are affiliates of the Company but are not included in the consolidated financial statements appears in note 19. Consolidated Statement of Cash Flows For purposes of this statement, cash and due from banks and federal funds sold are considered cash and cash equivalents. Securities purchased under agreements to resell and securities sold under agreements to repurchase Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at amounts equal to the cash or other consideration exchanged. It is generally the Company’s policy to take possession of collateral pledged to secure agreements to resell. Trading account Financial instruments used for trading purposes are stated at fair value. Realized gains and losses and unrealized changes in fair value of financial instruments utilized in trading activities are included in “trading account and foreign exchange gains” in the consolidated statement of income. Investment securities Investments in debt securities are classified as held to maturity and stated at amortized cost when management has the positive intent and ability to hold such securities to maturity. Investments in 117 117 other debt securities and equity securities having readily determinable fair values are classified as available for sale and stated at estimated fair value. Amortization of premiums and accretion of discounts for investment securities available for sale and held to maturity are included in interest income. Other securities are stated at cost and include stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank (“FHLB”) of New York. The cost basis of individual securities is written down through a charge to earnings when declines in value below amortized cost are considered to be other than temporary. In cases where fair value is less than amortized cost and the Company intends to sell a debt security, it is more likely than not to be required to sell a debt security before recovery of its amortized cost basis, or the Company does not expect to recover the entire amortized cost basis of a debt security, an other-than- temporary impairment is considered to have occurred. If the Company intends to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the debt security’s amortized cost basis and its fair value. If the Company does not expect to recover the entire amortized cost basis of the security, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings while the amount related to other factors is recognized in other comprehensive income, net of applicable taxes. Subsequently, the Company accounts for the other-than-temporarily impaired debt security as if the security had been purchased on the measurement date of the other-than-temporary impairment at an amortized cost basis equal to the previous amortized cost basis less the other-than- temporary impairment recognized in earnings. The cost basis of individual equity securities is written down to estimated fair value through a charge to earnings when declines in value below cost are considered to be other than temporary. Realized gains and losses on the sales of investment securities are determined using the specific identification method. Loans and leases The Company’s accounting methods for loans depends on whether the loans were originated by the Company or were acquired in a business combination. Originated loans and leases Interest income on loans is accrued on a level yield method. Loans are placed on nonaccrual status and previously accrued interest thereon is charged against income when principal or interest is delinquent 90 days, unless management determines that the loan status clearly warrants other treatment. Nonaccrual commercial loans and commercial real estate loans are returned to accrual status when borrowers have demonstrated an ability to repay their loans and there are no delinquent principal and interest payments. Consumer loans not secured by residential real estate are returned to accrual status when all past due principal and interest payments have been paid by the borrower. Loans secured by residential real estate are returned to accrual status when they are deemed to have an insignificant delay in payments of 90 days or less. Loan balances are charged off when it becomes evident that such balances are not fully collectible. For commercial loans and commercial real estate loans, charge-offs are recognized after an assessment by credit personnel of the capacity and willingness of the borrower to repay, the estimated value of any collateral, and any other potential sources of repayment. A charge-off is recognized when, after such assessment, it becomes evident that the loan balance is not fully collectible. For loans secured by residential real estate, the excess of 118 118 the loan balances over the net realizable value of the property collateralizing the loan is charged-off when the loan becomes 150 days delinquent. Consumer loans are generally charged-off when the loans are 91 to 180 days past due, depending on whether the loan is collateralized and the status of repossession activities with respect to such collateral. Loan fees and certain direct loan origination costs are deferred and recognized as an interest yield adjustment over the life of the loan. Net deferred fees have been included in unearned discount as a reduction of loans outstanding. Commitments to sell real estate loans are utilized by the Company 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 recorded in the consolidated balance sheet includes changes in estimated fair market value during the hedge period, typically from the date of close through the sale date. Valuation adjustments made on these loans and commitments are included in “mortgage banking revenues.” Except for consumer and residential mortgage loans that are considered smaller balance homogenous loans and are evaluated collectively, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Impaired loans are classified as either nonaccrual or as loans renegotiated at below market rates which continue to accrue interest, provided that a credit assessment of the borrower’s financial condition results in an expectation of full repayment under the modified contractual terms. Certain loans greater than 90 days delinquent are not considered impaired if they are well-secured and in the process of collection. Loans less than 90 days delinquent are deemed to have an insignificant delay in payment and are generally not considered impaired. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of collateral if the loan is collateral-dependent. Interest received on impaired loans placed on nonaccrual status is generally applied to reduce the carrying value of the loan or, if principal is considered fully collectible, recognized as interest income. Residual value estimates for commercial leases are generally determined through internal or external reviews of the leased property. The Company reviews commercial lease residual values at least annually and recognizes residual value impairments deemed to be other than temporary. Loans and leases acquired in a business combination Loans acquired in a business combination subsequent to December 31, 2008 are initially recorded at fair value with no carry-over of an acquired entity’s previously established allowance for credit losses. Purchased impaired loans represent specifically identified loans with evidence of credit deterioration for which it was probable at acquisition that the Company would be unable to collect all contractual principal and interest payments. For purchased impaired loans and other loans acquired at a discount that was, in part, attributable to credit quality, the excess of cash flows expected at acquisition over the estimated fair value of acquired loans is recognized as interest income over the remaining lives of the loans. Subsequent decreases in the expected principal cash flows require the Company to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in expected cash flows result first in the recovery of any related allowance for credit losses and then in recognition of additional interest income over the then-remaining lives of the loans. For all other acquired loans, the difference between the fair value and outstanding principal balance of the loans is recognized as an adjustment to interest income over the lives of those loans. Those loans are then accounted for in a manner that is similar to originated loans. 119 119 Allowance for credit losses The allowance for credit losses represents, in management’s judgment, the amount of losses inherent in the loan and lease portfolio as of the balance sheet date. The allowance is determined by management’s evaluation of the loan and lease portfolio based on such factors as the differing economic risks associated with each loan category, the current 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 guarantees or indemnifications. The effects of probable decreases in expected principal cash flows on loans acquired at a discount are also considered in the establishment of the allowance for credit losses. 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 included in “other assets” in the consolidated balance sheet. An in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Upon acquisition of assets taken in satisfaction of a defaulted loan, the excess of the remaining loan balance over the asset’s estimated fair value less costs to sell is charged-off against the allowance for credit losses. Subsequent declines in value of the assets are recognized as “other costs of operations” in the consolidated statement of income. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Capitalized servicing rights Capitalized servicing assets are included in “other assets” in the consolidated balance sheet. Separately recognized servicing assets are initially measured at fair value. The Company uses the amortization method to subsequently measure servicing assets. Under that method, capitalized servicing assets are charged to expense in proportion to and over the period of estimated net servicing income. To estimate the fair value of servicing rights, the Company considers market prices for similar assets and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. Such assumptions include estimates of the cost of servicing loans, loan default rates, an appropriate discount rate, and prepayment speeds. For purposes of evaluating and measuring impairment of capitalized servicing rights, the Company stratifies such assets based on the predominant risk characteristics of the underlying financial instruments that are expected to have the most impact on projected prepayments, cost of servicing and other factors affecting future cash flows associated with the servicing rights. Such factors may include financial asset or loan type, note rate and term. The amount of impairment recognized is the amount by which the carrying value of the capitalized servicing rights for a stratum exceeds estimated fair value. Impairment is recognized through a valuation allowance. 120 120 Sales and securitizations of financial assets Transfers of financial assets for which the Company has surrendered control of the financial assets are accounted for as sales. Interests in a sale of financial assets that continue to be held by the Company, including servicing rights, are measured at fair value. The fair values of retained debt securities are generally determined through reference to independent pricing information. The fair values of retained servicing rights and any other retained interests are determined based on the present value of expected future cash flows associated with those interests and by reference to market prices for similar assets. Securitization structures typically require the use of special-purpose trusts that are considered variable interest entities. A variable interest entity is included in the consolidated financial statements if the Company has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and has the obligation to absorb losses or the right to receive benefits of the variable interest entity that could potentially be significant to that entity. Goodwill and core deposit and other intangible assets Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired. Goodwill is not amortized, but rather is tested for impairment at least annually at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as core deposit intangibles, are initially recorded at estimated fair value and are amortized over their estimated lives. Core deposit and other intangible assets are generally amortized using accelerated methods over estimated useful lives of five to ten years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of core deposit and other intangible assets may be impaired. Derivative financial instruments The Company accounts for derivative financial instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available- for-sale security, or a foreign currency denominated forecasted transaction. 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. For such agreements, amounts receivable or payable are recognized as accrued under the terms of the agreement and the net differential is recorded as an adjustment to interest income or expense of the related asset or liability. Interest rate swap agreements may be designated as either fair value hedges or cash flow hedges. In a fair value hedge, the fair values of the interest rate swap agreements and changes in the fair values of the hedged items 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 values of interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in “other revenues from operations” in the consolidated statement of income. In a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss is initially recorded as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the unrealized gain or loss is reported in “other revenues from operations” immediately. The Company utilizes commitments to sell real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Commitments to originate real estate loans to be held 121 121 for sale and commitments to sell real estate loans are generally recorded in the consolidated balance sheet at estimated fair value. Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate swap agreements, that do not satisfy the hedge accounting requirements are recorded at fair value and are generally classified as trading account assets or liabilities with resultant changes in fair value being recognized in “trading account and foreign exchange gains” in the consolidated statement of income. Stock-based compensation Stock-based compensation expense is recognized over the vesting period of the stock-based grant based on the estimated grant date value of the stock-based compensation, except that the recognition of compensation costs is accelerated for stock-based awards granted to retirement-eligible employees and employees who will become retirement-eligible prior to full vesting of the award because the Company’s incentive compensation plan allows for vesting at the time an employee retires. Income taxes Deferred tax assets and liabilities are recognized for the future tax effects attributable to differences between the financial statement value of existing assets and liabilities and their respective tax bases and carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates and laws. The Company evaluates uncertain tax positions using the two-step process required by GAAP. The first step requires a determination of whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Under the second step, a tax position that meets the more- likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company accounts for its investments in qualified affordable housing projects using the proportional amortization method. Under that method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. Earnings per common share Basic earnings per common share exclude dilution and are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding (exclusive of shares represented by the unvested portion of restricted stock and restricted stock unit grants) and common shares issuable under deferred compensation arrangements during the period. Diluted earnings per common share reflect shares represented by the unvested portion of restricted stock and restricted stock unit grants and the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings. Proceeds assumed to have been received on such exercise or conversion are assumed to be used to purchase shares of M&T common stock at the average market price during the period, as required by the “treasury stock method” of accounting. GAAP requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) shall be considered participating securities and shall be included in the computation of earnings per common share pursuant to the two-class method. The Company has issued stock-based compensation awards in the form of restricted stock and restricted stock units that contain such rights and, accordingly, the Company’s earnings per common share are calculated using the two-class method. 122 122 Treasury stock Repurchases of shares of M&T common stock are recorded at cost as a reduction of shareholders’ equity. Reissuances of shares of treasury stock are recorded at average cost. 2. Acquisition and divestiture Hudson City Bancorp, Inc. On November 1, 2015, M&T completed the acquisition of Hudson City Bancorp, Inc. (“Hudson City”), headquartered in Paramus, New Jersey. On that date, Hudson City Savings Bank, the banking subsidiary of Hudson City, was merged into M&T Bank, a wholly owned banking subsidiary of M&T. Hudson City Savings Bank operated 135 banking offices in New Jersey, Connecticut and New York at the date of acquisition. The results of operations acquired in the Hudson City transaction have been included in the Company’s financial results since November 1, 2015. After application of the election, allocation and proration procedures contained in the merger agreement with Hudson City, M&T paid $2.1 billion in cash and issued 25,953,950 shares of M&T common stock in exchange for Hudson City shares outstanding at the time of the acquisition. The purchase price was approximately $5.2 billion based on the cash paid to Hudson City shareholders, the fair value of M&T stock exchanged and the estimated fair value of Hudson City stock awards converted into M&T stock awards. The acquisition of Hudson City expanded the Company’s presence in New Jersey, Connecticut and New York, and management expects that the Company will benefit from greater geographic diversity and the advantages of scale associated with a larger company. The Hudson City transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. The consideration paid for Hudson City’s common equity and the amounts of identifiable assets acquired and liabilities assumed as of the acquisition date were as follows: (In thousands) Identifiable assets: Cash and due from banks ............................................................................................. $ 131,688 Interest-bearing deposits at banks ................................................................................ 7,568,934 Investment securities .................................................................................................... 7,929,014 Loans ............................................................................................................................ 19,015,013 Goodwill ....................................................................................................................... 1,079,787 131,665 Core deposit intangible ................................................................................................. 843,219 Other assets .................................................................................................................. Total identifiable assets ........................................................................................... 36,699,320 Liabilities: Deposits ........................................................................................................................ 17,879,589 Borrowings ................................................................................................................... 13,211,598 405,025 Other liabilities ............................................................................................................. Total liabilities ......................................................................................................... 31,496,212 Total consideration ............................................................................................................ $ 5,203,108 Cash paid ........................................................................................................................... $ 2,064,284 Common stock issued (25,953,950 shares) ....................................................................... 3,110,581 28,243 Common stock awards converted ..................................................................................... Total consideration .................................................................................................. $ 5,203,108 123 123 In early November 2015, the Company sold $5.8 billion of investment securities obtained in the acquisition and repaid $10.6 billion of borrowings assumed in the transaction. In connection with the acquisition, the Company recorded approximately $1.1 billion of goodwill and $132 million of core deposit intangible. The core deposit intangible asset is being amortized over a period of seven years using an accelerated method. In many cases, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of these determinations related to the fair valuation of acquired loans. Approximately $688 million of the loans acquired from Hudson City had specific evidence of credit deterioration at the acquisition date and it was deemed probable that the Company would be unable to collect all contractually required principal and interest payments (“purchased impaired loans”). Such loans were acquired at a discount from outstanding customer principal balance of $1.0 billion. For purchased impaired loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, as shown in the following table, reflected the impact of estimated credit losses and other factors, such as prepayments. November 1, 2015 (In thousands) Contractually required principal and interest at acquisition ............................................... $ 1,304,366 Contractual cash flows not expected to be collected .......................................................... (498,919) Expected cash flows at acquisition ..................................................................................... 805,447 Interest component of expected cash flows ........................................................................ (117,251) Estimated fair value ............................................................................................................ $ 688,196 The remaining acquired loans had a fair value of $18.3 billion and outstanding principal of $18.0 billion, resulting in a premium which will be amortized over the remaining lives of the loans as a reduction of interest income. In accordance with GAAP, there was no carry-over of Hudson City’s previously established allowance for credit losses. 124 124 The following table discloses the impact of Hudson City since the acquisition on November 1, 2015 through the end of 2015. The table also presents certain pro forma information as if Hudson City had been acquired on January 1, 2014. These results combine the historical results of Hudson City into the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date. In particular, no adjustments have been made to eliminate the impact of gains on securities transactions of $102 million in 2015 and $104 million in 2014 that may not have been recognized had the investment securities been recorded at fair value as of the beginning of 2014. Furthermore, expenses related to systems conversions and other costs of integration of $97 million are included in the 2015 periods in which such costs were incurred. Additionally, the Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts that follow. Actual Since Acquisition Through December 31, 2015 Pro Forma Year Ended December 31 2015 2014 (In thousands) Total revenues(a) .............................................................. $ 111,168 $ 5,132,662 1,011,463 Net income (loss) ............................................................. (21,175) $ 5,406,291 1,445,779 (a) Represents net interest income plus other income. In connection with the Hudson City acquisition, the Company incurred merger-related expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company. Those expenses consisted largely of professional services and other temporary help fees associated with preparing for systems conversions and/or integration of operations; costs related to termination of existing contractual arrangements for various services; initial marketing and promotion expenses designed to introduce M&T Bank to its new customers; severance (for former Hudson City employees); travel costs; and other costs of completing the transaction and commencing operations in new markets and offices. There were no merger-related expenses during 2014. In 2015, the Company also recognized a $21 million provision for credit losses related to the $18.3 billion of Hudson City loans acquired at a premium. GAAP does not allow the credit loss component of the net premium associated with those loans to be bifurcated and accounted for as a nonaccreting difference as is the case with purchased impaired loans and other loans acquired at a discount. Neverthless, GAAP requires that an allowance for credit losses be recognized for incurred losses in loans acquired at a premium even though in a relatively homogenous portfolio of residential mortgage loans the specific loans to which the losses relate cannot be individually identified at the acquisition date. Given the recognition of such losses above and beyond the impact of forecasted losses used in determining the fair value of the loans acquired at a premium, the initial $21 million provision for credit losses has been noted as a merger-related expense. 125 125             A summary of merger-related expenses included in the consolidated statement of income for the years ended December 31, 2016 and 2015 follows: 2016 2015 (In thousands) Salaries and employee benefits .......................................................................... $ 5,334 $ 51,287 3 Equipment and net occupancy ........................................................................... 1,278 785 Outside data processing and software ................................................................ 1,067 79 Advertising and marketing ................................................................................. 10,522 Printing, postage and supplies ............................................................................ 1,482 504 Other cost of operations ..................................................................................... 16,072 23,318 Other expense .............................................................................................. 35,755 75,976 — 21,000 Total .............................................................................................................. $ 35,755 $ 96,976 Provision for credit losses .................................................................................. Sale of trust accounts In April 2015, the Company sold the trade processing business within the retirement services division of its Institutional Client Services business. That sale resulted in an after-tax gain of $23 million ($45 million pre-tax) that reflected the allocation of approximately $11 million of previously recorded goodwill to the divested business. Revenues of the sold business had been included in “trust income” and were $9 million and $34 million during 2015 and 2014, respectively. After considering related expenses, net income attributable to the business that was sold was not material to the consolidated results of operations of the Company in any of those periods. 126 126 3. Investment securities The amortized cost and estimated fair value of investment securities were as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (In thousands) Estimated Fair Value December 31, 2016 Investment securities available for sale: U.S. Treasury and federal agencies ......................... $ 1,912,110 $ Obligations of states and political subdivisions ...... Mortgage-backed securities: 3,570 386 $ 77 9,952 $ 1,902,544 3,641 6 Government issued or guaranteed ...................... 10,980,507 45 Privately issued .................................................. 134,105 Other debt securities ................................................ 307,964 Equity securities ...................................................... 13,338,301 88,343 — 1,407 45,073 135,286 113,989 10,954,861 44 118,516 352,466 141,515 13,332,072 1 16,996 571 Investment securities held to maturity: Obligations of states and political subdivisions ...... Mortgage-backed securities: 60,858 267 224 60,901 Government issued or guaranteed ...................... Privately issued .................................................. Other debt securities ................................................ 7,374 2,263,297 37,120 121,481 — 5,543 44,718 2,451,222 Other securities ....................................................... 461,118 Total ........................................................................ $16,256,697 $ 173,948 $ 186,233 $ 16,244,412 2,233,173 157,704 5,543 2,457,278 461,118 37,498 897 — 38,662 — — December 31, 2015 Investment securities available for sale: U.S. Treasury and federal agencies ......................... $ Obligations of states and political subdivisions ...... Mortgage-backed securities: 299,890 $ 5,924 294 $ 146 187 $ 42 299,997 6,028 Government issued or guaranteed ...................... 11,592,959 74 Privately issued .................................................. 28,438 Collateralized debt obligations ................................ 137,556 Other debt securities ................................................ 73,795 Equity securities ...................................................... 12,138,636 142,370 2 20,143 1,514 10,230 174,699 2 1,188 20,190 354 48,701 11,686,628 74 47,393 118,880 83,671 70,664 12,242,671 Investment securities held to maturity: Obligations of states and political subdivisions ...... Mortgage-backed securities: 118,431 1,003 421 119,013 Government issued or guaranteed ...................... Privately issued .................................................. Other debt securities ................................................ 7,817 2,596,731 141,828 41,367 — 6,575 49,605 2,864,147 554,059 Other securities ....................................................... Total ........................................................................ $15,552,404 $ 228,742 $ 120,269 $ 15,660,877 2,553,612 181,091 6,575 2,859,709 554,059 50,936 2,104 — 54,043 — — 127 127      No investment in securities of a single non-U.S. Government, government agency or government guaranteed issuer exceeded ten percent of shareholders’ equity at December 31, 2016. As of December 31, 2016, the latest available investment ratings of all obligations of states and political subdivisions, privately issued mortgage-backed securities and other debt securities were: Average Credit Rating of Fair Value Amount Amortized Cost Estimated Fair Value A or Better BBB (In thousands) BB B or Less Not Rated Obligations of states and political subdivisions ........................................... $ 64,428 $ 64,542 $47,023 $ — $ — $ — $17,519 Privately issued mortgage-backed 19 securities ................................................ 157,749 121,525 30,760 Other debt securities ................................. 139,648 124,059 5,442 63,353 30,373 — 24,891 Total .......................................................... $361,825 $310,126 $83,225 $63,369 $30,373 $ 90,730 $42,429 — 90,730 16 The amortized cost and estimated fair value of collateralized mortgage obligations included in mortgage-backed securities were as follows: December 31 2016 2015 (In thousands) Collateralized mortgage obligations: Amortized cost .............................................................................................. $ 162,027 $188,819 Estimated fair value ....................................................................................... 125,848 149,632 Gross realized gains from sales of investment securities were $30,545,000 in 2016. During 2016, the Company sold its collateralized debt obligations held in the available-for-sale investment securities portfolio for a gain of $30 million. There were no significant realized gross losses from sales of investments securities in 2016. There were no significant gross realized gains or losses from sales of investment securities in 2015 or 2014. 128 128 At December 31, 2016, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows: Amortized Cost Estimated Fair Value (In thousands) Debt securities available for sale: Due in one year or less ............................................................................... $ 158,334 Due after one year through five years ........................................................ 1,760,301 1,750,542 Due after five years through ten years ....................................................... 3,132 112,693 Due after ten years ..................................................................................... 2,049,785 2,024,701 Mortgage-backed securities available for sale ........................................... 10,980,552 10,954,905 $13,030,337 $ 12,979,606 2,689 128,841 157,954 $ Debt securities held to maturity: Due in one year or less ............................................................................... $ Due after one year through five years ........................................................ Due after five years through ten years ....................................................... Due after ten years ..................................................................................... 24,643 33,963 2,295 5,543 66,444 Mortgage-backed securities held to maturity ............................................. 2,390,877 2,384,778 $ 2,457,278 $ 2,451,222 24,533 $ 34,073 2,252 5,543 66,401 129 129 A summary of investment securities that as of December 31, 2016 and 2015 had been in a continuous unrealized loss position for less than twelve months and those that had been in a continuous unrealized loss position for twelve months or longer follows: Less Than 12 Months Fair Value Unrealized Losses 12 Months or More Fair Value Unrealized Losses (In thousands) December 31, 2016 Investment securities available for sale: U.S. Treasury and federal agencies ................................................. $1,710,241 $ Obligations of states and political subdivisions .............................. Mortgage-backed securities: — (9,950 ) $ 2,295 $ 593 — (2) (6) Government issued or guaranteed ............................................. 6,730,829 — Privately issued ......................................................................... 100 Other debt securities ....................................................................... 17,776 Equity securities.............................................................................. (615) (113,374 ) 81,003 — (1) 27 (1 ) 85,400 (16,995) (149) 151 (422 ) 8,458,946 (123,747 ) 169,469 (17,768) Investment securities held to maturity: Obligations of states and political subdivisions .............................. Mortgage-backed securities: 17,988 (126 ) 11,891 (98) Government issued or guaranteed ............................................. Privately issued ......................................................................... (6,842 ) 17,481 (532) (1,222 ) 57,016 (35,898) (8,190 )    86,388   (36,528) Total ................................................................................................ $9,113,677 $(131,937 )   $ 255,857   $ (54,296) 618,832 17,911 654,731 December 31, 2015 Investment securities available for sale: U.S. Treasury and federal agencies ................................................. $ 147,508 $ Obligations of states and political subdivisions .............................. Mortgage-backed securities: 865 (187 ) $ (2 ) — $ 1,335 — (40) Government issued or guaranteed ............................................. 4,061,899 — Privately issued ......................................................................... 5,711 Collateralized debt obligations ....................................................... 12,935 Other debt securities ....................................................................... 18,073 Equity securities.............................................................................. 4,246,991 (167) 7,216 (48,534 ) (2) 43 — (335 ) (853) 2,063 (462 ) 93,344 (19,728) (147) (207 ) (49,727 ) 104,154 (20,937) 153 Investment securities held to maturity: Obligations of states and political subdivisions .............................. Mortgage-backed securities: 42,913 (335 ) 5,853 (86) Government issued or guaranteed ............................................. Privately issued ......................................................................... (6,016) — 112,155 (41,367) (2,136 )    346,875   (47,469) Total ................................................................................................ $4,749,887 $ (51,863 )   $ 451,029   $ (68,406) 459,983 — 502,896 (1,801 ) 228,867 The Company owned 1,083 individual investment securities with aggregate gross unrealized losses of $186 million at December 31, 2016. Based on a review of each of the securities in the investment securities portfolio at December 31, 2016, the Company concluded that it expected to recover the amortized cost basis of its investment. As of December 31, 2016, the Company does not 130 130                       intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. At December 31, 2016, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $461 million of cost method investment securities. At December 31, 2016, investment securities with a carrying value of $3,775,571,000, including $3,240,079,000 of investment securities available for sale, were pledged to secure borrowings from various FHLBs, repurchase agreements, governmental deposits, interest rate swap agreements and available lines of credit as described in note 9. Investment securities pledged by the Company to secure obligations whereby the secured party is permitted by contract or custom to sell or repledge such collateral totaled $1,203,473,000 at December 31, 2016. The pledged securities included securities of the U.S. Treasury and federal agencies and mortgage-backed securities. 4. Loans and leases Total loans and leases outstanding were comprised of the following: December 31 2016 2015 (In thousands) Loans Commercial, financial, etc. ..................................................................... $21,351,119 $ 19,223,419 Real estate: Residential .......................................................................................... 22,584,141 26,249,059 Commercial ........................................................................................ 25,550,057 23,592,097 Construction ....................................................................................... 8,066,756 5,716,994 Consumer ................................................................................................ 12,130,094 11,584,347 Total loans .......................................................................................... 89,682,167 86,365,916 Leases Commercial ........................................................................................ 1,419,510 1,353,318 Total loans and leases ............................................................................. 91,101,677 87,719,234 (229,735) Less: unearned discount .......................................................................... Total loans and leases, net of unearned discount .................................... $90,853,416 $ 87,489,499 (248,261 ) One-to-four family residential mortgage loans held for sale were $414 million at December 31, 2016 and $353 million at December 31, 2015. Commercial real estate loans held for sale were $643 million at December 31, 2016 and $39 million at December 31, 2015. As of December 31, 2016, approximately $2.8 billion of commercial real estate loan balances serviced for others had been sold with recourse in conjunction with the Company’s participation in the Federal National Mortgage Association (“Fannie Mae”) Delegated Underwriting and Servicing (“DUS”) program. At December 31, 2016, the Company estimated that the recourse obligations described above were not material to the Company’s consolidated financial position. There have been no material losses incurred as a result of those credit recourse arrangements. 131 131 In addition to recourse obligations, as described in note 21, 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. Charges incurred for such obligation, which are recorded as a reduction of mortgage banking revenues, were $4 million, $5 million and $4 million in 2016, 2015 and 2014, respectively. The outstanding principal balance and the carrying amount of loans acquired at a discount that were recorded at fair value at the acquisition date and included in the consolidated balance sheet were as follows: December 31 2016 2015 (In thousands) Outstanding principal balance ................................................................. $ 2,311,699 $ 3,122,935 Carrying amount: Commercial, financial, leasing, etc. ................................................... Commercial real estate ....................................................................... Residential real estate ......................................................................... Consumer ........................................................................................... 78,847 59,928 456,820 644,284 799,802 1,016,129 725,807 487,721 $ 1,804,271 $ 2,465,067 Purchased impaired loans included in the table above totaled $578 million at December 31, 2016 and $768 million at December 31, 2015, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for loans acquired at a discount for the years ended December 31, 2016, 2015 and 2014 follows: For the Year Ended December 31, 2016 2015 2014 Purchased Impaired Other Acquired Purchased Impaired Other Acquired Purchased Impaired Acquired Other (In thousands) Balance at beginning of period .... $ 184,618 $ 296,434 $ 76,518 $ 397,379 $ 37,230 $ 538,633 Additions ...................................... — Interest income ............................. (52,769) (123,044) (28,551) (158,260 ) (21,263 ) (178,670) Reclassifications from 49,930 60,551 24,907 nonaccretable balance ............... 22,384 Other(a) ........................................ — 12,509 — Balance at end of period ............... $ 154,233 $ 201,153 $184,618 $ 296,434 $ 76,518 $ 397,379 22,677 19,400 — 5,086 — 117,251 7,385 — — — (a) Other changes in expected cash flows including changes in interest rates and prepayment assumptions. 132 132 A summary of current, past due and nonaccrual loans as of December 31, 2016 and 2015 follows: Accruing Loans Past Due 90 Days or More(a) Accruing Loans Acquired at a Discount Past Due 90 Days or More(b) (In thousands) Purchased Impaired(c) Nonaccrual Total Current 30-89 Days Past Due December 31, 2016 Commercial, financial, leasing, etc. ................................. $ 22,287,857 $ Real estate: Commercial .............................. 25,076,684 Residential builder and developer ............................... 1,884,989 Other commercial construction ........................... 5,985,118 Residential ................................ 17,631,377 Residential — limited documentation ....................... 3,239,344 Consumer: 53,503 $ 6,195 $ 417 $ 641 $ 261,434 $22,610,047 183,531 7,054 12,870 31,404 176,201 25,487,744 4,667 5 1,952 14,006 16,707 1,922,326 77,701 922 485,468 281,298 198 14,274 18,111 6,096,324 11,537 378,549 229,242 19,017,471 88,366 — — 139,158 106,573 3,573,441 Home equity lines and loans .... 5,502,091 Automobile ............................... 2,869,232 Other ......................................... 3,491,629 — 81,815 5,641,149 44,565 — 18,674 2,944,065 56,158 — 11,258 3,560,849 31,286 Total ............................................... $ 87,968,321 $1,025,245 $300,659 $ 61,144 $ 578,032 $ 920,015 $90,853,416 12,678 1 21,491 — — 5,185 December 31, 2015 Commercial, financial, leasing, etc. ................................. $ 20,122,648 $ Real estate: Commercial(d) ......................... 23,111,673 Residential builder and developer ............................... 1,507,856 Other commercial construction(d) ...................... 3,962,620 Residential ................................ 20,507,551 Residential — limited documentation ....................... 3,885,073 Consumer: 52,868 $ 2,310 $ 693 $ 1,902 $ 241,917 $20,422,338 172,439 12,963 8,790 46,790 179,606 23,532,261 7,969 5,760 6,925 28,734 28,429 1,585,673 65,932 7,936 560,312 284,451 2,001 24,525 16,363 4,079,377 16,079 488,599 153,281 22,010,273 137,289 — — 175,518 61,950 4,259,830 Home equity lines and loans .... 5,805,222 Automobile ............................... 2,446,473 Other ......................................... 3,051,435 45,604 2,261 84,467 5,952,776 56,181 — 16,597 2,519,257 — 16,799 3,127,714 36,702 Total ............................................... $ 84,400,551 $1,135,296 $317,441 $ 68,473 $ 768,329 $ 799,409 $87,489,499 15,222 6 18,757 — — 4,021 (a) Excludes loans acquired at a discount. (b) Loans acquired at a discount that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately. (c) Accruing loans acquired at a discount that were impaired at acquisition date and recorded at fair value. (d) The Company expanded its definition of construction loans in 2016 and, as a result, re-characterized certain commercial real estate loans as other commercial construction loans. The December 31, 2015 balances reflect such changes. 133 133       If nonaccrual and renegotiated loans had been accruing interest at their originally contracted terms, interest income on such loans would have amounted to $68,371,000 in 2016, $56,784,000 in 2015 and $58,314,000 in 2014. The actual amounts included in interest income during 2016, 2015 and 2014 on such loans were $33,941,000, $30,735,000 and $28,492,000, respectively. During the normal course of business, the Company modifies loans to maximize recovery efforts. If the borrower is experiencing financial difficulty and a concession is granted, the Company considers such modifications as troubled debt restructurings and classifies those loans as either nonaccrual loans or renegotiated loans. The types of concessions that the Company grants typically include principal deferrals and interest rate concessions, but may also include other types of concessions. 134 134 The table below summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the year ended December 31, 2016: Recorded Investment Post- Pre- modification modification (Dollars in thousands) Financial Effects of Modification Recorded Investment(a) Interest (b) Number Commercial, financial, leasing, etc. Principal deferral ............................................... Combination of concession types ..................... Real estate: Commercial Principal deferral ............................................... Interest rate reduction ....................................... Other ................................................................. Combination of concession types ..................... Residential builder and developer Principal deferral ............................................... Combination of concession types ..................... Other commercial construction Principal deferral ............................................... Combination of concession types ..................... Residential Principal deferral ............................................... Combination of concession types ..................... Residential-limited documentation Principal deferral ............................................... Combination of concession types ..................... Consumer: Home equity lines and loans 127 $ 102,872 $ 102,446 $ 41,673 51,221 37 56 1 1 23 3 3 1 2 73 46 8 13 24,323 129 4,723 15,695 23,558 129 4,447 15,603 23,905 15,755 22,958 15,123 250 2,863 250 2,782 11,082 8,975 11,771 9,367 902 2,658 1,047 2,917 Principal deferral ............................................... Combination of concession types ..................... 10 93 760 11,110 761 11,110 Automobile Principal deferral ............................................... Other ................................................................. Combination of concession types ..................... 117 38 8 1,124 55 85 1,124 55 85 Other (426 ) $ (9,548 ) — (95) (765 ) — (276 ) (92 ) (947 ) (632 ) — (81 ) 689 392 145 259 1 — — — — — (25) — (585) — — — — — (120) — (706) — (916) — — (3) Principal deferral ............................................... Other ................................................................. Combination of concession types ..................... Total ............................................................................. 57 5 17 968 968 45 45 196 196 739 $ 279,696 $ 268,415 $ — — — — — (32) (11,281 ) $ (2,482) (a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. (b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan. 135 135    The table below summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the year ended December 31, 2015: Number Recorded Investment Post- Pre- modification modification (Dollars in thousands) Recorded Investment(a) Financial Effects of Modification Interest (b) — (19) — (245) — — (159) Commercial, financial, leasing, etc. Principal deferral ............................................... Interest rate reduction ....................................... Other ................................................................. Combination of concession types ..................... 114 $ 1 3 9 55,621 $ 99 12,965 32,444 50,807 $ 99 12,827 31,439 (4,814 ) $ — (138 ) (1,005 ) Real estate: Commercial Principal deferral ............................................... Other ................................................................. Combination of concession types ..................... 49 3 6 49,486 4,169 3,238 48,388 4,087 3,242 (1,098 ) (82 ) 4 Residential builder and developer Principal deferral ............................................... 2 10,650 10,598 (52 ) — Other commercial construction Principal deferral ............................................... Combination of concession types ..................... 4 2 368 10,375 460 10,375 Residential Principal deferral ............................................... Other ................................................................. Combination of concession types ..................... Residential-limited documentation Principal deferral ............................................... Combination of concession types ..................... 58 1 26 2 9 6,194 267 4,024 6,528 267 4,277 426 1,536 437 1,635 Consumer: Home equity lines and loans Principal deferral ............................................... Combination of concession types ..................... 8 63 2,175 5,203 2,175 5,204 Automobile Principal deferral ............................................... Interest rate reduction ....................................... Other ................................................................. Combination of concession types ..................... 192 7 46 57 1,818 137 150 948 1,818 137 150 948 Other 92 — 334 — 253 11 99 — 1 — — — — — (49) — — (483) — (121) — (677) — (10) — (43) Principal deferral ............................................... Other ................................................................. Combination of concession types ..................... Total ............................................................................. 102 13 40 1,995 1,995 116 116 396 396 817 $ 204,800 $ 198,405 $ — — — — — (45) (6,395 ) $ (1,851) (a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. (b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan. 136 136       The table below summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the year ended December 31, 2014: Number Recorded Investment Post- modification (Dollars in thousands) Pre- modification Financial Effects of Modification Recorded Investment(a) Interest (b) Commercial, financial, leasing, etc. Principal deferral .................................................. Other .................................................................... Combination of concession types ........................ 95 $ 3 7 29,035 $ 29,912 19,167 23,628 $ 31,604 19,030 (5,407 ) $ 1,692 (137 ) — — (20) Real estate: Commercial Principal deferral .................................................. Interest rate reduction .......................................... Other .................................................................... Combination of concession types ........................ Residential builder and developer Principal deferral .................................................. Other commercial construction Principal deferral .................................................. Residential Principal deferral .................................................. Interest rate reduction .......................................... Other .................................................................... Combination of concession types ........................ Residential-limited documentation Principal deferral .................................................. Combination of concession types ........................ Consumer: Home equity lines and loans Principal deferral .................................................. Interest rate reduction .......................................... Combination of concession types ........................ Automobile 39 1 1 7 2 4 28 11 1 30 6 21 3 6 47 Principal deferral .................................................. Interest rate reduction .......................................... Other .................................................................... Combination of concession types ........................ 208 9 42 81 19,077 255 650 1,152 18,997 252 — 1,198 (80 ) (3 ) (650 ) 46 1,639 1,639 — 6,703 6,611 (92 ) 2,710 1,146 188 4,211 2,905 1,222 188 4,287 880 3,806 963 3,846 280 535 5,031 3,293 152 255 1,189 280 535 5,031 3,293 152 255 1,189 195 76 — 76 83 40 — — — — — — — — (48) — (264) — — — (152) — (483) — (386) — (120) (560) — (12) — (100) Other Principal deferral .................................................. Interest rate reduction .......................................... Other .................................................................... Combination of concession types ........................ Total ................................................................................   33 4 1 70 245 293 45 2,502 760 $ 134,351 $ 130,190 $ 245 293 45 2,502 — — — — — (63) — (761) (4,161 ) $ (2,969) (a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. (b) Represents the present value of interest rate concessions discounted at the effective rate of the original loan. Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the 137 137    impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended December 31, 2016, 2015 and 2014 and for which there was a subsequent payment default during the respective period were not material. Borrowings by directors and certain officers of M&T and its banking subsidiaries, and by associates of such persons, exclusive of loans aggregating less than $120,000, amounted to $63,543,000 and $52,152,000 at December 31, 2016 and 2015, respectively. During 2016, new borrowings by such persons amounted to $15,350,000 (including any borrowings of new directors or officers that were outstanding at the time of their election) and repayments and other reductions (including reductions resulting from retirements) were $3,959,000. At December 31, 2016, approximately $11.9 billion of commercial loans and leases, $12.5 billion of commercial real estate loans, $17.8 billion of one-to-four family residential real estate loans, $2.3 billion of home equity loans and lines of credit and $4.4 billion of other consumer loans were pledged to secure outstanding borrowings from the FHLB of New York and available lines of credit as described in note 9. The Company’s loan and lease portfolio includes commercial lease financing receivables consisting of direct financing and leveraged leases for machinery and equipment, railroad equipment, commercial trucks and trailers, and aircraft. A summary of lease financing receivables follows: December 31 2016 2015 (In thousands) Commercial leases: Direct financings: Lease payments receivable .................................................................... $ 1,136,815 $ 1,058,605 Estimated residual value of leased assets .............................................. 81,269 (107,535 ) (102,723) Unearned income ................................................................................... Investment in direct financings ......................................................... 1,108,729 1,037,151 79,449 Leveraged leases: Lease payments receivable .................................................................... Estimated residual value of leased assets .............................................. Unearned income ................................................................................... Investment in leveraged leases ......................................................... 92,918 95,316 110,328 118,128 (41,556) (38,760 ) 164,486 171,888 Total investment in leases ............................................................................... $ 1,273,215 $ 1,209,039 Deferred taxes payable arising from leveraged leases .................................... $ 139,067 $ 160,603 Included within the estimated residual value of leased assets at December 31, 2016 and 2015 were $47 million and $50 million, respectively, in residual value associated with direct financing leases that are guaranteed by the lessees or others. 138 138 At December 31, 2016, the minimum future lease payments to be received from lease financings were as follows: Year ending December 31: (In thousands) 2017 .............................................................................................................................. $ 301,611 2018 .............................................................................................................................. 276,524 2019 .............................................................................................................................. 209,835 2020 .............................................................................................................................. 150,631 2021 .............................................................................................................................. 101,403 Later years .................................................................................................................... 189,729 $ 1,229,733 The amount of foreclosed residential real estate property held by the Company was $129 million and $172 million at December 31, 2016 and 2015, respectively. There were $314 million and $315 million at December 31, 2016 and 2015, respectively, in loans secured by residential real estate and serviced by the Company that were in the process of foreclosure. There were $192 million in loans secured by residential real estate and serviced by other entities for the Company that were in the process of foreclosure at December 31, 2016. Of all the loans in the process of foreclosure at December 31, 2016, approximately 57% were classified as purchased impaired and 20% were government guaranteed. 5. Allowance for credit losses Changes in the allowance for credit losses for the years ended December 31, 2016, 2015 and 2014 were as follows: Commercial, Financial, Real Estate 2016 Leasing, etc. Commercial Residential Consumer  Unallocated Total (In thousands) Beginning balance ............................ $ 300,404 326,831 72,238 178,320 78,199 $ 955,992 Provision for credit losses ................ 59,506 33,627 6,902 (169 ) 190,000 Net charge-offs 90,134 — (231,255) Charge-offs .................................. (59,244) — 74,260 Recoveries ................................... 30,167 Net (charge-offs) recoveries ............. (29,077) — (156,995) Ending balance ................................. $ 330,833 362,719 61,127 156,288 78,030 $ 988,997 (4,805) (26,133) (141,073 ) 28,907 7,066 8,120 2,261 (18,013) (112,166 ) 139 139 Commercial, Financial, Real Estate 2015 Leasing, etc. Commercial Residential Consumer Unallocated Total (In thousands) Beginning balance .............................. $ 288,038 307,927 61,910 186,033 75,654 $ 919,562 Provision for credit losses .................. 43,065 25,768 19,133 79,489 2,545 170,000 Net charge-offs — (198,373) Charge-offs .................................... (60,983) (16,487) (13,116) (107,787 ) — 64,803 20,585 Recoveries ..................................... 30,284 Net charge-offs ................................... (30,699) — (133,570) (87,202 ) Ending balance ................................... $ 300,404 326,831 72,238 178,320 78,199 $ 955,992 9,623 (6,864) 4,311 (8,805) 2014 Beginning balance .............................. $ 273,383 324,978 78,656 164,644 75,015 $ 916,676 639 124,000 Provision for credit losses .................. 51,410 (13,779) Net charge-offs 89,704 (3,974) Charge-offs .................................... (58,943) (14,058) (21,351) 8,579 Recoveries ..................................... 22,188 10,786 (3,272) (12,772) — (178,742) — 57,628 — (121,114) Net charge-offs ................................... (36,755) Ending balance ................................... $ 288,038 307,927 61,910 186,033 75,654 $ 919,562 (84,390 ) 16,075 (68,315 ) Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any loan or lease type. In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan-by-loan analysis of larger balance commercial loans and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also monitored by the Company’s credit review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes 140 140 at any time. Except for consumer loans and residential real estate loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Modified loans, including smaller balance homogenous loans, that are considered to be troubled 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. 141 141 The following tables provide information with respect to loans and leases that were considered impaired as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014. December 31, 2016 Unpaid Principal Balance Recorded Investment   Related Allowance   Recorded Investment    December 31, 2015 Unpaid Principal Balance Related Allowance With an allowance recorded: Commercial, financial, leasing, etc. .... $168,072 184,432 48,480 179,037 195,821 44,752 Real estate: (In thousands) Commercial ..................................... 71,862 86,666 11,620 85,974 95,855 18,764 196 Residential builder and developer ... Other commercial construction ....... 348 Residential ...................................... 86,680 105,944 3,457 79,558 96,751 4,727 Residential-limited documentation ............................. 82,547 97,718 6,000 90,356 104,251 8,000 3,316 5,101 3,548 3,843 7,396 2,475 8,361 2,731 506 448 Consumer: Home equity lines and loans ........... 44,693 48,965 8,027 25,220 26,195 3,777 Automobile ..................................... 16,982 18,272 3,740 22,525 22,525 4,709 776 17,620 17,620 4,820 Other ............................................... 484,498 558,385 83,054 507,154 567,962 90,093 3,791 5,296 With no related allowance recorded: Commercial, financial, leasing, etc. .... 100,805 124,786 — 93,190 110,735 — Real estate: Commercial ..................................... 113,276 121,846 — 101,340 116,230 — Residential builder and developer ... 14,368 21,124 — 27,651 47,246 — Other commercial construction ....... 15,933 35,281 — 13,221 31,477 — Residential ...................................... 16,823 24,161 — 19,621 30,940 — Residential-limited documentation ............................. 15,429 24,590 — 18,414 31,113 — 276,634 351,788 — 273,437 367,741 — Total: Commercial, financial, leasing, etc. .... 268,877 309,218 48,480 272,227 306,556 44,752 Real estate: Commercial ..................................... 185,138 208,512 11,620 187,314 212,085 18,764 196 Residential builder and developer ... 21,764 29,485 Other commercial construction ....... 18,408 38,012 348 Residential ...................................... 103,503 130,105 3,457 99,179 127,691 4,727 Residential-limited documentation ............................. 97,976 122,308 6,000 108,770 135,364 8,000 506 30,967 52,347 448 16,769 35,320 Consumer: Home equity lines and loans ........... 44,693 48,965 8,027 25,220 26,195 3,777 Automobile ..................................... 16,982 18,272 3,740 22,525 22,525 4,709 776 17,620 17,620 4,820 Other ............................................... Total ........................................................ $761,132 910,173 83,054 780,591 935,703 90,093 3,791 5,296 142 142       Year Ended December 31, 2016 Interest Income Recognized Average Recorded Investment Total Cash Basis Year Ended December 31, 2015 Interest Income Recognized Average Recorded Investment Total Cash Basis (In thousands) $ 277,647 8,342 8,342 236,201 2,933 2,933 Commercial, financial, leasing, etc. ................................................ Real estate: Commercial ................................ 175,877 Residential builder and developer ................................. Other commercial construction ............................. 19,697 Residential .................................. 98,394 Residential-limited documentation ......................... 29,237 103,060 4,878 4,878 166,628 6,243 6,243 2,300 2,300 59,457 335 335 644 644 20,276 2,311 2,311 6,227 3,154 101,483 6,188 4,037 5,999 1,975 118,449 6,380 2,638 Consumer: Home equity lines and loans ...... 36,493 Automobile ................................. 19,636 9,218 Other ........................................... Total ................................................ $ 769,259 410 21,523 1,325 1,242 440 261 905 175 99 25,675 1,619 113 729 83 18,809 31,397 21,885 768,501 27,643 19,046 Year Ended December 31, 2014 Interest Income Recognized Average Recorded Investment Total (In thousands) Cash Basis Commercial, financial, leasing, etc. ................................................... $ 181,932 2,251 2,251 Real estate: Commercial ................................................................................... 184,773 4,029 4,029 91,149 Residential builder and developer ................................................. 142 Other commercial construction ..................................................... 62,734 1,893 1,893 Residential ..................................................................................... 126,005 9,180 6,978 Residential-limited documentation ................................................ 133,800 6,613 2,546 142 Consumer: Home equity lines and loans ......................................................... Automobile .................................................................................... Other .............................................................................................. 248 295 191 Total ................................................................................................... $ 852,027 27,799 18,573 750 18,083 35,173 2,251 690 18,378 In accordance with the previously described policies, the Company utilizes a loan grading system that is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified 143 143 as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger-balance criticized commercial loans and commercial real estate loans are individually reviewed by centralized credit personnel each quarter to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. Smaller-balance criticized loans are analyzed by business line risk management areas to ensure proper loan grade classification. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Company’s commercial loans and commercial real estate loans. Commercial, Financial, Leasing, etc. Commercial Real Estate Residential Builder and Commercial Construction Developer Other (In thousands) December 31, 2016 Pass ......................................................................... $21,398,581 24,570,269 1,789,071 5,912,351 741,274 116,548 165,862 Criticized accrual ................................................... Criticized nonaccrual ............................................. 18,111 176,201 Total ....................................................................... $22,610,047 25,487,744 1,922,326 6,096,324 December 31, 2015 Pass ......................................................................... $19,442,183 22,697,398 1,497,465 3,834,137 59,779 228,877 Criticized accrual ................................................... 16,363 28,429 Criticized nonaccrual ............................................. Total ....................................................................... $20,422,338 23,532,261 1,585,673 4,079,377 655,257 179,606 738,238 241,917 950,032 261,434 16,707 In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s credit department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values. The carrying value of residential real estate loans and home equity loans and lines of credit for which a partial charge-off has been recognized aggregated $44 million and $32 million, respectively, at December 31, 2016 and $55 million and $21 million, respectively, at December 31, 2015. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance totaled $16 million and $39 million, 144 144 respectively, at December 31, 2016 and $20 million and $28 million, respectively, at December 31, 2015. The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable. The allocation of the allowance for credit losses summarized on the basis of the Company’s impairment methodology was as follows: Commercial, Financial, Real Estate Leasing, etc. Commercial Residential Consumer Total (In thousands) — 1,918 3,677 December 31, 2016 Individually evaluated for impairment ........... $ 48,480 12,500 9,457 12,543 $ 82,980 Collectively evaluated for impairment ........... 282,353 348,301 47,993 143,745 822,392 Purchased impaired ........................................ 5,595 Allocated ........................................................ $ 330,833 362,719 61,127 156,288 910,967 78,030 Unallocated .................................................... Total ............................................................... $988,997 December 31, 2015 Individually evaluated for impairment ........... $ 44,752 19,175 12,727 13,306 $ 89,960 Collectively evaluated for impairment ........... 255,615 307,000 57,624 163,511 783,750 Purchased impaired ........................................ 4,083 Allocated ........................................................ $ 300,404 326,831 72,238 178,320 877,793 78,199 Unallocated .................................................... $955,992 Total ............................................................... 656 1,887 1,503 — 37 145 145 The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology was as follows: Commercial, Financial, Leasing, etc. Real Estate Commercial Residential Consumer Total (In thousands) 268,877 201,479 224,630 December 31, 2016 Individually evaluated for impairment .......................................... $ Collectively evaluated for impairment .......................................... 22,340,529 33,222,080 21,871,726 12,080,597 89,514,932 Purchased impaired ................................ 578,032 Total ....................................................... $22,610,047 33,506,394 22,590,912 12,146,063 $ 90,853,416 December 31, 2015 Individually evaluated for impairment .......................................... $ Collectively evaluated for impairment .......................................... 20,148,209 28,863,130 25,398,037 11,532,121 85,941,497 Purchased impaired ................................ 768,329 Total ....................................................... $20,422,338 29,197,311 26,270,103 11,599,747 $ 87,489,499 65,466 $ 65,365 $ 100,049 234,132 207,949 517,707 664,117 272,227 2,261 59,684 760,452 779,673 1,902 — 641 6. Premises and equipment The detail of premises and equipment was as follows: December 31 2016 2015 (In thousands) Land ................................................................................................................. $ 104,671 $ 105,435 Buildings — owned ......................................................................................... 448,442 443,507 Buildings — capital leases ............................................................................... 1,108 Leasehold improvements ................................................................................. 232,936 229,919 Furniture and equipment — owned.................................................................. 636,219 614,591 12,019 Furniture and equipment — capital leases ....................................................... 1,437,117 1,406,579 14,849 — Less: accumulated depreciation and amortization Owned assets ............................................................................................... 756,245 732,315 7,582 Capital leases ............................................................................................... 761,854 739,897 Premises and equipment, net ............................................................................ $ 675,263 $ 666,682 5,609 Net lease expense for all operating leases totaled $113,663,000 in 2016, $102,356,000 in 2015 and $104,297,000 in 2014. Minimum lease payments under noncancelable operating leases are presented in note 21. Minimum lease payments required under capital leases are not material. 146 146 7. Capitalized servicing assets Changes in capitalized servicing assets were as follows: For the Year Ended December 31, Residential Mortgage Loans 2015 2014 2016 Commercial Mortgage Loans 2015 2016 2014 (In thousands) Beginning balance ........................... $ 118,303 $109,871 $126,377 $ 83,692 $ 72,939 $ 72,499 Originations ..................................... 28,618 35,556 28,285 40,117 29,914 15,922 730 Purchases ......................................... Amortization ................................... (30,208) (27,367) (45,080) (20,045 ) (19,161 ) (16,212) 117,351 118,303 109,871 103,764 83,692 72,939 — — Valuation allowance ........................ Ending balance, net ......................... $ 117,351 $118,303 $109,871 $103,764 $ 83,692 $ 72,939 243 289 638 — — — — — — For the Year Ended December 31, 2016 Beginning balance ........................... $ Originations ..................................... Purchases ......................................... Amortization ................................... Valuation allowance ........................ Ending balance, net ......................... $ 729 $ — — (729) — — — $ Other 2015 2014 2016 (In thousands) Total 2015 2014 4,107 $ 11,225 $202,724 $ 186,917 $210,101 — 68,735 65,470 44,207 1,019 — (7,118) (50,982 ) (49,906 ) (68,410) 4,107 221,115 202,724 186,917 — 4,107 $221,115 $ 202,724 $186,917 — — (3,378) 729 — 729 $ 638 243 — — — Residential mortgage loans serviced for others were $53.2 billion at December 31, 2016, $61.7 billion at December 31, 2015 and $67.2 billion at December 31, 2014. Reflected in residential mortgage loans serviced for others were loans sub-serviced for others of $30.4 billion, $37.8 billion and $42.1 billion at December 31, 2016, 2015, and 2014, respectively. Commercial mortgage loans serviced for others were $11.8 billion at December 31, 2016, $11.0 billion at December 31, 2015 and $11.3 billion at December 31, 2014. The estimated fair value of capitalized residential mortgage loan servicing assets was approximately $235 million at December 31, 2016 and $249 million at December 31, 2015. The fair value of capitalized residential mortgage loan servicing assets was estimated using weighted-average discount rates of 12.2% and 12.4% at December 31, 2016 and 2015, respectively, and contemporaneous prepayment assumptions that vary by loan type. At December 31, 2016 and 2015, the discount rate represented a weighted-average option-adjusted spread (“OAS”) of 1095 basis points (hundredths of one percent) and 1119 basis points, respectively, over market implied forward London Interbank Offered Rates (“LIBOR”). The estimated fair value of capitalized residential mortgage loan servicing rights may vary significantly in subsequent periods due to changing interest rates and the effect thereof on prepayment speeds. The estimated fair value of capitalized commercial mortgage loan servicing assets was approximately $119 million and $99 million at December 31, 2016 and 2015, respectively. An 18% discount rate was used to estimate the fair value of capitalized commercial mortgage loan servicing rights at December 31, 2016 and 2015 with no prepayment assumptions because, in general, the servicing agreements allow the Company to share in customer loan prepayment fees and thereby recover the remaining carrying value of the capitalized servicing rights associated with such loan. The Company’s ability to realize the carrying value of capitalized commercial mortgage servicing rights is more dependent on the borrowers’ abilities to repay the underlying loans than on prepayments or changes in interest rates. 147 147 The key economic assumptions used to determine the fair value of significant portfolios of capitalized servicing rights at December 31, 2016 and the sensitivity of such value to changes in those assumptions are summarized in the table that follows. Those calculated sensitivities are hypothetical and actual changes in the fair value of capitalized servicing rights may differ significantly from the amounts presented herein. The effect of a variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another which may magnify or counteract the sensitivities. The changes in assumptions are presumed to be instantaneous. Residential Commercial Weighted-average prepayment speeds .............................................. 11.30 % Impact on fair value of 10% adverse change ............................... $ (8,525,000 ) Impact on fair value of 20% adverse change ............................... (16,390,000 ) 10.95 % Impact on fair value of 10% adverse change ............................... $ (7,106,000 ) Impact on fair value of 20% adverse change ............................... (13,779,000 ) Weighted-average OAS .................................................................... Weighted-average discount rate ........................................................ Impact on fair value of 10% adverse change ............................... Impact on fair value of 20% adverse change ............................... 18.00% $ (5,285,000) (10,186,000) 8. Goodwill and other intangible assets In accordance with GAAP, the Company does not amortize goodwill, however, core deposit and other intangible assets are amortized over the estimated life of each respective asset. Total amortizing intangible assets were comprised of the following: Gross Carrying Amount Accumulated Amortization (In thousands) Net Carrying Amount December 31, 2016 Core deposit ....................................................... $ Other .................................................................. Total .................................................................. $ 887,459 $ 177,268 1,064,727 $ 789,988 $ 177,084 967,072 $ 97,471 184 97,655 December 31, 2015 Core deposit ....................................................... $ Other .................................................................. Total .................................................................. $ 887,459 $ 177,268 1,064,727 $ 750,624 $ 173,835 924,459 $ 136,835 3,433 140,268 148 148 Amortization of core deposit and other intangible assets was generally computed using accelerated methods over original amortization periods of five to ten years. The weighted-average original amortization period was approximately eight years. The remaining weighted-average amortization period as of December 31, 2016 was approximately six years. Amortization expense for core deposit and other intangible assets was $42,613,000, $26,424,000 and $33,824,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Estimated amortization expense in future years for such intangible assets is as follows: Year ending December 31: 2017 .............................................................................................................................. $ 2018 .............................................................................................................................. 2019 .............................................................................................................................. 2020 .............................................................................................................................. 2021 .............................................................................................................................. Later years .................................................................................................................... $ 30,305 23,462 18,026 13,323 8,621 3,918 97,655 (In thousands) In accordance with GAAP, the Company completed annual goodwill impairment tests as of October 1, 2016, 2015 and 2014. For purposes of testing for impairment, the Company assigned all recorded goodwill to the reporting units originally intended to benefit from past business combinations, which has historically been the Company’s core relationship business reporting units. Goodwill was generally assigned based on the implied fair value of the acquired goodwill applicable to the benefited reporting units at the time of each respective acquisition. The implied fair value of the goodwill was determined as the difference between the estimated incremental overall fair value of the reporting unit and the estimated fair value of the net assets assigned to the reporting unit as of each respective acquisition date. To test for goodwill impairment at each evaluation date, the Company compared the estimated fair value of each of its reporting units to their respective carrying amounts and certain other assets and liabilities assigned to the reporting unit, including goodwill and core deposit and other intangible assets. The methodologies used to estimate fair values of reporting units as of the acquisition dates and as of the evaluation dates were similar. For the Company’s core customer relationship business reporting units, fair value was estimated as the present value of the expected future cash flows of the reporting unit. Based on the results of the goodwill impairment tests, the Company concluded that the amount of recorded goodwill was not impaired at the respective testing dates. A summary of goodwill assigned to each of the Company’s reportable segments as of December 31, 2016 and 2015 for purposes of testing for impairment is as follows. (In thousands) Business Banking ............................................................................................................ $ 864,366 Commercial Banking ...................................................................................................... 1,401,873 654,389 Commercial Real Estate .................................................................................................. — Discretionary Portfolio .................................................................................................... Residential Mortgage Banking ........................................................................................ — Retail Banking ................................................................................................................. 1,309,191 All Other ......................................................................................................................... 363,293 Total ................................................................................................................................ $ 4,593,112 149 149 9. Borrowings The amounts and interest rates of short-term borrowings were as follows: Federal Funds Purchased and Repurchase Agreements Other Short-term Borrowings (Dollars in thousands) Total At December 31, 2016 Amount outstanding ...................................................... $ 163,442 0.32% Weighted-average interest rate ...................................... — $ 163,442 0.32% — For the year ended December 31, 2016 Highest amount at a month-end ..................................... $ 225,940 $ 1,974,013 Daily-average amount outstanding ................................ Weighted-average interest rate ...................................... 203,853 0.28% 689,969 $ 893,822 0.41% 0.44 % At December 31, 2015 Amount outstanding ...................................................... $ 150,546 $ 1,981,636 $ 2,132,182 0.40% Weighted-average interest rate ...................................... 0.43 % 0.06% For the year ended December 31, 2015 Highest amount at a month-end ..................................... $ 202,951 $ 1,989,257 Daily-average amount outstanding ................................ Weighted-average interest rate ...................................... 187,167 0.08% 360,838 $ 548,005 0.31% 0.43 % At December 31, 2014 Amount outstanding ...................................................... $ 192,676 0.07% Weighted-average interest rate ...................................... — $ 192,676 0.07% — For the year ended December 31, 2014 Highest amount at a month-end ..................................... $ 280,350 214,736 Daily-average amount outstanding ................................ 0.05% Weighted-average interest rate ...................................... — — $ 214,736 0.05% — Short-term borrowings have a stated maturity of one year or less at the date the Company enters into the obligation. In general, federal funds purchased and short-term repurchase agreements outstanding at December 31, 2016 matured on the next business day following year-end. Other short- term borrowings at December 31, 2015 represent borrowings from the FHLB of New York that were assumed in the acquisition of Hudson City. Those borrowings matured at various dates during 2016. At December 31, 2016, M&T Bank had lines of credit under formal agreements as follows: (In thousands) Outstanding borrowings ................................................................................................. $ 1,154,828 Unused ........................................................................................................................... 32,573,956 At December 31, 2016, M&T Bank had borrowing facilities available with the FHLBs whereby M&T Bank could borrow up to approximately $22.5 billion. Additionally, M&T Bank had an available line of credit with the Federal Reserve Bank of New York totaling approximately $11.2 billion at December 31, 2016. M&T Bank is required to pledge loans and investment securities as collateral for these borrowing facilities. 150 150 Long-term borrowings were as follows: December 31, 2016 2015 (In thousands) Senior notes of M&T Bank: Variable rate due 2016 .................................................................. $ Variable rate due 2017 .................................................................. 1.25% due 2017 ............................................................................. 1.40% due 2017 ............................................................................. 1.45% due 2018 ............................................................................. 2.25% due 2019 ............................................................................. 2.30% due 2019 ............................................................................. 2.10% due 2020 ............................................................................. 2.90% due 2025 ............................................................................. — $ 550,000 499,999 749,946 501,829 649,012 749,473 749,735 749,320 300,000 550,000 499,984 749,851 503,527 648,628 749,219 749,650 749,236 Advances from FHLB: Fixed rates ..................................................................................... Agreements to repurchase securities .................................................. Subordinated notes of Wilmington Trust Corporation (a wholly owned subsidiary of M&T): 1,154,737 1,084,694 1,158,216 1,899,281 8.50% due 2018 ............................................................................. 207,651 213,417 Subordinated notes of M&T Bank: 6.625% due 2017 ........................................................................... 5.585% due 2020, variable rate commenced 2015 ........................ 5.629% due 2021, variable rate commenced 2016 ........................... 409,526 409,361 500,000 419,800 409,361 518,797 Junior subordinated debentures of M&T associated with preferred capital securities: Fixed rates: BSB Capital Trust I — 8.125%, due 2028 ............................... Provident Trust I — 8.29%, due 2028 ...................................... Southern Financial Statutory Trust I — 10.60%, due 2030 ..... 15,659 26,293 6,620 15,635 25,817 6,583 Variable rates: First Maryland Capital I — due 2027 ....................................... First Maryland Capital II — due 2027 ..................................... Allfirst Asset Trust — due 2029 ............................................... BSB Capital Trust III — due 2033 ........................................... Provident Statutory Trust III — due 2033 ................................ Southern Financial Capital Trust III — due 2033 .................... Other ................................................................................................... $ 146,256 147,954 96,494 15,464 53,834 7,968 12,010 145,717 147,291 96,349 15,464 53,244 7,889 20,902 9,493,835 $ 10,653,858 The variable rate senior notes of M&T Bank pay interest quarterly at rates that are indexed to the three-month LIBOR. The contractual interest rates for those notes ranged from 1.18% to 1.26% at December 31, 2016 and from 0.62% to 0.75% at December 31, 2015. The weighted-average contractual interest rates payable were 1.22% at December 31, 2016 and 0.69% at December 31, 2015. Long-term fixed rate advances from the FHLB had contractual interest rates ranging from 1.17% to 7.32% with a weighted-average contractual interest rate of 1.65% at December 31, 2016 and 1.66% at 151 151 December 31, 2015. Advances from the FHLB mature at various dates through 2035 and are secured by residential real estate loans, commercial real estate loans and investment securities. Long-term agreements to repurchase securities had contractual interest rates that ranged from 3.65% to 4.58% at December 31, 2016 and from 3.61% to 4.58% at December 31, 2015. The weighted-average contractual interest rates payable were 4.05% at December 31, 2016 and 4.00% at December 31, 2015. The agreements reflect various repurchase dates through 2020, however, the contractual maturities of the underlying investment securities extend beyond such repurchase dates. The agreements are subject to legally enforceable master netting arrangements, however, the Company has not offset any amounts related to these agreements in its consolidated financial statements. The Company posted collateral consisting primarily of government guaranteed mortgage-backed securities of $1.1 billion and $2.0 billion at December 31, 2016 and 2015, respectively. The subordinated notes of M&T Bank and Wilmington Trust Corporation are unsecured and are subordinate to the claims of other creditors of those entities. The subordinated notes of M&T Bank that mature in 2020 converted to variable rate notes in December 2015. These notes now pay interest monthly at a rate that is indexed to the one-month LIBOR. The contractual interest rates were 1.97% and 1.64% at December 31, 2016 and 2015, respectively. The subordinated notes of M&T Bank that mature in 2021 converted to variable rate notes in December 2016. These notes now pay interest quarterly at a rate that is indexed to the three-month LIBOR. The contractual interest rate was 1.57% at December 31, 2016. The fixed and variable rate junior subordinated deferrable interest debentures of M&T (“Junior Subordinated Debentures”) 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 risk-based capital guidelines, in 2015 only 25% of then-outstanding Capital Securities were included in Tier 1 capital and beginning in 2016 none of the securities were included in M&T’s Tier 1 regulatory capital, but do qualify for inclusion in Tier 2 regulatory capital. The variable rate Junior Subordinated Debentures pay interest quarterly at rates that are indexed to the three-month LIBOR. Those rates ranged from 1.74% to 4.23% at December 31, 2016 and from 1.18% to 3.67% at December 31, 2015. The weighted-average variable rates payable on those Junior Subordinated Debentures were 2.33% at December 31, 2016 and 1.78% at December 31, 2015. Holders of the Capital Securities receive preferential cumulative cash distributions unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures as allowed by the terms of each such debenture, in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. In general, the agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T. The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates (ranging from 2027 to 2033) of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after an optional redemption prior to contractual maturity contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part, subject to possible regulatory approval. 152 152 Long-term borrowings at December 31, 2016 mature as follows: Year ending December 31: 2017 .............................................................................................................................. $ 3,442,484 2018 .............................................................................................................................. 714,358 2019 .............................................................................................................................. 2,299,502 2020 .............................................................................................................................. 1,269,939 2021 .............................................................................................................................. 500,144 Later years .................................................................................................................... 1,267,408 $ 9,493,835 (In thousands) 10. 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: December 31, 2016 December 31, 2015 Shares Issued and Outstanding Shares Issued and Outstanding Carrying value (Dollars in thousands) Carrying value Series A (a) Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation preference per share .............................. 230,000 $ 230,000 230,000 $ 230,000 Series C (a) Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation preference per share .............................. 151,500 $ 151,500 151,500 $ 151,500 Series D (b) Fixed Rate Non-cumulative Perpetual Preferred Stock, $10,000 liquidation preference per share ............................ Series E (c) Fixed-to-Floating Rate Non-cumulative Perpetual Preferred Stock, $1,000 liquidation preference per share ................... 350,000 $ 350,000 350,000 $ 350,000 Series F (d) Fixed-to-Floating Rate Non-cumulative Perpetual Preferred Stock, $10,000 liquidation preference per share ................. 50,000 $ 500,000 50,000 $ 500,000 — — — — (a) Dividends, if declared, are paid at 6.375%. Warrants to purchase M&T common stock at $73.86 per share issued in connection with the Series A preferred stock expire in 2018 and totaled 631,794 and 719,175 at December 31, 2016 and 2015, respectively. The shares were fully redeemed in December 2016, having received the approval of the Federal Reserve to redeem such shares after issuing the Series F preferred stock. (b) (c) Dividends, if declared, are paid semi-annually at a rate of 6.45% through February 14, 2024 and thereafter will be paid quarterly at a rate of the three-month LIBOR plus 361 basis points (hundredths of one percent). The shares are redeemable in whole or in part on or after February 15, 2024. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence. (d) Dividends, if declared, are paid semi-annually at a rate of 5.125% through October 31, 2026 and thereafter will be paid quarterly at a rate of the three-month LIBOR plus 352 basis points. The shares are redeemable in whole or in part on or after November 1, 2026. Notwithstanding M&T’s option to redeem the shares, if an event occurs such that the shares no longer qualify as Tier 1 capital, M&T may redeem all of the shares within 90 days following that occurrence. 153 153     In addition to the Series A warrants mentioned in (a) above, a warrant to purchase 95,383 shares of M&T common stock at $518.96 per share was outstanding at each of December 31, 2016 and 2015. The obligation under that warrant was assumed by M&T in an acquisition. 11. Stock-based compensation plans Stock-based compensation expense was $65 million in 2016 and 2014, and $67 million in 2015. The Company recognized income tax benefits related to stock-based compensation of $31 million in 2016, $29 million in 2015 and $31 million in 2014. The Company’s equity incentive compensation plan allows for the issuance of various forms of stock-based compensation, including stock options, restricted stock, restricted stock units and performance-based awards. At December 31, 2016 and 2015, respectively, there were 3,667,800 and 3,954,712 shares available for future grant under the Company’s equity incentive compensation plan. Restricted stock awards Restricted stock awards are comprised of restricted stock and restricted stock units. Restricted stock awards granted since 2014 vest over three years. Restricted stock awards granted prior to 2014 vest over four years. A portion of restricted stock awards granted after 2013 require a performance condition to be met before such awards vest. Unrecognized compensation expense associated with restricted stock was $12 million as of December 31, 2016 and is expected to be recognized over a weighted-average period of approximately one year. The Company may issue restricted shares from treasury stock to the extent available or issue new shares. The number of restricted shares issued was 218,341 in 2016, 218,183 in 2015 and 221,822 in 2014, with a weighted-average grant date fair value of $24,085,000 in 2016, $24,726,000 in 2015 and $24,765,000 in 2014. Unrecognized compensation expense associated with restricted stock units was $5 million as of December 31, 2016 and is expected to be recognized over a weighted-average period of approximately one year. The number of restricted stock units issued was 348,297 in 2016, 324,772 in 2015 and 299,525 in 2014, with a weighted-average grant date fair value of $38,795,000, $37,070,000 and $33,406,000, respectively. A summary of restricted stock and restricted stock unit activity follows: Restricted Stock Units Outstanding Weighted- Average Grant Price Restricted Stock Outstanding Weighted- Average Grant Price Unvested at January 1, 2016 ................................... 968,498 $ 109.38 625,888 $ 103.82 111.38 218,341 110.31 Granted .................................................................... 348,297 108.21 (324,981 ) Vested ...................................................................... (570,509) 98.55 Cancelled ................................................................. 110.90 (19,924 ) 108.15 (6,936) Unvested at December 31, 2016 ............................. 739,350 $ 111.21 499,324 $ 109.92 Stock option awards Stock options issued generally vested over four years and are exercisable over terms not exceeding ten years and one day. The Company used an option pricing model to estimate the grant date present value of stock options granted. Stock options granted in 2016, 2015 and 2014 were not significant. 154 154 A summary of stock option activity follows: Weighted-Average Stock Options Outstanding Exercise Price Life (In Years) Aggregate Intrinsic Value (In thousands) Outstanding at January 1, 2016 ............................... 4,223,710 $ 126.65 110.18 Granted .................................................................... 200 106.68 Exercised ................................................................. (1,694,440) Expired .................................................................... 140.75 (934,879) Outstanding at December 31, 2016 ......................... 1,594,591 $ 139.60 Exercisable at December 31, 2016 .......................... 1,594,149 $ 139.60 1.5 $ 1.5 $ 39,326 39,305 For 2016, 2015 and 2014, M&T received $172 million, $93 million and $127 million, respectively, in cash and realized tax benefits from the exercise of stock options of $15 million, $6 million and $9 million, respectively. The intrinsic value of stock options exercised during those periods was $42 million, $17 million and $26 million, respectively. As of December 31, 2016, the amount of unrecognized compensation cost related to non-vested stock options was not significant. The total grant date fair value of stock options vested during 2016, 2015 and 2014 was not significant. Upon the exercise of stock options, the Company may issue shares from treasury stock to the extent available or issue new shares. Stock purchase plan The stock purchase plan provides eligible employees of the Company with the right to purchase shares of M&T common stock at a discount through accumulated payroll deductions. In connection with the employee stock purchase plan, 2,500,000 shares of M&T common stock were authorized for issuance under a plan adopted in 2013. There were 97,880 shares issued in 2016, 89,384 shares issued in 2015 and 85,761 shares issued in 2014. For 2016, 2015 and 2014, M&T received $9,528,000, $9,296,000 and $8,607,000, respectively, in cash for shares purchased through the employee stock purchase plan. Compensation expense recognized for the stock purchase plan was not significant in 2016, 2015 or 2014. Deferred bonus plan The Company provided a deferred bonus plan pursuant to which eligible employees could elect to defer all or a portion of their annual incentive compensation awards and allocate such awards to several investment options, including M&T common stock. Participants could elect the timing of distributions from the plan. Such distributions are payable in cash with the exception of balances allocated to M&T common stock which are distributable in the form of M&T common stock. Shares of M&T common stock distributable pursuant to the terms of the deferred bonus plan were 23,188 and 26,365 at December 31, 2016 and 2015, respectively. The obligation to issue shares is included in “common stock issuable” in the consolidated balance sheet. Directors’ stock plan The Company maintains a compensation plan for non-employee members of the Company’s boards of directors and directors advisory councils that allows such members to receive all or a portion of their compensation in shares of M&T common stock. Through December 31, 2016, 243,652 shares had been issued in connection with the directors’ stock plan. 155 155 Through acquisitions, the Company assumed obligations to issue shares of M&T common stock related to deferred directors compensation plans. Shares of common stock issuable under such plans were 9,215 and 10,279 at December 31, 2016 and 2015, respectively. The obligation to issue shares is included in “common stock issuable” in the consolidated balance sheet. 12. 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. The Company uses a December 31 measurement date for all of its plans. Net periodic pension expense for defined benefit plans consisted of the following: 2016 Year Ended December 31 2015 (In thousands) 2014 Service cost ........................................................................ $ Interest cost on benefit obligation ...................................... Expected return on plan assets ........................................... Amortization of prior service credit ................................... Recognized net actuarial loss ............................................. Net periodic pension expense............................................. $ 25,037 $ 83,410 (108,473) (3,228) 30,145 26,891 $ 24,372 $ 72,731 (96,155 ) (6,005 ) 44,825 39,768 $ 20,520 69,162 (91,568) (6,552) 14,494 6,056 Net other postretirement benefits expense for defined benefit plans consisted of the following: 2016 Year Ended December 31 2015 (In thousands) 2014 Service cost ........................................................................ $ Interest cost on benefit obligation ...................................... Amortization of prior service credit ................................... Recognized net actuarial loss ............................................. Net other postretirement benefits expense ......................... $ 1,595 $ 4,971 (1,359) 60 5,267 $ 914 $ 2,995 (1,359 ) 106 2,656 $ 605 2,778 (1,359) — 2,024 156 156 Data relating to the funding position of the defined benefit plans were as follows: Change in benefit obligation: Pension Benefits 2016 2015 Other Postretirement Benefits 2015 2016 (In thousands) Benefit obligation at beginning of year .............. $2,004,531 $1,813,409 $ 121,497 $ 67,502 914 Service cost ........................................................ 2,995 Interest cost ........................................................ 2,619 Plan participants’ contributions .......................... — Amendments and curtailments ........................... (2,431) Actuarial (gain) loss ........................................... — 56,539 Business combinations ....................................... 420 Medicare Part D reimbursement ......................... 592 (7,061) (69,728) (11,265 ) Benefits paid ....................................................... Benefit obligation at end of year ........................ 2,007,158 2,004,531 109,922 121,497 1,595 4,971 3,085 — (83,593) (10,553 ) 247,340 — 25,037 83,410 — (28,308) 4,827 — — (82,339) 24,372 72,731 — — Change in plan assets: Fair value of plan assets at beginning of year .... 1,625,134 1,505,661 (14,069) Actual return on plan assets................................ 8,367 Employer contributions ...................................... Plan participants’ contributions .......................... — 194,903 Business combinations ....................................... Medicare Part D reimbursement ......................... — Benefits paid ....................................................... Fair value of plan assets at end of year .............. 1,642,131 1,625,134 — — 4,022 2,619 — 420 (7,061) — Funded status ........................................................... $ (365,027) $ (379,397) $ (109,922 ) $(121,497) Accrued liabilities recognized in the consolidated balance sheet ........................................................ $ (365,027) $ (379,397) $ (109,922 ) $(121,497) Amounts recognized in accumulated other comprehensive income (“AOCI”) were: — — 7,588 3,085 — 592 (69,728) (11,265 ) — 88,564 10,772 — — — (82,339) (6,413 ) $ Net loss (gain) .................................................... $ 460,562 $ 494,279 $ (7,737 ) Net prior service cost (credit) ............................. 277 494,556 (14,150 ) Pre-tax adjustment to AOCI ............................... 5,568 Taxes .................................................................. (194,608) (8,582 ) $ Net adjustment to AOCI ..................................... $ 281,456 $ 299,948 $ 3,505 464,067 (182,611) 4,200 (9,096) (4,896) 1,927 (2,969) The Company has an unfunded supplemental pension plan for certain key executives and others. The projected benefit obligation and accumulated benefit obligation included in the preceding data related to such plan were $160,433,000 as of December 31, 2016 and $161,657,000 as of December 31, 2015. The accumulated benefit obligation for all defined benefit pension plans was $1,979,225,000 and $1,951,425,000 at December 31, 2016 and 2015, respectively. 157 157 GAAP requires an employer to recognize in its balance sheet as an asset or liability the overfunded or underfunded status of a defined benefit postretirement plan, measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. Gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit expense, are recognized as a component of other comprehensive income. As indicated in the preceding table, as of December 31, 2016 the Company recorded a minimum liability adjustment of $449,916,000 ($464,066,000 related to pension plans and $(14,150,000) related to other postretirement benefits) with a corresponding reduction of shareholders’ equity, net of applicable deferred taxes, of $272,874,000. In aggregate, the benefit plans realized a net gain during 2016 that allowed the Company to decrease its minimum liability adjustment from that which was recorded at December 31, 2015 by $39,743,000 with a corresponding increase to shareholders’ equity that, net of applicable deferred taxes, was $24,105,000. The net gain reflects the amortization of unrealized losses previously recorded in other comprehensive income and the reduction of future benefit accruals under the former Hudson City retirement plan upon its merger with the Company’s qualified pension plan as of December 31, 2016. The table below reflects the changes in plan assets and benefit obligations recognized in other comprehensive income related to the Company’s postretirement benefit plans. Pension Plans Other Postretirement Benefit Plans (In thousands) Total 2016 Net loss (gain) .................................................................... $ Amendments and curtailments ........................................... Amortization of prior service credit ................................... Amortization of actuarial loss ............................................ Total recognized in other comprehensive income, pre-tax ............................................................................. $ 2015 Net loss (gain) .................................................................... $ Amortization of prior service credit ................................... Amortization of actuarial loss ............................................ Total recognized in other comprehensive income, pre-tax ............................................................................. $ 24,736 $ (28,308) 3,228 (30,145) (10,553 ) $ — 1,359 (60 ) 14,183 (28,308) 4,587 (30,205) (30,489) $ (9,254 ) $ (39,743) 26,631 $ 6,005 (44,825) (2,431 ) $ 1,359 (106 ) 24,200 7,364 (44,931) (12,189) $ (1,178 ) $ (13,367) The following table reflects the amortization of amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit expense during 2017: Amortization of net prior service cost (credit) ................................... $ Amortization of net loss (gain) .......................................................... 557 $ 27,196 (1,359) (44) Pension Plans Other Postretirement Benefit Plans (In thousands) 158 158 The Company also provides a qualified defined contribution pension plan to eligible employees who were not participants in the defined benefit pension plan as of December 31, 2005 and to other employees who have elected to participate in the defined contribution plan. The Company makes contributions to the defined contribution plan each year in an amount that is based on an individual participant’s total compensation (generally defined as total wages, incentive compensation, commissions and bonuses) and years of service. Participants do not contribute to the defined contribution pension plan. Pension expense recorded in 2016, 2015 and 2014 associated with the defined contribution pension plan was approximately $25 million, $23 million and $22 million, respectively. Assumptions The assumed weighted-average rates used to determine benefit obligations at December 31 were: Pension Benefits Other Postretirement Benefits 2016 2015 2016 2015 Discount rate .......................................................................... 4.00% 4.25 % 4.00 % 4.25% Rate of increase in future compensation levels ...................... 4.39% 4.37 % — — The assumed weighted-average rates used to determine net benefit expense for the years ended December 31 were: Pension Benefits 2015 2016 2014 2016 Other Postretirement Benefits 2015 2014 Discount rate ........................................................ 4.25% 4.00% 4.75% 4.25 % 4.00 % 4.75% Long-term rate of return on plan assets ................ 6.50% 6.50% 6.50% — — — Rate of increase in future compensation levels ................................................................. 4.37% 4.39% 4.42% — — — The expected long-term rate of return assumption as of each measurement date was developed through analysis of historical market returns, current market conditions, anticipated future asset allocations, the funds’ past experience, and expectations on potential future market returns. The expected rate of return assumption represents a long-term average view of the performance of the plan assets, a return that may or may not be achieved during any one calendar year. For measurement of other postretirement benefits, a 6.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2017. The rate was assumed to decrease to 5.00% over 12 years. A one-percentage point change in assumed health care cost trend rates would have had the following effects: Increase (decrease) in: Service and interest cost ......................................................................................... $ 106 $ (87) Accumulated postretirement benefit obligation ..................................................... 1,548 (1,400) +1% -1% (In thousands) 159 159 Plan assets The Company’s policy is to invest the pension plan assets in a prudent manner for the purpose of providing benefit payments to participants and mitigating reasonable expenses of administration. The Company’s investment strategy is designed to provide a total return that, over the long-term, places an emphasis on the preservation of capital. The strategy attempts to maximize investment returns on assets at a level of risk deemed appropriate by the Company while complying with applicable regulations and laws. The investment strategy utilizes asset diversification as a principal determinant for establishing an appropriate risk profile while emphasizing total return realized from capital appreciation, dividends and interest income. The target allocations for plan assets are generally 25 to 60 percent equity securities, 10 to 65 percent debt securities, and 10 to 85 percent money-market funds/cash equivalents and other investments, although holdings could be more or less than these general guidelines based on market conditions at the time and actions taken or recommended by the investment managers providing advice to the Company. Assets are managed by a combination of internal and external investment managers. Equity securities may include investments in domestic and international equities, through individual securities, mutual funds and exchange-traded funds. Debt securities may include investments in corporate bonds of companies from diversified industries, mortgage-backed securities guaranteed by government agencies and U.S. Treasury securities, through individual securities and mutual funds. Additionally, the Company’s defined benefit pension plan held $234,969,000 (14.3% of total assets) of real estate, private investments, hedge funds and other investments at December 31, 2016. Returns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns. Furthermore, management regularly reviews the investment policy and may, if deemed appropriate, make changes to the target allocations noted above. 160 160 The fair values of the Company’s pension plan assets at December 31, 2016, by asset category, were as follows: Fair Value Measurement of Plan Assets At December 31, 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In thousands) Total Asset category: Money-market funds .............................................. $ Equity securities: M&T .................................................................. Domestic(a) ....................................................... International(b) .................................................. Mutual funds: Domestic(a) .................................................. International(b) ............................................. Debt securities: Corporate(c) ...................................................... Government ....................................................... International ...................................................... Mutual funds: Domestic(d) .................................................. 39,556 $ 35,562 $ 3,994 $ 164,474 200,595 14,364 250,472 290,172 920,077 104,909 121,869 13,073 164,474 200,595 14,364 250,472 290,172 920,077 — — — — — — — 104,909 — 121,869 — 13,073 205,847 445,698 205,847 — 205,847 239,851 — — — — — — — — — — — — Other: Diversified mutual fund..................................... Real estate partnerships ..................................... Private equity ..................................................... Hedge funds ....................................................... Guaranteed deposit fund .................................... 92,691 3,112 21,924 106,250 10,992 234,969 Total(e) ................................................................... $1,640,300 $ 92,691 768 — 85,270 — 178,729 — — — — — — 1,340,215 $ 243,845 $ — 2,344 21,924 20,980 10,992 56,240 56,240 161 161 The fair values of the Company’s pension plan assets at December 31, 2015, by asset category, were as follows: Fair Value Measurement of Plan Assets At December 31, 2015 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In thousands) Total Asset category: Money-market funds .............................................. $ Equity securities: M&T .................................................................. Domestic(a) ....................................................... International(b) .................................................. Mutual funds: 69,634 $ 37,958 $ 31,676 $ 148,800 106,993 9,433 148,800 106,993 9,433 Domestic(a) .................................................. International(b) ............................................. 445,663 348,869 1,059,758 445,663 348,869 1,059,758 Debt securities: Corporate(c) ...................................................... Government ....................................................... International ...................................................... Mutual funds: Domestic(d) .................................................. 105,499 120,346 7,492 51,028 284,365 — 105,499 — 120,346 7,492 — 51,028 — 51,028 233,337 — — — — — — — — — — — — — — — — — — Other: Diversified mutual fund..................................... Real estate partnerships ..................................... Private equity ..................................................... Hedge funds ....................................................... Guaranteed deposit fund .................................... 70,343 2,787 5,603 119,549 11,596 209,878 Total(e) ................................................................... $1,623,635 $ 70,343 — — 81,861 — 152,204 — — — — — — 1,300,948 $ 265,013 $ — 2,787 5,603 37,688 11,596 57,674 57,674 (a) This category is comprised of equities of companies primarily within the mid-cap and large-cap sectors of the U.S. economy and range across diverse industries. (b) This category is comprised of equities in companies primarily within the mid-cap and large-cap sectors of international markets mainly in developed markets in Europe and the Pacific Rim. (c) This category represents investment grade bonds of U.S. issuers from diverse industries. (d) Approximately 75% of the mutual funds were invested in investment grade bonds and 25% in high-yielding bonds at December 31, 2016. Approximately 33% of the mutual funds were invested in investment grade bonds and 67% in high-yielding bonds at December 31, 2015. The holdings within the funds were spread across diverse industries. (e) Excludes dividends and interest receivable totaling $1,831,000 and $1,499,000 at December 31, 2016 and 2015, respectively. 162 162 Pension plan assets included common stock of M&T with a fair value of $164,474,000 (10.0% of total plan assets) at December 31, 2016 and $148,800,000 (9.2% of total plan assets) at December 31, 2015. No other investment in securities of a non-U.S. Government or government agency issuer exceeded ten percent of plan assets at December 31, 2016. Assets subject to Level 3 valuations did not constitute a significant portion of plan assets at December 31, 2016 or December 31, 2015. The changes in Level 3 pension plan assets measured at estimated fair value on a recurring basis during the year ended December 31, 2016 were as follows: Balance – January 1, 2016 Purchases (Sales) Total Realized/ Unrealized Gains (Losses) Balance – December 31, 2016 (In thousands) Other Private real estate .................................................... $ Private equity .......................................................... Hedge funds ............................................................ Guaranteed deposit fund ......................................... 2,787 $ 5,603 37,688 11,596 Total ................................................................... $ 57,674 $ (1,111) $ 17,177 (16,337) (540) (811) $ 2,344 668 $ (856 ) 21,924 (371 ) 20,980 (64 ) 10,992 (623 ) $ 56,240 The Company makes contributions to its funded qualified defined benefit pension plan as required by government regulation or as deemed appropriate by management after considering factors such as the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plan. Subject to the impact of actual events and circumstances that may occur in 2017, the Company may make contributions to the qualified defined benefit pension plan in 2017, but the amount of any such contribution has not yet been determined. The Company did not make any contributions to the plan in 2016 or 2015. The Company regularly funds the payment of benefit obligations for the supplemental defined benefit pension and postretirement benefit plans because such plans do not hold assets for investment. Payments made by the Company for supplemental pension benefits were $10,772,000 and $8,367,000 in 2016 and 2015, respectively. Payments made by the Company for postretirement benefits were $7,588,000 and $4,022,000 in 2016 and 2015, respectively. Payments for supplemental pension and other postretirement benefits for 2017 are not expected to differ from those made in 2016 by an amount that will be material to the Company’s consolidated financial position. Estimated benefits expected to be paid in future years related to the Company’s defined benefit pension and other postretirement benefits plans are as follows: Pension Benefits Other Postretirement Benefits (In thousands) Year ending December 31: 2017 ...................................................................................................... $ 2018 ...................................................................................................... 2019 ...................................................................................................... 2020 ...................................................................................................... 2021 ...................................................................................................... 2022 through 2026................................................................................ 81,927 $ 85,715 91,819 96,465 101,698 568,830 8,142 8,220 8,251 8,259 8,235 40,282 163 163 The Company has a retirement savings plan (“RSP”) that is a defined contribution plan in which eligible employees of the Company may defer up to 50% of qualified compensation via contributions to the plan. The Company makes an employer matching contribution in an amount equal to 75% of an employee’s contribution, up to 4.5% of the employee’s qualified compensation. Employees’ accounts, including employee contributions, employer matching contributions and accumulated earnings thereon, are at all times fully vested and nonforfeitable. Employee benefits expense resulting from the Company’s contributions to the RSP totaled $36,766,000, $34,145,000 and $32,466,000 in 2016, 2015 and 2014, respectively. 13. Income taxes The components of income tax expense were as follows: 2016 Year Ended December 31 2015 (In thousands) 2014 Current Federal .................................................................................................. $428,750 $ 130,349 $378,978 State and city ........................................................................................ 50,790 Total current .................................................................................... 524,176 151,898 429,768 95,426 21,549 Deferred Federal .................................................................................................. 147,662 324,317 26,351 72,279 State and city ........................................................................................ Total deferred .................................................................................. 174,013 396,596 45,095 46,531 65,503 27,345 92,848 53,383 Total income taxes applicable to pre-tax income ............................ $743,284 $ 595,025 $575,999 Amortization of investments in qualified affordable housing projects ..... The Company files a consolidated federal income tax return reflecting taxable income earned by all domestic subsidiaries. In prior years, applicable federal tax law allowed certain financial institutions the option of deducting as bad debt expense for tax purposes amounts in excess of actual losses. In accordance with GAAP, such financial institutions were not required to provide deferred income taxes on such excess. Recapture of the excess tax bad debt reserve established under the previously allowed method will result in taxable income if M&T Bank fails to maintain bank status as defined in the Internal Revenue Code or charges are made to the reserve for other than bad debt losses. At December 31, 2016, M&T Bank’s tax bad debt reserve for which no federal income taxes have been provided was $137,121,000. No actions are planned that would cause this reserve to become wholly or partially taxable. Income taxes attributable to gains or losses on bank investment securities were an expense of $11,929,000 in 2016. There were no significant gains or losses on bank investment securities in 2015 or 2014. No alternative minimum tax expense was recognized in 2016, 2015 or 2014. 164 164 Total income taxes differed from the amount computed by applying the statutory federal income tax rate to pre-tax income as follows: 2016 Year Ended December 31 2015 (In thousands) 2014 Income taxes at statutory federal income tax rate ............................... $720,439 $ 586,142 $574,786 Increase (decrease) in taxes: Tax-exempt income ........................................................................ (35,364 ) (33,102 ) (31,752) State and city income taxes, net of federal income tax effect ........ 79,155 60,988 50,788 Qualified affordable housing project federal tax credits, net ......... (15,091 ) (15,297 ) (14,827) (2,996) Other ............................................................................................... $743,284 $ 595,025 $575,999 (5,855 ) (3,706 ) Deferred tax assets (liabilities) were comprised of the following at December 31: 2016 2015 (In thousands) 2014 590,288 $ 143,067 52,512 36,616 61,266 52,181 10,741 — 106,876 Losses on loans and other assets ........................................ $ Retirement benefits ............................................................ Postretirement and other employee benefits ...................... Incentive and other compensation plans ............................ Interest on loans ................................................................. Stock-based compensation ................................................. Unrealized investment losses ............................................. Depreciation and amortization ........................................... Other ................................................................................... 637,955 $ 605,273 120,222 148,722 34,052 55,962 36,450 60,337 79,147 57,640 64,017 72,090 — — 3,527 — 100,999 162,086 Gross deferred tax assets ............................................... 1,053,547 1,194,792 1,043,687 (280,596) (285,074 ) (82,065) (31,121 ) (46,393) (59,171 ) — (56,731 ) (66,939) (55,611 ) (487,708 ) (475,993) 707,084 $ 567,694 Leasing transactions ........................................................... Unrealized investment gains .............................................. Capitalized servicing rights ................................................ Depreciation and amortization ........................................... Other ................................................................................... Gross deferred tax liabilities.......................................... Net deferred tax asset ......................................................... $ (266,268) — (71,108) (63,959) (87,200) (488,535) 565,012 $ The Company believes that it is more likely than not that the deferred tax assets will be realized through taxable earnings or alternative tax strategies. The income tax credits shown in the statement of income of M&T in note 25 arise principally from operating losses before dividends from subsidiaries. 165 165 A reconciliation of the beginning and ending amount of unrecognized tax benefits follows: Federal, State and Local Tax Unrecognized Income Tax Benefits Accrued Interest (In thousands) — 453 769 — Gross unrecognized tax benefits at January 1, 2014 ......................... $ 14,611 $ 14,696 $ 29,307 Increases as a result of tax positions taken during 2014 ................ 769 453 Increases as a result of tax positions taken in prior years .............. Decreases as a result of settlements with taxing authorities .......... (4,668) (11,280 ) (15,948) Gross unrecognized tax benefits at December 31, 2014 ................... 10,712 3,869 14,581 8,108 Increases as a result of tax positions taken during 2015 ................ 8,108 807 Increases as a result of tax positions taken in prior years .............. — Decreases as a result of settlements with taxing authorities .......... (1,515) (1,789) Unrealized tax benefits acquired in a business combination ......... 7,232 3,567 10,799 Gross unrecognized tax benefits at December 31, 2015 ................... 24,537 7,969 32,506 — 12,237 Increases as a result of tax positions taken during 2016 ................ 12,237 656 656 — Increases as a result of tax positions taken in prior years .............. (1,595) (710 ) (885) Decreases as a result of tax positions taken in prior years ............. Gross unrecognized tax benefits at December 31, 2016 ................... $ 35,889 $ 7,915 43,804 Less: Federal, state and local income tax benefits ............................ (15,332) Net unrecognized tax benefits at December 31, 2016 that, if recognized, would impact the effective income tax rate ............ — 807 (274 ) $ 28,472 The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in income taxes in the consolidated statement of income. The balance of accrued interest at December 31, 2016 is included in the table above. The Company’s federal, state and local income tax returns are routinely subject to examinations from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Should determinations rendered by tax authorities ultimately indicate that management’s assumptions were inappropriate, the result and adjustments required could have a material effect on the Company’s results of operations. Examinations by the Internal Revenue Service of the Company’s federal income tax returns have been largely concluded through 2015, although under statute the income tax returns from 2010 and 2013 through 2015 could be adjusted. The Company also files income tax returns in over forty states and numerous local jurisdictions. Substantially all material state and local matters have been concluded for years through 2012. It is not reasonably possible to estimate when examinations for any subsequent years will be completed. 166 166 14. Earnings per common share The computations of basic earnings per common share follow: Income available to common shareholders: 2016 Year Ended December 31 2015 (In thousands, except per share) 2014 Net income .................................................................... $ 1,315,114 $ 1,079,667 $ 1,066,246 (75,878) (81,270) Less: Preferred stock dividends(a) ................................ Net income available to common equity ....................... 1,233,844 990,368 Less: Income attributable to unvested stock-based compensation awards ................................................. (81,270 ) 998,397 (10,385) Net income available to common shareholders ................. $ 1,223,459 $ Weighted-average shares outstanding: (10,708 ) (11,837) 987,689 $ 978,531 Common shares outstanding (including common stock issuable) and unvested stock-based compensation awards ......................................................................... Less: Unvested stock-based compensation awards ....... Weighted-average shares outstanding ................................ 158,121 (1,341) 156,780 138,285 (1,482 ) 136,803 132,532 (1,582) 130,950 Basic earnings per common share ...................................... $ 7.80 $ 7.22 $ 7.47 (a) Including impact of not as yet declared cumulative dividends. The computations of diluted earnings per common share follow: 2016 Year Ended December 31 2015 (In thousands, except per share) 2014 Net income available to common equity ............................ $ 1,233,844 $ 998,397 $ 990,368 Less: Income attributable to unvested stock-based compensation awards ................................................. (10,363) Net income available to common shareholders ................. $ 1,223,481 $ Adjusted weighted-average shares outstanding: (11,787) (10,673 ) 987,724 $ 978,581 Common and unvested stock-based compensation awards ......................................................................... Less: Unvested stock-based compensation awards ....... Plus: Incremental shares from assumed conversion of stock-based compensation awards and warrants to purchase common stock ............................................. Adjusted weighted-average shares outstanding ................. 158,121 (1,341) 138,285 (1,482 ) 132,532 (1,582) 524 157,304 730 137,533 894 131,844 Diluted earnings per common share ................................... $ 7.78 $ 7.18 $ 7.42 GAAP defines unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities that shall be included in the computation of earnings per common share pursuant to the two-class method. The Company has issued stock-based compensation awards in the form of restricted stock and restricted stock units, which, in accordance with GAAP, are considered participating securities. 167 167 Stock-based compensation awards and warrants to purchase common stock of M&T representing common shares of approximately 2,171,000 in 2016, 2,268,000 in 2015 and 2,017,000 in 2014 were not included in the computations of diluted earnings per common share because the effect on those years would have been antidilutive. 15. Comprehensive income The following tables display the components of other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income (loss) to net income: Investment Securities Defined Benefit All Plans Other With OTTI (a) Other Total Amount Before Tax Income Tax Net (In thousands) Balance — January 1, 2016 .............. $ 16,359 $ 62,849 $(489,660) $(4,093) $(414,545 ) Other comprehensive income before reclassifications: $ 162,918 $(251,627) Unrealized holding gains (losses), net ............................... 30,366 (110,316) Foreign currency translation adjustment ................................ — Current year benefit plans gains ......................................... — — — Total other comprehensive income (loss) before reclassifications ......... 30,366 (110,316) Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income: — — (79,950 ) 31,509 (48,441) — (4,020) (4,020 ) 1,406 (2,614) 14,125 — 14,125 (5,557 ) 8,568 14,125 (4,020) (69,845 ) 27,358 (42,487) 3,996 (30,314) Amortization of unrealized holding losses on held-to- maturity ("HTM") securities ..... — Gains realized in net income ....... — Accretion of net gain on terminated cash flow hedges .... — Amortization of prior service credit ......................................... — Amortization of actuarial — losses ........................................ — (855 ) Total reclassifications ....................... — (26,318) Total gain (loss) during the period .... 30,366 (136,634) (70,700 ) Balance — December 31, 2016 ........ $ 46,725 $ (73,785) $(449,917) $(8,268) $(485,245 ) 30,205 — 25,618 (155) 39,743 (4,175) — — — — (4,587) — (155) — — — 3,996 (b) (1,572 ) (30,314 ) (c) 11,925 2,424 (18,389) (155 ) (d) (4,587 ) (e) 61 (94) 1,805 (2,782) 18,319 30,205 (e) (11,886 ) (522) 333 27,691 (43,009) $ 190,609 $(294,636) 168 168  Investment Securities Defined Benefit All Plans Other With OTTI (a) Other Total Amount Before Tax Income Tax Net (In thousands) Balance — January 1, 2015 .............. $ 7,438 $ 201,828 $(503,027) $(4,082) $(297,843 ) Other comprehensive income before reclassifications: $ 116,849 $(180,994) Unrealized holding gains (losses), net ............................... 8,921 (142,623) Foreign currency translation adjustment ................................ — Gains on cash flow hedges .......... — Current year benefit plans losses ........................................ — — — — Total other comprehensive income (loss) before reclassifications ......... 8,921 (142,623) Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income: — — (133,702 ) 52,376 (81,326) — (1,323) — 1,453 (1,323 ) 1,453 398 (572 ) (925) 881 (24,200) — (24,200 ) 8,612 (15,588) (24,200) 130 (157,772 ) 60,814 (96,958) 3,514 130 Amortization of unrealized holding losses on HTM securities ................................... — Losses realized in net income ...... — Accretion of net gain on terminated cash flow hedges .... — Amortization of prior service credit ......................................... — Amortization of actuarial 28,942 44,931 (e) (15,989 ) — losses ........................................ — 26,325 (14,745 ) 41,070 Total reclassifications ....................... — 3,644 46,069 Total gain (loss) during the period .... 8,921 (138,979) (70,633) (11) (116,702 ) $ 162,918 $(251,627) Balance — December 31, 2015 ........ $ 16,359 $ 62,849 $(489,660) $(4,093) $(414,545 ) 44,931 — 37,567 (141) 13,367 — — — — 3,514 (b) 130 (c) (1,383 ) (49 ) (7,364) — 2,131 81 (7,364 ) (e) (141 ) (d) 2,620 (4,744) (141) — — — 56 (85) 169 169  Investment Securities With OTTI (a)   All Other Defined Benefit Plans Other Total Amount Before Tax Income Tax Net (In thousands) Balance — January 1, 2014 .............. $ 37,255 $ 18,450 $(161,617) $ Other comprehensive income before reclassifications: 115 $(105,797 ) $ 41,638 $ (64,159) Unrealized holding gains (losses), net ............................... (29,818) 180,005 Foreign currency translation adjustment ................................ Unrealized losses on cash flow hedges ....................................... Current year benefit plans losses ........................................ — — — — — — — 150,187 (58,962 ) 91,225 — (4,039) (4,039 ) 1,432 (2,607) — (165) (165 ) 65 (100) — (347,993) — (347,993 ) Total other comprehensive income (loss) before reclassifications ......... (29,818) 180,005 (347,993) (4,204) (202,010 ) Amounts reclassified from accumulated other comprehensive income that (increase) decrease net income: 1 3,373 Amortization of unrealized holding losses on HTM securities ................................... Amortization of losses on terminated cash flow hedges .... Amortization of prior service credit ......................................... Amortization of actuarial 14,494 (e) — losses ........................................ Total reclassifications ....................... 9,964 1 Total gain (loss) during the period .... (29,817) 183,378 (341,410) (4,197) (192,046 ) Balance — December 31, 2014 ........ $ 7,438 $201,828 $(503,027) $(4,082) $(297,843 ) 14,494 — 7 6,583 (7,911) — — 3,373 — — (7,911 ) (e) 3,374 (b) 7 (d) — — — — — 7 136,587 (211,406) 79,122 (122,888) (1,324 ) 2,050 (3 ) 4 3,105 (4,806) (5,689 ) (3,911 ) 8,805 6,053 75,211 (116,835) $ 116,849 $(180,994) (a) Other-than-temporary impairment. Included in interest income. (b) Included in gain (loss) on bank investment securities. (c) Included in interest expense. (d) Included in salaries and employee benefits expense. (e) 170 170 Accumulated other comprehensive income (loss), net consisted of the following: Investment securities With OTTI All Other Defined Benefit Plans (In thousands) Other Total Balance at January 1, 2014............................. $ 22,632 $ 11,294 $ (98,182 ) $ 97 $ (64,159) Net gain (loss) during 2014 ............................ (18,114) 111,389 (207,407 ) (2,703 ) (116,835) 4,518 122,683 (305,589 ) (2,606 ) (180,994) Balance at December 31, 2014....................... 5,403 (84,517) Net gain (loss) during 2015 ............................ (129 ) (70,633) 8,610 9,921 38,166 (296,979 ) (2,735 ) (251,627) Balance at December 31, 2015....................... 24,105 (2,708 ) (43,009) Net gain (loss) during 2016 ............................ 18,417 (82,823) Balance at December 31, 2016....................... $ 28,338 $ (44,657) $(272,874 ) $ (5,443 ) $(294,636) 16. Other income and other expense The following items, which exceeded 1% of total interest income and other income in the respective period, were included in either “other revenues from operations” or “other costs of operations” in the consolidated statement of income: 2016 Year Ended December 31 2015 (In thousands) 2014 Other income: Credit-related fee income ............................................................... $ 70,424 $ 81,558 $ 72,454 52,724 56,708 Letter of credit fees......................................................................... 52,984 50,004 Bank owned life insurance ............................................................. Other expense: Professional services ...................................................................... 268,060 267,540 324,460 49,906 68,410 Amortization of capitalized servicing rights .................................. 17. International activities The Company engages in limited international activities including certain trust-related services in Europe, collecting Eurodollar deposits, engaging in foreign currency transactions associated with customer activity, providing credit to support the international activities of domestic companies and holding certain loans to foreign borrowers. Assets and revenues associated with international activities represent less than 1% of the Company’s consolidated assets and revenues. International assets included $292 million and $265 million of loans to foreign borrowers at December 31, 2016 and 2015, respectively. Deposits at M&T Bank’s Cayman Islands office were $202 million and $170 million at December 31, 2016 and 2015, respectively. The Company uses such deposits to facilitate customer demand and as an alternative to short-term borrowings when the costs of such deposits seem reasonable. Deposits at M&T Bank’s office in Ontario, Canada were $50 million at December 31, 2016 and $35 million at December 31, 2015. Revenues from providing international trust-related services were approximately $25 million in 2016, $26 million in 2015 and $31 million in 2014. 18. 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 171 171 and interest-bearing liabilities. The Company designates interest rate swap agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain master netting and collateral provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant as of December 31, 2016. The net effect of interest rate swap agreements was to increase net interest income by $37 million in 2016, $44 million in 2015 and $45 million in 2014. The average notional amounts of interest rate swap agreements impacting net interest income that were entered into for interest rate risk management purposes were $1.4 billion in each of 2016, 2015 and 2014. Information about interest rate swap agreements entered into for interest rate risk management purposes summarized by type of financial instrument the swap agreements were intended to hedge follows: Notional Amount (In thousands) Average Maturity Fixed (In years) Weighted- Average Rate Variable Estimated Fair Value Gain (In thousands) December 31, 2016 Fair value hedges: Fixed rate long-term borrowings(a) ................. $ 900,000 1.1 3.75% 2.08 % $ 11,892 December 31, 2015 Fair value hedges: Fixed rate long-term borrowings(a) ................. $1,400,000 1.7 4.42% 1.39 % $ 43,892 (a) Under the terms of these agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate. The notional amount of interest rate swap agreements entered into for risk management purposes that were outstanding at December 31, 2016 mature as follows: Year ending December 31: 2017 .............................................................................................................................. $ 400,000 2018 .............................................................................................................................. 500,000 $ 900,000 (In thousands) The Company utilizes commitments to sell residential and commercial real estate loans to hedge the exposure to changes in the fair value of real estate loans held for sale. Such commitments have generally been designated as fair value hedges. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in fair value of certain commitments to originate real estate loans for sale. Derivative financial instruments used for trading account purposes included interest rate contracts, foreign exchange and other option contracts, foreign exchange forward and spot contracts, and financial futures. Interest rate contracts entered into for trading account purposes had notional values of $21.6 billion and $18.4 billion at December 31, 2016 and 2015, respectively. The notional amounts of foreign currency and other option and futures contracts entered into for trading account purposes aggregated $471 million and $1.6 billion at December 31, 2016 and 2015, respectively. 172 172 Information about the fair values of derivative instruments in the Company’s consolidated balance sheet and consolidated statement of income follows: Derivatives designated and qualifying as hedging instruments Fair value hedges: Interest rate swap agreements(a) ....................................................... $ Commitments to sell real estate loans(a) ........................................... Derivatives not designated and qualifying as hedging instruments Mortgage-related commitments to originate real estate loans for sale(a) ................................................................................................... Commitments to sell real estate loans(a) ................................................. Trading: Asset Derivatives Fair Value December 31 Liability Derivatives Fair Value December 31 2016 2015 2016 2015 (In thousands) 11,892 $ 33,189 45,081 43,892 $ 1,844 45,736 — $ 1,347 1,347 8,060 5,210 10,282 533 735 399 — 656 656 403 846 Interest rate contracts(b).................................................................... Foreign exchange and other option and futures contracts(b) ............. 153,723 7,022 161,994 Total derivatives ..................................................................................... $ 295,069 $ 268,637 $ 176,857 $ 162,650 203,517 167,737 6,639 222,901 175,510 228,810 7,908 249,988 8,569 (a) Asset derivatives are reported in other assets and liability derivatives are reported in other liabilities. (b) Asset derivatives are reported in trading account assets and liability derivatives are reported in other liabilities. Year Ended December 31, 2016 Amount of Gain (Loss) Recognized Year Ended December 31, 2015 Derivative Hedged Item Derivative Hedged Item (In thousands) Year Ended December 31, 2014 Hedged Item Derivative Derivatives in fair value hedging relationships Interest rate swap agreements: Fixed rate long-term borrowings(a) ........................... $(32,000) 30,906 $(29,359) 28,719 $ (29,624) 28,870 Derivatives not designated as hedging instruments Trading: Interest rate contracts(b) ............................................ $ 14,042 Foreign exchange and other option and futures contracts(b) ............................................................. 7,665 Total ................................................................................ $ 21,707 $ 10,755 $ 3,398 9,337 $ 20,092 7,670 $ 11,068 (a) Reported as other revenues from operations. (b) Reported as trading account and foreign exchange gains. The Company also has commitments to sell and commitments to originate residential and commercial real estate loans that are considered derivatives. The Company designates certain of the commitments to sell real estate loans as fair value hedges of real estate loans held for sale. The Company also utilizes commitments to sell real estate loans to offset the exposure to changes in the fair value of certain commitments to originate real estate loans for sale. As a result of these activities, net unrealized pre-tax gains related to hedged loans held for sale, commitments to originate loans for sale and commitments to sell loans were approximately $28 million and $18 million at December 31, 2016 and 2015, respectively. Changes in unrealized gains and losses are included in mortgage 173 173 banking revenues and, in general, are realized in subsequent periods as the related loans are sold and commitments satisfied. The Company does not offset derivative asset and liability positions in its consolidated financial statements. The Company’s exposure to credit risk by entering into derivative contracts is mitigated through master netting agreements and collateral posting requirements. Master netting agreements covering interest rate and foreign exchange contracts with the same party include a right to set-off that becomes enforceable in the event of default, early termination or under other specific conditions. The aggregate fair value of derivative financial instruments in a liability position, which are subject to enforceable master netting arrangements, was $34 million and $59 million at December 31, 2016 and 2015, respectively. After consideration of such netting arrangements, the net liability positions with counterparties aggregated $30 million and $55 million at December 31, 2016 and 2015, respectively. The Company was required to post collateral relating to those positions of $27 million and $52 million at December 31, 2016 and 2015, respectively. Certain of the Company’s derivative financial instruments contain provisions that require the Company to maintain specific credit ratings from credit rating agencies to avoid higher collateral posting requirements. If the Company’s debt ratings were to fall below specified ratings, the counterparties to the derivative financial instruments could demand immediate incremental collateralization on those instruments in a net liability position. The aggregate fair value of all derivative financial instruments with such credit risk-related contingent features in a net liability position on December 31, 2016 was $2 million, for which the Company was not required to post collateral in the normal course of business. If the credit risk-related contingent features had been triggered on December 31, 2016, the maximum amount of additional collateral the Company would have been required to post with counterparties was $2 million. The aggregate fair value of derivative financial instruments in an asset position, which are subject to enforceable master netting arrangements, was $15 million and $23 million at December 31, 2016 and 2015, respectively. After consideration of such netting arrangements, the net asset positions with counterparties aggregated $11 million and $19 million at December 31, 2016 and 2015, respectively. Counterparties posted collateral relating to those positions of $9 million and $22 million at December 31, 2016 and 2015, respectively. Trading account interest rate swap agreements entered into with customers are subject to the Company’s credit risk standards and often contain collateral provisions. In addition to the derivative contracts noted above, the Company clears certain derivative transactions through a clearinghouse, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and additional collateral depending on the contracts being in a net asset or liability position. The amount of initial margin posted by the Company was $111 million and $52 million at December 31, 2016 and 2015, respectively. The net fair values of derivative instruments cleared through clearinghouses for which variation margin is required was a net asset position of $63 million at December 31, 2016. Collateral posted by the clearinghouses associated with that net asset position was $81 million at December 31, 2016. The net fair values of derivative instruments cleared through clearinghouses for which variation margin is required was a net liability position of $50 million at December 31, 2015. Collateral posted by the Company associated with that net liability position was $47 million at December 31, 2015. 19. 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 had included the one-to-four family residential mortgage loans that were included in the trust in its consolidated financial statements. In 174 174 the first quarter of 2016, the securitization trust was terminated as the Company exercised its right to purchase the underlying mortgage loans pursuant to the clean-up call provisions of the trust. At December 31, 2015, the carrying value of the loans in the securitization trust was $81 million. The outstanding principal amount of mortgage-backed securities issued by the qualified special purpose trust that was held by parties unrelated to M&T at December 31, 2015 was $13 million. During the years ended December 31, 2016, 2015 and 2014, the Company securitized one-to- four family residential real estate loans that had been originated for sale in guaranteed mortgage securitizations with Ginnie Mae totaling $24 million, $65 million and $135 million, respectively, and retained those securities in its investment securities portfolio. Pre-tax gains on such transactions were not material. As a result of the securitization structures, the Company does not have effective control over the underlying loans and expects no material credit-related losses on the retained securities as a result of the guarantees by Ginnie Mae. As described in note 9, 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 December 31, 2016 and 2015, the Company included the junior subordinated debentures as “long-term borrowings” in its consolidated balance sheet and recognized $24 million in other assets for its “investment” in the common securities of the trusts that will be concomitantly repaid to M&T by the respective trust from the proceeds of M&T’s repayment of the junior subordinated debentures associated with preferred capital securities described in note 9. The Company has invested as a limited partner in various partnerships that collectively had total assets of approximately $1.0 billion at December 31, 2016 and $1.1 billion at December 31, 2015. Those partnerships generally construct or acquire properties for which the investing partners are eligible to receive certain federal income tax credits in accordance with government guidelines. Such investments may also provide tax deductible losses to the partners. The partnership investments also assist the Company in achieving its community reinvestment initiatives. As a limited partner, there is no recourse to the Company by creditors of the partnerships. However, the tax credits that result from the Company’s investments in such partnerships are generally subject to recapture should a partnership fail to comply with the respective government regulations. The Company’s maximum exposure to loss of its investments in such partnerships was $294 million, including $102 million of unfunded commitments, at December 31, 2016 and $295 million, including $78 million of unfunded commitments, at December 31, 2015. Contingent commitments to provide additional capital contributions to these partnerships were not material at December 31, 2016. The Company has not provided financial or other support to the partnerships that was not contractually required. Management currently estimates that no material losses are probable as a result of the Company’s involvement with such entities. The Company, in its position as limited partner, does not direct the activities that most significantly impact the economic performance of the partnerships and, therefore, in accordance with the accounting provisions for variable interest entities, the partnership entities are not included in the Company’s consolidated financial statements. The Company’s investment cost is amortized to income taxes in the consolidated statement of income as tax credits and other tax benefits resulting from deductible losses associated with the projects are received. The Company serves as investment advisor for certain registered money-market funds. The Company has no explicit arrangement to provide support to those funds, but may waive portions of its allowable management fees as a result of market conditions. 175 175 20. 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 December 31, 2016. Pursuant to GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.    Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market. Level 3 — Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability. When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. The following is a description of the valuation methodologies used for the Company’s assets and liabilities that are measured on a recurring basis at estimated fair value. Trading account assets and liabilities Trading account assets and liabilities consist primarily of interest rate swap agreements and foreign exchange contracts with customers who require such services with offsetting positions with third parties to minimize the Company’s risk with respect to such transactions. The Company generally determines the fair value of its derivative trading account assets and liabilities using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. Mutual funds held in connection with deferred compensation and other arrangements have been classified as Level 1 valuations. Valuations of investments in municipal and other bonds can generally be obtained through reference to quoted prices in less active markets for the same or similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Investment securities available for sale The majority of the Company’s available-for-sale investment securities have been valued by reference to prices for similar securities or through model-based techniques in which all significant inputs are observable and, therefore, such valuations have been classified as Level 2. Certain investments in mutual funds and equity securities are actively traded and, therefore, have been classified as Level 1 valuations. Included in collateralized debt obligations at December 31, 2015 were securities backed by trust preferred securities issued by financial institutions and other entities. As disclosed in note 3, the Company sold its collateralized debt obligations in 2016. The Company performed internal modeling 176 176 to estimate the cash flows and fair value of its portfolio of securities backed by trust preferred securities at December 31, 2015. The modeling techniques included estimating cash flows using bond-specific assumptions about future collateral defaults and related loss severities. The resulting cash flows were then discounted by reference to market yields observed in the single-name trust preferred securities market. In determining a market yield applicable to the estimated cash flows, a margin over LIBOR, ranging from 4% to 10% with a weighted-average of 8% was used. Significant unobservable inputs used in the determination of estimated fair value of collateralized debt obligations are included in the accompanying table of significant unobservable inputs to Level 3 measurements. At December 31, 2015, the total amortized cost and fair value of securities backed by trust preferred securities issued by financial institutions and other entities were $28 million and $47 million, respectively. Real estate loans held for sale The Company utilizes commitments to sell real estate loans to hedge the exposure to changes in fair value of real estate loans held for sale. The carrying value of hedged real estate loans held for sale includes changes in estimated fair value during the hedge period. Typically, the Company attempts to hedge real estate loans held for sale from the date of close through the sale date. The fair value of hedged real estate loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans with similar characteristics and, accordingly, such loans have been classified as a Level 2 valuation. Commitments to originate real estate loans for sale and commitments to sell real estate loans The Company enters into various commitments to originate real estate loans for sale and commitments to sell real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value on the consolidated balance sheet. The estimated fair values of such commitments were generally calculated by reference to quoted prices in secondary markets for commitments to sell real estate loans to certain government-sponsored entities and other parties. The fair valuations of commitments to sell real estate loans generally result in a Level 2 classification. The estimated fair value of commitments to originate real estate loans for sale are adjusted to reflect the Company’s anticipated commitment expirations. The estimated commitment expirations are considered significant unobservable inputs contributing to the Level 3 classification of commitments to originate real estate loans for sale. Significant unobservable inputs used in the determination of estimated fair value of commitments to originate real estate loans for sale are included in the accompanying table of significant unobservable inputs to Level 3 measurements. Interest rate swap agreements used for interest rate risk management The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest- bearing liabilities. The Company generally determines the fair value of its interest rate swap agreements using externally developed pricing models based on market observable inputs and, therefore, classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap agreement assets and has considered its own credit risk in the valuation of its interest rate swap agreement liabilities. 177 177 The following tables present assets and liabilities at December 31, 2016 and 2015 measured at estimated fair value on a recurring basis: Fair Value Measurements at December 31, 2016 Level 1 (a) Level 2 (a) Level 3 (In thousands) Trading account assets ..................................... $ Investment securities available for sale: 323,867 $ 46,135 $ 277,732 $ U.S. Treasury and federal agencies ............. 1,902,544 Obligations of states and political subdivisions .............................................. Mortgage-backed securities: 3,641 — 1,902,544 — 3,641 — 10,954,861 Government issued or guaranteed .......... 10,954,861 — — 44 Privately issued ....................................... 118,516 118,516 Other debt securities .................................... — 50,755 352,466 301,711 Equity securities .......................................... 13,332,072 301,711 13,030,317 — 1,056,180 50,291 — Total assets .................................................. $ 14,770,470 $ 347,846 $14,414,520 $ 174,376 $ 1,746 176,122 $ Trading account liabilities ................................ $ Other liabilities(b) ............................................ Total liabilities ............................................. $ Real estate loans held for sale .......................... 1,056,180 58,351 Other assets(b) .................................................. 174,376 $ 2,481 176,857 $ — $ — — $ — — — — 44 — — 44 — 8,060 8,104 — 735 735 178 178 Fair Value Measurements at December 31, 2015 Level 1(a) Level 2(a) Level 3 (In thousands) Trading account assets ..................................... $ Investment securities available for sale: U.S. Treasury and federal agencies ............. Obligations of states and political subdivisions .............................................. Mortgage-backed securities: 273,783 $ 56,763 $ 217,020 $ 299,997 — 299,997 6,028 — 6,028 — — — Government issued or guaranteed .......... 11,686,628 74 Privately issued ....................................... 47,393 Collateralized debt obligations .................... 118,880 Other debt securities .................................... 83,671 Equity securities .......................................... 12,242,671 392,036 56,551 — 74 47,393 — — 47,467 — 10,282 Total assets .................................................. $ 12,965,041 $ 121,941 $12,785,351 $ 57,749 — 403 403 — 11,686,628 — — — — — 118,880 18,493 65,178 65,178 12,130,026 392,036 46,269 Trading account liabilities ................................ $ Other liabilities(b) ............................................ Total liabilities ............................................. $ Real estate loans held for sale .......................... Other assets(b) .................................................. 160,745 $ 1,502 162,247 $ 160,745 $ 1,905 162,650 $ — $ — — $ — — (a) There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2016 and 2015. (b) Comprised predominantly of interest rate swap agreements used for interest rate risk management (Level 2), commitments to sell real estate loans (Level 2) and commitments to originate real estate loans to be held for sale (Level 3). 179 179 The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the year ended December 31, 2016 were as follows: Investment Securities Available for Sale    Privately Issued Mortgage-Backed Securities Collateralized Debt Obligations (In thousands) Other Assets and Other Liabilities Balance - January 1, 2016 ................................... $ Total gains (losses) realized/unrealized: Included in earnings ....................................... Included in other comprehensive income ....... Sales .................................................................... Settlements .......................................................... Transfers out of Level 3(a) .................................. Balance — December 31, 2016 .......................... $ Changes in unrealized gains included in earnings related to assets still held at December 31, 2016 .......................................... $ 74 $ 47,393 $ 9,879 — — — (30) — 44 $ 30,041 (c) (18,268 ) (d) (58,296 ) (870 ) — — $ 110,937 (b) — — — (113,491)(e) 7,325 — $ — $ 7,256 (b) The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the year ended December 31, 2015 were as follows: Investment Securities Available for Sale    Privately Issued Mortgage-Backed Securities Collateralized Debt Obligations (In thousands) Other Assets and Other Liabilities Balance — January 1, 2015 ................................ $ Total gains realized/unrealized: Included in earnings ....................................... Included in other comprehensive income ....... Settlements .......................................................... Transfers out of Level 3(a) .................................. Balance — December 31, 2015 .......................... $ Changes in unrealized gains included in earnings related to assets still held at December 31, 2015 .......................................... $ 103 $ 50,316 $ 17,347 — — (29) — 74 $ — 3,254 (d) (6,177 ) — 47,393 $ 87,061 (b) — — (94,529)(e) 9,879 — $ — $ 8,850 (b) 180 180 The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the year ended December 31, 2014 were as follows: Investment Securities Available for Sale     Privately Issued Mortgage-Backed Securities Collateralized Debt Obligations (In thousands) Other Assets and Other Liabilities Balance – January 1, 2014 ............................... $ Total gains realized/unrealized: Included in earnings .................................... Included in other comprehensive income .... Settlements ....................................................... Transfers out of Level 3(a) ............................... Balance – December 31, 2014 ......................... $ Changes in unrealized gains included in earnings related to assets still held at December 31, 2014 ....................................... $ 1,850 $ 63,083 $ 3,941 — 271 (d) (2,018) — 103 $ — 8,209 (d) (20,976 ) — 50,316 83,417 (b) — — (70,011)(e) 17,347 $ — $ — $ 18,196 (b) (a) The Company’s policy for transfers between fair value levels is to recognize the transfer as of the actual date of the event or change in circumstances that caused the transfer. (b) Reported as mortgage banking revenues in the consolidated statement of income and includes the fair value of commitment issuances and expirations. (c) Reported as gain (loss) on bank investment securities in the consolidated statement of income. (d) Reported as net unrealized gains (losses) on investment securities in the consolidated statement of comprehensive income. (e) Transfers out of Level 3 consist of interest rate locks transferred to closed loans. The Company is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair value measurements. The more significant of those assets follow. Loans Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have generally been classified as Level 2, unless significant adjustments have been made to the valuation that are not readily observable by market participants. Non-real estate collateral supporting commercial loans generally consists of business assets such as receivables, inventory and equipment. Fair value estimations are typically determined by discounting recorded values of those assets to reflect estimated net realizable value considering specific borrower facts and circumstances and the experience of credit personnel in their dealings with similar borrower collateral liquidations. Such discounts were generally in the range of 15% to 90% at December 31, 181 181       2016. As these discounts are not readily observable and are considered significant, the valuations have been classified as Level 3. Automobile collateral is typically valued by reference to independent pricing sources based on recent sales transactions of similar vehicles, and the related non-recurring fair value measurement adjustments have been classified as Level 2. Collateral values for other consumer installment loans are generally estimated based on historical recovery rates for similar types of loans. As these recovery rates are not readily observable by market participants, such valuation adjustments have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $293 million at December 31, 2016, ($153 million and $140 million of which were classified as Level 2 and Level 3, respectively), $210 million at December 31, 2015 ($106 million and $104 million of which were classified as Level 2 and Level 3, respectively), and $173 million at December 31, 2014 ($94 million and $79 million of which were classified as Level 2 and Level 3, respectively). Changes in fair value recognized during the years ended December 31, 2016, 2015 and 2014 for partial charge-offs of loans and loan impairment reserves on loans held by the Company at the end of each of those years were decreases of $71 million, $75 million and $55 million, 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 $56 million and $29 million at December 31, 2016 and December 31, 2015, respectively. Changes in fair value recognized during the years ended December 31, 2016, 2015 and 2014 for foreclosed assets held by the Company at the end of each of those years were not material. 182 182 Significant unobservable inputs to level 3 measurements The following tables present quantitative information about significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities at December 31, 2016 and 2015: Fair Value at December 31, 2016 (In thousands) Valuation Technique Unobservable Inputs/Assumptions Range (Weighted- Average) Recurring fair value measurements: Privately issued mortgage-backed securities ...................................... $ Two independent pricing quotes 44 Net other assets (liabilities)(a) ........ 7,325 Discounted cash flow — Commitment expirations — 0%-77% (30%) Fair Value at December 31, 2015 (In thousands) Valuation Technique Unobservable Inputs/Assumptions Range (Weighted- Average) Recurring fair value measurements: Privately issued mortgage-backed securities ...................................... $ Two independent pricing quotes 74 — — Collateralized debt obligations ....... 47,393 Discounted cash flow Probability of default Loss severity 10%-56% (31%) 100% Net other assets (liabilities)(a) ........ 9,879 Discounted cash flow Commitment expirations 0%-60% (39%) (a) Other Level 3 assets (liabilities) consist of commitments to originate real estate loans. Sensitivity of fair value measurements to changes in unobservable inputs An increase (decrease) in the estimate of expirations for commitments to originate real estate loans would generally result in a lower (higher) fair value measurement. Estimated commitment expirations are derived considering loan type, changes in interest rates and remaining length of time until closing. An increase (decrease) in the probability of default and loss severity for collateralized debt securities would generally result in a lower (higher) fair value measurement. 183 183 Disclosures of fair value of financial instruments The carrying amounts and estimated fair value for financial instrument assets (liabilities) are presented in the following table: December 31, 2016 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (In thousands) Financial assets: 1,320,549 1,249,654 Cash and cash equivalents ................. $ 1,320,549 5,000,638 5,000,638 Interest-bearing deposits at banks ..... Trading account assets ...................... 323,867 323,867 Investment securities ......................... 16,250,468 16,244,412 Loans and leases: 70,895 — 5,000,638 46,135 277,732 301,711 15,821,176 — — — 121,525 Commercial loans and leases ....... 22,610,047 22,239,428 Commercial real estate loans ....... 33,506,394 33,129,428 Residential real estate loans ......... 22,590,912 22,638,167 Consumer loans ............................ 12,146,063 12,061,590 — Allowance for credit losses .......... Loans and leases, net ............... 89,864,419 90,068,613 308,805 Accrued interest receivable ............... (988,997) 308,805 — 22,239,428 — — 642,590 32,486,838 — 4,912,488 17,725,679 — 12,061,590 — — — — — 5,555,078 84,513,535 — — 308,805 Financial liabilities: Noninterest-bearing deposits ............. $(32,813,896) (32,813,896) Savings and interest-checking deposits ........................................... (52,346,207) (52,346,207) Time deposits .................................... (10,131,846) (10,222,585) (201,927) Deposits at Cayman Islands office .... (163,442) Short-term borrowings ...................... (9,473,844) Long-term borrowings ...................... (75,172) Accrued interest payable ................... (174,376) Trading account liabilities ................. (201,927) (163,442) (9,493,835) (75,172) (174,376) — (32,813,896 ) — (52,346,207 ) — (10,222,585 ) — (201,927 ) — (163,442 ) — (9,473,844 ) — (75,172 ) — (174,376 ) — — — — — — — — Other financial instruments: Commitments to originate real estate loans for sale ........................ $ Commitments to sell real estate loans ............................................... Other credit-related commitments ..... Interest rate swap agreements used for interest rate risk management ... 7,325 7,325 36,653 (136,295) 36,653 (136,295) 11,892 11,892 — — — — — 7,325 36,653 — — (136,295) 11,892 — 184 184 December 31, 2015 Carrying Amount Estimated Fair Value Level 1 (In thousands) Level 2 Level 3 Financial assets: 1,368,040 1,276,678 Cash and cash equivalents ................. $ 1,368,040 7,594,350 7,594,350 Interest-bearing deposits at banks ..... Trading account assets ...................... 273,783 273,783 Investment securities ......................... 15,656,439 15,660,877 Loans and leases: 91,362 — 7,594,350 56,763 217,020 65,178 15,406,404 — — — 189,295 Commercial loans and leases ....... 20,422,338 20,146,201 Commercial real estate loans ....... 29,197,311 29,044,244 Residential real estate loans ......... 26,270,103 26,267,771 Consumer loans ............................ 11,599,747 11,550,270 — Allowance for credit losses .......... Loans and leases, net ............... 86,533,507 87,008,486 306,496 Accrued interest receivable ............... (955,992) 306,496 Financial liabilities: Noninterest-bearing deposits ............. $(29,110,635) (29,110,635) Savings and interest-checking deposits ........................................... (49,566,644) (49,566,644) Time deposits .................................... (13,110,392) (13,135,042) (170,170) Deposits at Cayman Islands office .... (2,132,182) Short-term borrowings ...................... Long-term borrowings ...................... (10,653,858) (10,639,556) (85,145) Accrued interest payable ................... (160,745) Trading account liabilities ................. (170,170) (2,132,182) (85,145) (160,745) — 20,146,201 — 38,774 29,005,470 — — 4,727,816 21,539,955 — 11,550,270 — — — — — 4,766,590 82,241,896 — — 306,496 — (29,110,635 ) — (49,566,644 ) — (13,135,042 ) — (170,170 ) — (2,132,182 ) — (10,639,556 ) — (85,145 ) — (160,745 ) — — — — — — — — Other financial instruments: Commitments to originate real estate loans for sale ........................ $ Commitments to sell real estate loans ............................................... Other credit-related commitments ..... Interest rate swap agreements used for interest rate risk management ... 9,879 9,879 875 (122,334) 875 (122,334) 43,892 43,892 — — — — — 9,879 875 — — (122,334) 43,892 — With the exception of marketable securities, certain off-balance sheet financial instruments and 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. 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. 185 185 Cash and cash equivalents, interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable Due to the nature of cash and cash equivalents and the near maturity of interest-bearing deposits at banks, deposits at Cayman Islands office, short-term borrowings, accrued interest receivable and accrued interest payable, the Company estimated that the carrying amount of such instruments approximated estimated fair value. 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 interest-checking deposits must be established at carrying value because of the customers’ ability to withdraw funds immediately. Time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. As a result, amounts assigned to time deposits were based on discounted cash flow calculations using prevailing market interest rates based on the Company’s pricing at the respective date for deposits with comparable remaining terms to maturity. The Company believes that deposit accounts have a value greater than that prescribed by GAAP. The Company feels, however, that the value associated with these deposits is greatly influenced by characteristics of the buyer, such as the ability to reduce the costs of servicing the deposits and deposit attrition which often occurs following an acquisition. Long-term borrowings The amounts assigned to long-term borrowings were based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for borrowings of similar terms and credit risk. Other commitments and contingencies As described in note 21, 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 186 186 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. 21. 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 December 31 2016 2015 (In thousands) Home equity lines of credit ............................................................... $ 5,499,609 $ 5,631,680 Commercial real estate loans to be sold ............................................ 57,597 Other commercial real estate ............................................................. 6,451,709 5,949,933 Residential real estate loans to be sold .............................................. 488,621 212,619 Other residential real estate ............................................................... Commercial and other ....................................................................... 12,298,473 11,802,850 Standby letters of credit ......................................................................... 2,987,091 3,330,013 55,559 Commercial letters of credit ................................................................... Financial guarantees and indemnification contracts .............................. 3,043,580 2,794,322 782,885 Commitments to sell real estate loans .................................................... 1,489,237 478,950 232,721 44,723 70,100 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. 187 187 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 DUS program. The Company’s maximum credit risk for recourse associated with loans sold under this program totaled approximately $2.8 billion and $2.5 billion at December 31, 2016 and 2015, respectively. Since many loan commitments, standby letters of credit, and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the fair value of real estate loans held for sale. Such commitments are considered derivatives and along with commitments to originate real estate loans to be held for sale are generally recorded in the consolidated balance sheet at estimated fair market value. The Company occupies certain banking offices and uses certain equipment under noncancelable operating lease agreements expiring at various dates over the next 22 years. Minimum lease payments under noncancelable operating leases are summarized in the following table: Year ending December 31: 2017 ................................................................................................................................ $ 2018 ................................................................................................................................ 2019 ................................................................................................................................ 2020 ................................................................................................................................ 2021 ................................................................................................................................ Later years ...................................................................................................................... 99,847 94,448 74,814 58,216 44,508 94,825 $ 466,658 (In thousands) 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. Nevertheless, given the outcome of the matter discussed in the following paragraph, at December 31, 2016 the Company’s remaining obligation to loan purchasers was not considered material to the Company’s consolidated financial position. The Company was the subject of an investigation by government agencies relating to the origination of Federal Housing Administration (“FHA”) insured residential home loans and residential home loans sold to The Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Fannie Mae. A number of other U.S. financial institutions have announced similar investigations. Regarding FHA loans, the U.S. Department of Housing and Urban Development (“HUD”) Office of Inspector General and the U.S. Department of Justice (collectively, the “Government”) investigated whether the Company complied with underwriting guidelines concerning certain loans where HUD paid FHA insurance claims. The Company fully cooperated with the investigation. The Government advised the Company that based upon its review of a sample of loans for which an FHA insurance 188 188 claim was paid by HUD, some of the loans did not meet underwriting guidelines. The Company, based on its own review of the sample, did not agree with the sampling methodology and loan analysis employed by the Government. Regarding loans originated by the Company and sold to Freddie Mac and Fannie Mae, the investigation concerned whether the mortgages sold to Freddie Mac and Fannie Mae complied with applicable underwriting guidelines. The Company also cooperated with that portion of the investigation. In order to bring those investigations to a close, M&T Bank entered into a settlement agreement with the Government under which M&T Bank paid $64 million on May 12, 2016, without admitting liability. As a result, on May 20, 2016, a Joint Stipulation of Dismissal was filed with the United States District Court for the Western District of New York. The settlement did not have a material impact on the Company’s consolidated financial condition or results of operations in the year ended December 31, 2016. M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings and other matters in which claims for monetary damages are asserted. On an on-going basis management, after consultation with legal counsel, assesses the Company’s liabilities and contingencies in connection with such proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability, was between $0 and $40 million. Although the Company does not believe that the outcome of pending litigations will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future. 22. 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 1 with certain exceptions. The more significant of these exceptions are described herein. The Company allocates interest income or interest expense using a methodology that charges users of funds (assets) interest expense and credits providers of funds (liabilities) with income based on the maturity, prepayment and/or repricing characteristics of the assets and liabilities. The net effect of this allocation is recorded in the “All Other” category. A provision for credit losses is allocated to segments in an amount based largely on actual net charge-offs incurred by the segment during the period plus or minus an amount necessary to adjust the segment’s allowance for credit losses due to changes in loan balances. In contrast, the level of the consolidated provision for credit losses is determined using the methodologies described in notes 1 and 5. Indirect fixed and variable expenses incurred by certain centralized support areas are allocated to segments based on actual usage (for example, volume measurements) and other criteria. Certain types of administrative expenses and bankwide expense accruals (including amortization of core deposit and other intangible assets associated with acquisitions of financial institutions) are generally not allocated to segments. Income taxes are allocated to segments based on the Company’s marginal statutory tax rate adjusted for any tax-exempt income or non-deductible expenses. Equity is allocated to the segments based on regulatory 189 189 capital requirements and in proportion to an assessment of the inherent risks associated with the business of the segment (including interest, credit and operating risk). 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, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. During 2016, the Company revised its funds transfer pricing allocation related to borrowings and to the residential real estate loans obtained in the acquisition of Hudson City, retroactive to 2015. Accordingly, segment financial information for the year ended December 31, 2015 has been reclassified to conform to the current methodology. As a result, net interest income, income tax expense and net income increased in the Discretionary Portfolio segment and decreased in the “All Other” category by $12 million, $5 million and $7 million, respectively, for the year ended December 31, 2015 from that which was previously reported. Information about the Company’s segments is presented in the accompanying table. Income statement amounts are in thousands of dollars. Balance sheet amounts are in millions of dollars. Business Banking 2016 2015 2014 For the Years Ended December 31, 2016, 2015 and 2014 Commercial Real Estate 2015 Commercial Banking 2015 2014 2016 2014 2016 Discretionary Portfolio 2015 2016 2014 290,142 274,923 Net interest income(a) ............... $ 354,333 $ 338,855 $ 345,773 $ 785,874 $ 753,604 $ 746,344 $ 608,385 $ 577,922 $ 555,358 $ 345,926 $ 26,075 Noninterest income ................... 108,783 108,195 105,149 97,626 $ 28,114 463,116 447,050 450,922 1,060,797 1,043,746 1,000,639 788,091 720,870 680,445 372,001 125,740 7,599 254,295 179,706 142,948 125,087 Provision for credit losses .......... 12,709 15,513 18,883 Amortization of core deposit and other intangible assets ...... Depreciation and other amortization ........................... 472 16,300 405 284,091 204,965 169,688 169,039 95,300 Other noninterest expense ......... 292,124 264,163 263,734 682,747 566,453 539,938 502,445 243,304 Income (loss) before taxes ......... 157,879 166,967 167,900 Income tax expense (benefit) ..... 64,533 68,209 68,630 79,766 279,819 216,095 199,297 186,485 Net income (loss) ...................... $ 93,346 $ 98,758 $ 99,270 $ 411,696 $ 431,030 $ 402,928 $ 350,358 $ 340,641 $ 315,960 $ 163,538 $ 520 327,616 697,758 286,062 566 288,303 729,788 298,758 — — 679 49,839 67,623 8,351 59,272 $ 891 33,522 50,708 2,365 48,343 74,204 27,464 101,668 16,547 (7,339 ) 20,120 19,247 32,925 (3,447 ) (8,003 ) 34,903 33,213 25,089 404 407 — — — 588 — — — — — — — Average total assets (in millions) ............................ $ 5,456 $ 5,339 $ 5,278 $ Capital expenditures (in millions) ............................ $ — $ — $ 2 $ Residential Mortgage Banking 2015 2014 2016 25,592 $ 24,143 $ 22,860 $ 21,131 $ 18,827 $ 17,405 $ 40,867 $ 26,648 $ 20,798 — $ — $ — $ — $ — $ — $ — $ — $ — For the Years Ended December 31, 2016, 2015 and 2014 Retail Banking 2015 2016 2014 2016 All Other 2015 2014 2016 Total 2015 2014 (3,617 ) 323,176 Net interest income(a) ............... $ 70,655 $ 63,939 $ 67,482 $ 1,074,125 $ 917,041 $ 908,828 $ 230,589 $ 93,600 $ (21,543 ) $ 3,469,887 $ 2,842,587 $ 2,676,446 336,042 570,475 594,586 599,870 1,825,996 1,825,037 1,779,273 324,953 Noninterest income ................... 342,858 336,099 331,366 413,513 400,038 398,848 1,397,301 1,241,994 1,244,870 801,064 688,186 578,327 5,295,883 4,667,624 4,455,719 124,000 Provision for credit losses .......... Amortization of core deposit and other intangible assets ...... Depreciation and other amortization ........................... 30,264 27,883 47,086 37,788 164,906 35,291 668,919 892,625 959,345 854,883 2,846,894 2,647,583 2,490,744 682,594 Other noninterest expense ......... 258,141 233,651 216,556 461,005 (198,805 ) (424,509 ) (359,274 ) 2,058,398 1,674,692 1,642,245 451,156 Income (loss) before taxes ......... 128,725 143,729 136,714 Income tax expense (benefit) ..... 49,047 55,151 52,172 575,999 187,647 (140,657 ) (218,379 ) (201,119 ) 743,284 595,025 183,638 Net income (loss) ...................... $ 79,678 $ 88,578 $ 84,542 $ 274,646 $ 267,518 $ 273,358 $ (58,148 ) $ (206,130 ) $ (158,155 ) $ 1,315,114 $ 1,079,667 $ 1,066,246 37,657 776,123 463,084 188,438 (12,954 ) 190,000 170,000 61,848 157,978 148,925 33,824 120,437 (5,225 ) 68,541 42,613 26,424 64,852 62,074 42,613 (1,508 ) (3,910 ) 26,424 77,158 72,953 33,824 — — — — — — Average total assets (in millions) ............................ $ 2,569 $ 2,918 $ 3,076 $ Capital expenditures (in millions) ............................ $ — $ — $ — $ 11,840 $ 11,035 $ 10,449 $ 16,885 $ 12,870 $ 12,277 $ 124,340 $ 101,780 $ 92,143 46 $ 14 $ 14 $ 62 $ 68 $ 57 $ 108 $ 82 $ 73 (a) Net interest income is the difference between actual taxable-equivalent interest earned on assets and interest paid on liabilities by a segment and a funding charge (credit) based on the Company’s internal funds transfer pricing methodology. Segments are charged a cost to fund any assets (e.g. loans) and are paid a funding credit for any funds provided (e.g. deposits). The taxable-equivalent adjustment aggregated $26,962,000 in 2016, $24,463,000 in 2015 and $23,642,000 in 2014 and is eliminated in “All Other” net interest income and income tax expense (benefit). 190 190                                                         The Business Banking segment provides deposit, lending, cash management and other financial services to small businesses and professionals through the Company’s banking office network and several other delivery channels, including business banking centers, telephone banking, Internet banking and automated teller machines. The Commercial Banking segment provides a wide range of credit products and banking services to middle-market and large commercial customers, mainly within the markets the Company serves. Among the services provided by this segment are commercial lending and leasing, letters of credit, deposit products and cash management services. The Commercial Real Estate segment provides credit services which are secured by various types of multifamily residential and commercial real estate and deposit services to its customers. Activities of this segment include the origination, sales and servicing of commercial real estate loans. Commercial real estate loans held for sale are included in the Commercial Real Estate Segment. The Discretionary Portfolio segment includes securities; residential real estate loans and other assets; short-term and long-term borrowed funds; brokered deposits; and Cayman Islands branch deposits. This segment also provides foreign exchange services to customers. Residential real estate loans obtained in the Hudson City acquisition on November 1, 2015 are included in this segment. The Residential Mortgage Banking segment originates and services residential real estate loans for consumers and sells substantially all of those loans in the secondary market to investors or to the Discretionary Portfolio segment. The segment periodically purchases servicing rights to loans that have been originated by other entities. Residential real estate loans held for sale are included in the Residential Mortgage Banking segment. The Retail Banking segment offers a variety of services to consumers through several delivery channels that include banking offices, automated teller machines, and telephone, mobile and Internet banking. Consumer loans and deposits obtained in the acquisition of Hudson City have been included in this segment. The “All Other” category includes other operating activities of the Company that are not directly attributable to the reported segments; the difference between the provision for credit losses and the calculated provision allocated to the reportable segments; goodwill and core deposit and other intangible assets resulting from acquisitions of financial institutions; merger-related gains and expenses resulting from acquisitions; the net impact of the Company’s internal funds transfer pricing methodology; eliminations of transactions between reportable segments; certain nonrecurring transactions; the residual effects of unallocated support systems and general and administrative expenses; and the impact of interest rate risk management strategies. The amount of intersegment activity eliminated in arriving at consolidated totals was included in the “All Other” category as follows: 2016 Year Ended December 31 2015 (In thousands) 2014 Revenues ............................................................................ $ Expenses ............................................................................. Income taxes (benefit) ........................................................ Net income (loss) ............................................................... (48,625) $ (40,422) (3,338) (4,865) (48,972 ) $ (13,332 ) (14,503 ) (21,137 ) (49,800) (12,014) (15,375) (22,411) The Company conducts substantially all of its operations in the United States. There are no transactions with a single customer that in the aggregate result in revenues that exceed ten percent of consolidated total revenues. 191 191 23. Regulatory matters Payment of dividends by M&T’s banking subsidiaries is restricted by various legal and 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 preceding two years. For purposes of this test, at December 31, 2016, approximately $627 million was available for payment of dividends to M&T from banking subsidiaries. Additionally, the Federal Reserve Board requires bank holding companies with $50 billion or more of total consolidated assets to submit annual capital plans. Such bank holding companies may pay dividends and repurchase stock only in accordance with a capital plan that the Federal Reserve Board has not objected to. Banking regulations prohibit extensions of credit by the subsidiary banks to M&T unless appropriately secured by assets. Securities of affiliates are not eligible as collateral for this purpose. The bank subsidiaries are required to maintain reserves against certain deposit liabilities. During the maintenance periods that included December 31, 2016 and 2015, cash and due from banks and interest-earning deposits at banks included a daily average of $594,831,000 and $664,586,000, respectively, for such purpose. M&T and its subsidiary banks are required to comply with applicable capital adequacy regulations established by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Pursuant to the rules in effect as of December 31, 2016, the required minimum and well capitalized capital ratios are as follows: Capitalized 6.5% ● Common equity Tier 1 ("CET1") to risk-weighted assets ........................ 4.5 % ● Tier 1 capital to risk-weighted assets ........................................................ 6.0 % 8.0% ● Total capital to risk-weighted assets ......................................................... 8.0 % 10.0% 5.0% ● Leverage — Tier 1 capital to average total assets, as defined .................. 4.0 % Minimum Well In addition, capital regulations provide for the phase-in of a “capital conservation buffer” composed entirely of CET1 on top of these minimum risk-weighted asset ratios. When fully phased- in on January 1, 2019 the capital conservation buffer will be 2.5%. For 2016, the phase-in transition portion of that buffer was .625%. 192 192                 The capital ratios and amounts of the Company and its banking subsidiaries as of December 31, 2016 and 2015 are presented below: M&T (Consolidated) M&T Bank (Dollars in thousands) Wilmington Trust, N.A. December 31, 2016: Common equity Tier 1 capital Amount ......................................................................... $10,849,642 $10,115,688 $ 496,801 57.08% Ratio(a) ......................................................................... 44,607 Minimum required amount(b) ...................................... 5,195,288 10.02 % 5,175,310 10.70% Tier 1 capital Amount ......................................................................... 12,083,948 Ratio(a) ......................................................................... Minimum required amount(b) ...................................... 6,715,859 11.92% 10,115,688 496,801 57.08% 57,662 10.02 % 6,690,035 Total capital Amount ......................................................................... 14,282,492 Ratio(a) ......................................................................... Minimum required amount(b) ...................................... 8,743,289 14.09% 11,812,114 501,111 57.57% 75,070 11.70 % 8,709,668 Leverage Amount ......................................................................... 12,083,948 Ratio(c) ......................................................................... Minimum required amount(b) ...................................... 4,836,901 9.99% 10,115,688 496,801 15.31% 4,812,685 129,774 8.41 % December 31, 2015: Common equity Tier 1 capital Amount ......................................................................... $10,485,426 $10,680,827 $ 476,106 86.87% Ratio(a) ......................................................................... 24,664 Minimum required amount(b) ...................................... 4,259,977 11.33 % 4,242,817 11.08% Tier 1 capital Amount ......................................................................... 12,008,232 Ratio(a) ......................................................................... Minimum required amount(b) ...................................... 5,679,969 12.68% 10,680,827 476,106 86.87% 32,886 11.33 % 5,657,089 Total capital Amount ......................................................................... 14,128,454 Ratio(a) ......................................................................... Minimum required amount(b) ...................................... 7,573,292 14.92% 12,589,917 480,415 87.65% 43,848 13.35 % 7,542,786 Leverage Amount ......................................................................... 12,008,232 Ratio(c) ......................................................................... Minimum required amount(b) ...................................... 4,408,971 10.89% 10,680,827 476,106 22.38% 85,082 9.75 % 4,381,617 (a) The ratio of capital to risk-weighted assets, as defined by regulation. (b) Minimum amount of capital to be considered adequately capitalized, as defined by regulation and including transition portion of the capital conservation buffer for 2016. (c) The ratio of capital to average assets, as defined by regulation. 193 193 24. Relationship with Bayview Lending Group LLC and Bayview Financial Holdings, L.P. M&T holds a 20% minority interest in Bayview Lending Group LLC (“BLG”), a privately-held commercial mortgage company. M&T recognizes income or loss from BLG using the equity method of accounting. The carrying value of that investment was $12 million at December 31, 2016. Bayview Financial Holdings, L.P. (together with its affiliates, “Bayview Financial”), a privately- held specialty financial company, is BLG’s majority investor. In addition to their common investment in BLG, the Company and Bayview Financial conduct other business activities with each other. The Company has obtained loan servicing rights for mortgage loans from BLG and Bayview Financial having outstanding principal balances of $3.5 billion and $4.1 billion at December 31, 2016 and 2015, respectively. Revenues from those servicing rights were $19 million, $23 million and $26 million during 2016, 2015 and 2014, respectively. The Company sub-services residential real estate loans for Bayview Financial having outstanding principal balances totaling $30.4 billion and $37.7 billion at December 31, 2016 and 2015, respectively. Revenues earned for sub-servicing loans for Bayview Financial were $98 million in 2016 and $115 million in each of 2015 and 2014. In addition, the Company held $158 million and $181 million of mortgage-backed securities in its held-to-maturity portfolio at December 31, 2016 and 2015, respectively, that were securitized by Bayview Financial. 25. Parent company financial statements Condensed Balance Sheet Assets Cash in subsidiary bank ..................................................................... $ Due from consolidated bank subsidiaries December 31 2016 2015 (In thousands) 15,003 $ 19,874 Money-market savings .................................................................. Current income tax receivable ....................................................... Other .............................................................................................. Total due from consolidated bank subsidiaries ........................ 1,767,184 3,061 — 1,770,245 865,274 572 10 865,856 Investments in consolidated subsidiaries Banks ............................................................................................. 15,003,964 15,581,931 149,178 Other .............................................................................................. 23,824 Investments in unconsolidated subsidiaries (note 19) ........................ 30,264 Investment in Bayview Lending Group LLC ..................................... 73,147 Other assets ........................................................................................ Total assets ............................................................................... $ 17,057,651 $ 16,744,074 161,201 23,643 11,908 71,687 Liabilities Accrued expenses and other liabilities ............................................... $ Long-term borrowings ....................................................................... Total liabilities .......................................................................... 56,796 513,989 570,785 Shareholders’ equity ........................................................................ 16,486,622 16,173,289 Total liabilities and shareholders’ equity .................................. $ 17,057,651 $ 16,744,074 54,487 $ 516,542 571,029 194 194 Condensed Statement of Income 2016 Year Ended December 31 2015 (In thousands, except per share) 2014 Income Dividends from consolidated bank subsidiaries ................. $ 1,930,000 $ (10,752) Equity in earnings of Bayview Lending Group LLC ......... 5,530 Other income ...................................................................... Total income .................................................................. 1,924,778 480,000 $ 480,000 (16,672) (14,267 ) 7,755 2,364 471,083 468,097 Expense Interest on long-term borrowings ....................................... Other expense ..................................................................... Total expense ................................................................. 18,963 21,361 40,324 24,453 16,793 41,246 47,700 15,107 62,807 Income before income taxes and equity in undistributed income of subsidiaries ..................................................... 1,884,454 Income tax credits .............................................................. 17,247 Income before equity in undistributed income of subsidiaries ..................................................................... 1,901,701 Equity in undistributed income of subsidiaries Net income of subsidiaries ................................................. 1,343,413 1,112,851 1,110,686 (480,000) Less: dividends received .................................................... (1,930,000) 630,686 (586,587) Equity in undistributed income of subsidiaries .................. Net income .......................................................................... $ 1,315,114 $ 1,079,667 $ 1,066,246 Net income per common share (480,000 ) 632,851 426,851 19,965 408,276 27,284 446,816 435,560 Basic .............................................................................. $ Diluted ........................................................................... 7.80 $ 7.78 7.22 $ 7.18 7.47 7.42 195 195 Condensed Statement of Cash Flows 2016 Year Ended December 31 2015 (In thousands) 2014 Cash flows from operating activities Net income ......................................................................... $ 1,315,114 $ 1,079,667 $ 1,066,246 Adjustments to reconcile net income to net cash provided by operating activities 586,587 Equity in undistributed income of subsidiaries ............. (3,157) Provision for deferred income taxes .............................. 12,898 Net change in accrued income and expense .................. Loss (gain) on sale of assets .......................................... (2,342) Net cash provided by operating activities ..................... 1,909,100 (632,851 ) (3,655 ) 21,780 119 465,060 (630,686) (6,522) 23,419 — 452,457 Cash flows from investing activities Proceeds from sales or maturities of investment securities ....................................................... Other, net ............................................................................ Net cash provided by investing activities ...................... 51 13,619 13,670 755 14,038 14,793 — 10,721 10,721 Cash flows from financing activities Payments on long-term borrowings ................................... Purchases of treasury stock ................................................ Dividends paid — common ............................................... Dividends paid — preferred ............................................... Redemption of Series D preferred stock ............................ Proceeds from issuance of preferred stock ......................... Other, net ............................................................................ (322,621 ) — — (641,334) (375,017 ) (441,891) (81,270 ) (81,270) — (500,000) — 495,000 76,364 143,764 (702,544 ) Net cash used by financing activities ............................ (1,025,731) 897,039 (222,691 ) 885,148 1,107,839 Net increase (decrease) in cash and cash equivalents ........ Cash and cash equivalents at beginning of year ................. Cash and cash equivalents at end of year ........................... $ 1,782,187 $ Supplemental disclosure of cash flow information Interest received during the year ........................................ $ Interest paid during the year ............................................... Income taxes received during the year ............................... (350,010) — (371,199) (70,234) — 346,500 110,601 (334,342) 128,836 979,003 885,148 $ 1,107,839 1,905 $ 30,420 16,696 2,094 47,003 24,588 1,931 $ 15,918 8,877 196 196 26. Recent accounting developments Effective January 1, 2016, the Company adopted amended accounting guidance relating to the consolidation of variable interest entities that modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. The amended guidance also eliminates certain conditions in the assessment of whether fees paid by a legal entity to a decision maker or a service provider represent a variable interest in the legal entity and reduces the extent to which related party arrangements cause an entity to be considered a primary beneficiary. The new guidance eliminates the indefinite deferral of existing consolidation guidance for certain investment funds, but provides a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations. In January 2016, the Company also adopted amended accounting guidance for debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position at January 1, 2016. In the first quarter of 2016, the Company adopted amended accounting guidance for share- based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amended guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations. Amended accounting guidance for measurement-period adjustments related to business combinations was also adopted by the Company in the first quarter of 2016. The amended guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is now required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations. In January 2017, the Financial Accounting Standards Board (“FASB”) issued amended guidance eliminating Step 2 from the goodwill impairment test. Under the amendments to the guidance, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized, 197 197 however, should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method. Early adoption is permitted. The Company does not expect the guidance will have a material impact on its consolidated financial statements, unless at some point in the future one of its reporting units were to fail step 1 of the goodwill impairment test. In January 2017, the FASB issued amended guidance clarifying the definition of a business for purposes of evaluating whether transactions would be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a screen to determine when a set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar assets, the set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and (2) remove the evaluation of whether a market participant could replace missing elements. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 using a prospective transition method. The Company does not expect the guidance to have a material impact on its consolidated financial statements. In November 2016, the FASB issued amended guidance for the presentation of restricted cash in the statement of cash flows. The guidance requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. In addition, when cash, cash equivalents, and restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, the line items and amounts must be presented on the face of the statement of cash flows or disclosed in the notes to the financial statements. Information about the nature of restrictions on an entity’s cash and cash equivalents must also be disclosed. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, using a retrospective transition method. The Company is evaluating the impact the guidance may have on the presentation of its consolidated statement of cash flows. In August 2016, the FASB issued amended guidance for how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance addresses the following eight specific cash flow issues: 1) cash payments for debt extinguishment costs should be classified as cash outflows for financing activities; 2) for zero-coupon debt instruments, the portion of the cash payment attributable to the accreted interest should be classified as a cash outflow for operating activities; 3) contingent consideration payments made after a business combination should be classified based on the timing of the payment; 4) cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; 5) cash proceeds received from the settlement of corporate-owned and bank-owned life insurance policies should be classified as cash inflows from investing activities; 6) when the equity method is applied, an accounting policy election should be made to classify distributions received using either the cumulative earnings approach or the nature of the distribution approach; 7) cash receipts from payments on a transferor’s beneficial interests obtained in a securitization of financial assets should be classified as cash inflows from investing activities; and 8) the classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined by applying specific guidance in GAAP. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is evaluating the impact the guidance may have on the presentation within its consolidated statement of cash flows. 198 198 In June 2016, the FASB issued amended guidance for the measurement of credit losses on certain financial assets. The amended guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses will represent a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense. Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. In addition, the amended guidance requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The calculation of credit losses for available-for-sale securities will be similar to how it is determined under existing guidance. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The Company expects that the new guidance will result in an increase in its allowance for credit losses as a result of considering credit losses over the expected life of its loan portfolios. Increases in the level of the allowance for credit losses will also reflect new requirements to include the nonaccretable principal difference on purchased credit impaired loans and estimated credit losses on investment securities classified as held-to-maturity, if any. The Company is still evaluating the extent of the increase to the allowance for credit losses and the impact to its financial statements. In March 2016, the FASB issued amended accounting guidance for share-based transactions. The amended guidance requires that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement and that such amounts be recognized in the period in which the tax deduction arises or in the period in which an expiration of an award occurs. The guidance allows an entity to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The guidance permits share-based awards that allow for the withholding of shares up to the maximum statutory tax rate in applicable jurisdictions to qualify for equity classification. The previous GAAP threshold was restricted to the employer’s minimum statutory withholding requirements. The guidance also specifies certain changes to the reporting of share-based transactions on the statement of cash flows and is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company expects adoption of the guidance will result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for share-based transactions, but the actual amounts recognized in tax expense will be dependent on the amount of share-based transactions entered into and the stock price at the time of vesting. In March 2016, the FASB issued amended accounting guidance for the transition to the equity method of accounting. The amended guidance eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method has been in effect during all previous periods that the investment had been held. Instead, the amended guidance requires the investor to adopt the equity method of accounting as of the date the investment first qualifies for such 199 199 accounting. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company does not expect the guidance to have a material impact on its consolidated financial statements. In March 2016, the FASB issued two amendments to its rules on accounting for derivatives and hedging. The first amendment clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The second amendment clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment is required to assess the embedded call (put) options solely in accordance with a four-step decision sequence and no longer has to assess whether the event that triggers the ability to exercise the option is related to interest rates or credit risks. Both amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect the guidance to have a material impact on its consolidated financial statements. In February 2016, the FASB issued guidance related to the accounting for leases. The core principle of the guidance is that all leases create an asset and a liability for the lessee and, therefore, lease assets and lease liabilities should be recognized in the balance sheet. Lease assets will be recognized as a right-of-use asset and lease liabilities will be recognized as a liability to make lease payments. While the guidance requires all leases to be recognized in the balance sheet, there continues to be a differentiation between finance leases and operating leases for purposes of income statement recognition and cash flow statement presentation. For finance leases, interest on the lease liability and amortization of the right-of-use asset will be recognized separately in the statement of income. Repayments of principal on those lease liabilities will be classified within financing activities and payments of interest on the lease liability will be classified within operating activities in the statement of cash flows. For operating leases, a single lease cost is recognized in the statement of income and allocated over the lease term, generally on a straight-line basis. All cash payments are presented within operating activities in the statement of cash flows. The accounting applied by lessors is largely unchanged from existing GAAP, however, the guidance eliminates the accounting model for leveraged leases for leases that commence after the effective date of the guidance. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company occupies certain banking offices and uses certain equipment under noncancelable operating lease agreements, which currently are not reflected in its consolidated balance sheet. Upon adoption of the guidance, the Company expects to report increased assets and increased liabilities as a result of recognizing right-of-use assets and lease liabilities on its consolidated balance sheet. As described in note 21 of the Notes to Financial Statements, the Company is committed to $467 million of minimum lease payments under noncancelable operating lease agreements at December 31, 2016. The Company does not expect the new guidance will have a material impact to its consolidated statement of income. In January 2016, the FASB issued amended guidance related to recognition and measurement of financial assets and liabilities. The amended guidance requires that equity investments (excluding those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. An entity can elect to measure equity investments that do not have readily determinable fair values at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The impairment assessment of equity investments without readily determinable fair values is simplified by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates impairment exists, an entity is required to measure the investment at fair value. The guidance eliminates the requirement 200 200 for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Further, the guidance requires public entities to use the exit price when measuring the fair value of financial instruments for disclosure purposes. The guidance also requires an entity to present separately in other comprehensive income, a change in the instrument-specific credit risk when the entity has elected to measure a liability at fair value in accordance with the fair value option. Separate presentation of financial assets and liabilities by measurement category and type of instrument on the balance sheet or accompanying notes to the financial statements is required. The guidance also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is still evaluating the impact the guidance could have on its consolidated financial statements, however, it does hold certain equity securities in its available-for-sale portfolio. Upon adoption of this guidance, fair value changes in such equity securities will be recognized in the consolidated statement of income as opposed to accumulated other comprehensive income where they are recognized under current accounting guidance. In May 2014, the FASB issued amended accounting and disclosure guidance for revenue from contracts with customers. The core principle of the accounting guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amended disclosure guidance requires sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of this guidance by one year. The amended guidance is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The guidance should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application (the “modified retrospective approach”). At present, the Company expects to adopt the revenue recognition guidance in the first quarter of 2018 using the modified retrospective approach. A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. With respect to noninterest income, the Company has identified revenue streams within the scope of the guidance, and is performing an evaluation of the underlying revenue contracts. To date, the Company has not yet identified any material changes in the timing of revenue recognition when considering the amended accounting guidance, however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date. 201 201 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. (a) Evaluation of disclosure controls and procedures. Based upon their evaluation of the effectiveness of M&T’s disclosure controls and procedures (as defined in Exchange Act rules 13a- 15(e) and 15d-15(e)), Robert G. Wilmers, Chairman of the Board and Chief Executive Officer, and Darren J. King, Executive Vice President and Chief Financial Officer, concluded that M&T’s disclosure controls and procedures were effective as of December 31, 2016. (b) Management’s annual report on internal control over financial reporting. Included under the heading “Report on Internal Control Over Financial Reporting” at Item 8 of this Annual Report on Form 10-K. (c) Attestation report of the registered public accounting firm. Included under the heading “Report of Independent Registered Public Accounting Firm” at Item 8 of this Annual Report on Form 10-K. (d) Changes in internal control over financial reporting. M&T regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. No changes in internal control over financial reporting have been identified in connection with the evaluation of disclosure controls and procedures during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, M&T’s internal control over financial reporting. Item 9B. Other Information. None. PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required to be furnished pursuant to Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be included in M&T’s Proxy Statement for the 2017 Annual Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14A on or about March 7, 2017 (the “2017 Proxy Statement”). The information concerning M&T’s directors will appear under the caption “NOMINEES FOR DIRECTOR” in the 2017 Proxy Statement. The information regarding compliance with Section 16 of the Securities Exchange Act will appear under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2017 Proxy Statement. The information concerning M&T’s Code of Ethics for CEO and Senior Financial Officers will appear under the caption “CORPORATE GOVERNANCE OF M&T BANK CORPORATION” in the 2017 Proxy Statement. The information regarding M&T’s Audit Committee will appear under the caption “CORPORATE GOVERNANCE OF M&T BANK CORPORATION.” Such information is incorporated herein by reference. The information concerning M&T’s executive officers is presented under the caption “Executive Officers of the Registrant” contained in Part I of this Annual Report on Form 10-K. 202 202 Item 11. Executive Compensation. The information required to be furnished pursuant to Items 402 and 407 of Regulation S-K will appear under the captions “COMPENSATION DISCUSSION AND ANALYSIS,” “EXECUTIVE COMPENSATION,” “DIRECTOR COMPENSATION,” “NOMINATION, COMPENSATION AND GOVERNANCE COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION,” and “NOMINATION, COMPENSATION AND GOVERNANCE COMMITTEE REPORT” in the 2017 Proxy Statement. Such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required to be furnished pursuant to Item 403 of Regulation S-K will appear under the caption “STOCK OWNERSHIP INFORMATION” in the 2017 Proxy Statement. Such information is incorporated herein by reference. The information required to be furnished pursuant to Item 201(d) concerning equity compensation plans is presented under the caption “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Part II, Item 5 of this Annual Report on Form 10-K. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required to be furnished pursuant to Items 404 and 407 of Regulation S-K will appear under the caption “TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS” and “CORPORATE GOVERNANCE OF M&T BANK CORPORATION” in the 2017 Proxy Statement. Such information is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. The information required to be furnished by Item 9 of Schedule 14A will appear under the caption “PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OF M&T BANK CORPORATION FOR THE YEAR ENDING DECEMBER 31, 2017” in the 2017 Proxy Statement. Such information is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Financial statements and financial statement schedules filed as part of this Annual Report on Form 10-K. See Part II, Item 8. “Financial Statements and Supplementary Data.” Financial statement schedules are not required or are inapplicable, and therefore have been omitted. (b) Exhibits required by Item 601 of Regulation S-K. The exhibits listed on the Exhibit Index of this Annual Report on Form 10-K have been previously filed, are filed herewith or are incorporated herein by reference to other filings. (c) Additional financial statement schedules. None. Item 16. Form 10-K Summary. None. 203 203 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of February, 2017. M&T BANK CORPORATION By: /S/ ROBERT G. WILMERS Robert G. Wilmers Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Principal Executive Officer: /S/ ROBERT G. WILMERS Robert G. Wilmers Principal Financial Officer: /S/ DARREN J. KING Darren J. King Principal Accounting Officer: /S/ MICHAEL R. SPYCHALA Michael R. Spychala A majority of the board of directors: Edward G. Amoroso /S/ BRENT D. BAIRD Brent D. Baird /S/ C. ANGELA BONTEMPO C. Angela Bontempo Robert T. Brady /S/ T. JEFFERSON CUNNINGHAM III T. Jefferson Cunningham III 204 204 Title Date Chairman of the Board and Chief Executive Officer February 22, 2017 Executive Vice President and Chief Financial Officer February 22, 2017 Senior Vice President and Controller February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 Mark J. Czarnecki /S/ GARY N. GEISEL Gary N. Geisel /S/ RICHARD A. GROSSI Richard A. Grossi /S/ JOHN D. HAWKE, JR. John D. Hawke, Jr. /S/ NEWTON P.S. MERRILL Newton P. S. Merrill /S/ MELINDA R. RICH Melinda R. Rich /S/ ROBERT E. SADLER, JR. Robert E. Sadler, Jr. /S/ DENIS J. SALAMONE Denis J. Salamone /S/ HERBERT L. WASHINGTON Herbert L. Washington /S/ ROBERT G. WILMERS Robert G. Wilmers February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 February 22, 2017 205 205 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 10.1 10.2 10.3 10.4 EXHIBIT INDEX Restated Certificate of Incorporation of M&T Bank Corporation dated November 18, 2010. Incorporated by reference to Exhibit 3.1 to the Form 8-K dated November 19, 2010 (File No. 1-9861). Amended and Restated Bylaws of M&T Bank Corporation, effective November 16, 2010. Incorporated by reference to Exhibit 3.2 to the Form 8-K dated November 19, 2010 (File No. 1-9861). Certificate of Amendment to Certificate of Incorporation with respect to Perpetual 6.875% Non-Cumulative Preferred Stock, Series D, dated May 26, 2011. Incorporated by reference to Exhibit 3.1 of M&T Bank Corporation’s Form 8-K dated May 26, 2011 (File No. 1-9861). Certificate of Amendment to Restated Certificate of Incorporation of M&T Bank Corporation, dated April 19, 2013. Incorporated by reference to Exhibit 3.1 to the Form 8- K dated April 22, 2013 (File No. 1-9861). Certificate of Amendment to Restated Certificate of Incorporation of M&T Bank Corporation, dated February 11, 2014. Incorporated by reference to Exhibit 3.1 to the Form 8-K dated February 11, 2014 (File No. 1-9861). Certificate of Amendment to Certificate of Incorporation with respect to Perpetual Fixed- to-Floating Rate Non-Cumulative Preferred Stock, Series F, dated October 27, 2016. Incorporated by reference to Exhibit 3.1 of M&T Bank Corporation’s Form 8-K dated October 28, 2016 (File No. 1-9861). There are no instruments with respect to long-term debt of M&T Bank Corporation and its subsidiaries that involve securities authorized under the instrument in an amount exceeding 10 percent of the total assets of M&T Bank Corporation and its subsidiaries on a consolidated basis. M&T Bank Corporation agrees to provide the SEC with a copy of instruments defining the rights of holders of long-term debt of M&T Bank Corporation and its subsidiaries on request. Warrant to purchase shares of M&T Bank Corporation Common Stock dated as of March 26, 2010. Incorporated by reference to Exhibit 4.2 to the Form 10-K for the year ended December 31, 2012 (File No. 1-9861). Warrant to purchase shares of M&T Bank Corporation Common Stock effective May 16, 2011. Incorporated by reference to Exhibit 4.1 to the Form 8-K dated May 19, 2011 (File No. 1-9861). Warrant Agreement (including Form of Warrant), dated as of December 11, 2012, between M&T Bank Corporation and Registrar and Transfer Company. Incorporated by reference to Exhibit 4.1 to the Form 8-A 12B dated December 12, 2012 (File No. 1-9861). M&T Bank Corporation Annual Executive Incentive Plan. Incorporated by reference to Exhibit No. 10.3 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1- 9861).* Supplemental Deferred Compensation Agreement between Manufacturers and Traders Trust Company and Brian E. Hickey dated as of July 21, 1994, as amended. Filed herewith.* Consulting Agreement, dated as of June 14, 2016, between M&T Bank Corporation and Robert E. Sadler, Jr. Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 2016 (File No. 1-9861).* M&T Bank Corporation Supplemental Pension Plan, as amended and restated. Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended March 31, 2016 (File No. 1-9861).* 206 206 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 M&T Bank Corporation Supplemental Retirement Savings Plan. Incorporated by reference to Exhibit 10.2 to the Form 10-Q for the quarter ended March 31, 2016 (File No. 1-9861).* M&T Bank Corporation Deferred Bonus Plan, as amended and restated. Filed herewith.* M&T Bank Corporation 2008 Directors’ Stock Plan, as amended. Incorporated by reference to Exhibit 4.1 to the Form S-8 dated October 19, 2012 (File No. 333-184504).* Keystone Financial, Inc. 1992 Director Fee Plan. Incorporated by reference to Exhibit 10.11 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1999 (File No. 000-11460).* M&T Bank Corporation Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.22 to the Form 10-K for the year ended December 31, 2012 (File No. 1-9861).* M&T Bank Corporation 2005 Incentive Compensation Plan. Incorporated by reference to Appendix A to the definitive Proxy Statement of M&T Bank Corporation dated March 4, 2005 (File No. 1-9861).* M&T Bank Corporation 2009 Equity Incentive Compensation Plan. Incorporated by reference to Appendix A to the Proxy Statement of M&T Bank Corporation dated March 5, 2015 (File No. 1-9861).* M&T Bank Corporation Form of Restricted Stock Award Agreement. Incorporated by reference to Exhibit 10.25 to the Form 10-K for the year ended December 31, 2013 (File No. 1-9861).* M&T Bank Corporation Form of Restricted Stock Unit Award Agreement. Incorporated by reference to Exhibit 10.26 to the Form 10-K for the year ended December 31, 2013 (File No. 1-9861).* M&T Bank Corporation Form of Performance-Vested Restricted Stock Unit Award Agreement. Incorporated by reference to Exhibit 10.27 to the Form 10-K for the year ended December 31, 2013 (File No. 1-9861).* M&T Bank Corporation Form of Performance-Vested Restricted Stock Unit Award Agreement (for named executive officers (“NEOs”) subject to Section 162 (m) of the Internal Revenue Code of 1986, as amended from time to time). Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended March 31, 2014 (File No. 1- 9861).* Provident Bankshares Corporation Amended and Restated Stock Option Plan. Incorporated by reference to Exhibit 4.1 to M&T Bank Corporation’s Registration Statement on Form S-8 dated June 5, 2009 (File No. 333-159795).* Provident Bankshares Corporation 2004 Equity Compensation Plan. Incorporated by reference to Exhibit 4.2 to M&T Bank Corporation’s Registration Statement on Form S-8 dated June 5, 2009 (File No. 333-159795).* Wilmington Trust Corporation Amended and Restated 2002 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.64 to the Form 10-Q of Wilmington Trust Corporation filed on November 9, 2004 (File No. 1-14659).* Wilmington Trust Corporation Amended and Restated 2005 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.21 to the Form 10-K of Wilmington Trust Corporation filed on February 29, 2008 (File No. 1-14659).* Wilmington Trust Corporation 2009 Long-Term Incentive Plan. Incorporated by reference to Exhibit D to the definitive Proxy Statement of Wilmington Trust Corporation filed on March 16, 2009 (File No. 1-14659).* Hudson City Bancorp, Inc. Amended and Restated 2011 Stock Incentive Plan. Incorporated by reference to Exhibit 4.6 to the Form S-8 dated November 2, 2015 (File No. 333-184411).* 207 207 10.22 11.1 12.1 21.1 23.1 31.1 31.2 32.1 32.2 Hudson City Bancorp, Inc. 2006 Stock Incentive Plan. Incorporated by reference to Exhibit 4.7 to the Form S-8 dated November 2, 2015 (File No. 333-184411).* Statement re: Computation of Earnings Per Common Share. Incorporated by reference to note 14 of Notes to Financial Statements filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” Ratio of Earnings to Fixed Charges. Filed herewith. Subsidiaries of the Registrant. Incorporated by reference to the caption “Subsidiaries” contained in Part I, Item 1 hereof. Consent of PricewaterhouseCoopers LLP re: Registration Statements on Form S-8 (Nos. 33-32044, 333-43175, 333-16077, 333-40640, 333-84384, 333-127406, 333-150122, 333- 164015, 333-163992, 333-160769, 333-159795, 333-170740, 333-189099, 333-184504, 333-189097 and 333-184411) and Form S-3 (Nos. 333-182348 and 333-207030). Filed herewith. Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. Certification of Chief Executive Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. Certification of Chief Financial Officer under 18 U.S.C. §1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. 101.INS XBRL Instance Document. Filed herewith. 101.SCH XBRL Taxonomy Extension Schema. Filed herewith. 101.CAL XBRL Taxonomy Extension Calculation Linkbase. Filed herewith. 101.LAB XBRL Taxonomy Extension Label Linkbase. Filed herewith. 101.PRE XBRL Taxonomy Extension Presentation Linkbase. Filed herewith. 101.DEF XBRL Taxonomy Definition Linkbase. Filed herewith. * Management contract or compensatory plan or arrangement. 208 208 Direct Stock Purchase A plan is available to common shareholders and the general public whereby and Dividend shares of M&T Bank Corporation’s common stock may be purchased directly Reinvestment Plan through the transfer agent noted below and common shareholders may also invest their dividends and voluntary cash payments in additional shares of M&T Bank Corporation’s common stock. Inquiries Requests for information about the Direct Stock Purchase and Dividend Reinvestment Plan and questions about stock certificates, dividend checks, direct deposit of dividends or other account information should be addressed to M&T Bank Corporation’s transfer agent, registrar and dividend disbursing agent: (First Class, Registered and Certified Mail) (Overnight and Courier Mail) Computershare P.O. Box 30170 Computershare 211 Quality Circle, Suite 210 College Station, TX 77842-3170 College Station, TX 77845 866-293-3379 E-mail address: web.queries@computershare.com Internet address: www.computershare.com/investor Requests for additional copies of this publication or annual or quarterly reports filed with the United States Securities and Exchange Commission (SEC Forms 10-K and 10-Q), which are available at no charge, may be directed to: M&T Bank Corporation Shareholder Relations Department One M&T Plaza, 8th Floor Buffalo, NY 14203-2399 716-842-5138 E-mail address: ir@mtb.com All other general inquiries may be directed to: 716-635-4000 Internet Address www.mtb.com Quotation and Trading M&T Bank Corporation’s common stock is traded under the of Common Stock symbol MTB on the New York Stock Exchange (“NYSE”). mtb.com COVER & SEC 10-K: 10% NARRATIVE: 

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