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Acquisition and divestiture
12 Months Ended
Dec. 31, 2015
Business Combinations [Abstract]  
Acquisition and divestiture

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

 

     (In thousands)  

Identifiable assets:

  

Cash and due from banks

   $ 131,688   

Interest-bearing deposits at banks

     7,568,934   

Investment securities

     7,929,014   

Loans

     19,015,013   

Goodwill

     1,079,787   

Core deposit intangible

     131,665   

Other assets

     843,219   
  

 

 

 

Total identifiable assets

     36,699,320   
  

 

 

 

Liabilities:

  

Deposits

     17,879,589   

Borrowings

     13,211,598   

Other liabilities

     405,025   
  

 

 

 

Total liabilities

     31,496,212   
  

 

 

 

Total consideration

   $ 5,203,108   
  

 

 

 

Cash paid

   $ 2,064,284   

Common stock issued (25,953,950 shares)

     3,110,581   

Common stock awards converted

     28,243   
  

 

 

 

Total consideration

   $ 5,203,108   
  

 

 

 

In early November 2015, the Company sold $5.8 billion of investment securities obtained in the acquisition and repaid $10.6 billion of borrowings assumed in the transaction.

In connection with the acquisition, the Company recorded approximately $1.1 billion of goodwill and $132 million of core deposit intangible. The core deposit intangible asset is being amortized over a period of 7 years using an accelerated method. Information regarding the allocation of goodwill recorded as a result of the acquisition to the Company’s reportable segments, as well as the carrying amounts and amortization of core deposit and other intangible assets, is provided in note 8.

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, reflects 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.

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       $ 5,406,291   

Net income (loss)

     (21,175      1,011,463         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. The Company expects that there will be additional merger-related expenses in 2016. There were no merger-related expenses during 2014. As of December 31, 2015, the remaining unpaid portion of incurred merger-related expenses was $56 million. 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.

A summary of merger-related expenses included in the consolidated statement of income for the years ended December 31, 2015 and 2013 follows:

 

     2015      2013  
     (In thousands)  

Salaries and employee benefits

   $ 51,287       $ 836   

Equipment and net occupancy

     3         690   

Printing, postage and supplies

     504         1,825   

Other cost of operations

     24,182         9,013   
  

 

 

    

 

 

 

Other expense

     75,976         12,364   

Provision for credit losses

     21,000           
  

 

 

    

 

 

 

Total

   $ 96,976       $ 12,364   
  

 

 

    

 

 

 

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, $34 million and $38 million during 2015, 2014 and 2013, 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.