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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9861
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FIRST EMPIRE STATE CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 16-0968385
(State of incorporation) (I.R.S. Employer Identification No.)
ONE M&T PLAZA, BUFFALO, NEW YORK 14240
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(716)842-5445
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $5 PAR VALUE AMERICAN STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
8.234% CAPITAL SECURITIES OF FIRST EMPIRE CAPITAL TRUST I
(AND THE GUARANTEE OF FIRST EMPIRE STATE CORPORATION WITH RESPECT THERETO)
(Title of class)
8.234% JUNIOR SUBORDINATED DEBENTURES OF
FIRST EMPIRE STATE CORPORATION
(Title of class)
8.277% CAPITAL SECURITIES OF FIRST EMPIRE CAPITAL TRUST II
(AND THE GUARANTEE OF FIRST EMPIRE STATE CORPORATION WITH RESPECT THERETO)
(Title of class)
8.277% JUNIOR SUBORDINATED DEBENTURES OF
FIRST EMPIRE STATE CORPORATION
(Title of Class)
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 X 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. / /
Aggregate market value of the Common Stock, $5 par value, held by
non-affiliates of the registrant, computed by reference to the closing price as
of the close of business on March 5, 1998: $2,261,267,227.
Number of shares of the Common Stock, $5 par value, outstanding as of the
close of business on March 5, 1998: 6,666,230 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS
OF FIRST EMPIRE STATE CORPORATION IN PART III.
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FIRST EMPIRE STATE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
FORM
10-K
PAGE
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CROSS-REFERENCE SHEET
PART I
Item 1. Business........................................................................................ 5
Statistical disclosure pursuant to Guide 3
I. Distribution of assets, liabilities, and stockholders' equity; interest rates and interest
differential
A. Average balance sheets............................................................. 42-43
B. Interest income/expense and resulting yield or rate on average interest-earning
assets (including non-accrual loans) and interest-bearing liabilities.............. 42-43
C. Rate/volume variances.............................................................. 18
II. Investment portfolio
A. Year-end balances.................................................................. 15
B. Maturity schedule and weighted average yield....................................... 53
C. Aggregate carrying value of securities that exceed ten percent of stockholders'
equity............................................................................. 66
III. Loan portfolio
A. Year-end balances.................................................................. 15,68
B. Maturities and sensitivities to changes in interest rates.......................... 51
C. Risk elements......................................................................
Nonaccrual, past-due and renegotiated loans........................................ 48
Actual and pro forma interest on certain loans..................................... 68
Nonaccrual policy.................................................................. 61
Loan concentrations................................................................ 29
IV. Summary of loan loss experience...............................................................
A. Analysis of the allowance for loan losses.......................................... 46
Factors influencing management's judgment concerning the adequacy of the allowance
and provision...................................................................... 28,61
B. Allocation of the allowance for loan losses........................................ 47
V. Deposits
A. Average balances and rates......................................................... 42-43
B. Maturity schedule of domestic time deposits with balances of $100,000 or more...... 49
VI. Return on equity and assets................................................................... 17,23,33-34
2
FIRST EMPIRE STATE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
FORM
10-K
PAGE
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CROSS-REFERENCE SHEET--continued
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PART I. continued
Item 1. Business, continued
VII. Short-term borrowings........................................................................... 71-72
Item 2. Properties...................................................................................... 19,69-70
Item 3. Legal Proceedings............................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............................................. 19
Executive Officers of the Registrant............................................................ 19-21
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters..................................................................... 22
A. Principal market...................................................................
Market prices 22
B. Approximate number of holders at year-end.......................................... 37-38
C. Frequency and amount of dividends declared......................................... 15
D. Restrictions on dividends.......................................................... 10,89
Item 6. Selected Financial Data
A. Selected consolidated year-end balances............................................ 15
B. Consolidated earnings, etc......................................................... 16-17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................... 22-53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 31,33,50
Item 8. Financial Statements and Supplementary Data
A. Report of Independent Accountants.................................................. 55
B. Consolidated Balance Sheet--
December 31, 1997 and 1996......................................................... 56
3
FIRST EMPIRE STATE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
FORM
10-K
PAGE
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CROSS-REFERENCE SHEET--continued
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PART II. continued
Item 8. Financial Statements and Supplementary Data, continued
C. Consolidated Statement of Income--
Years ended December 31, 1997, 1996 and 1995....................................... 57
D. Consolidated Statement of Cash Flows--
Years ended December 31, 1997, 1996 and 1995....................................... 58
E. Consolidated Statement of Changes in
Stockholders' Equity--Years ended December 31,
1997, 1996 and 1995................................................................ 59
F. Notes to Financial Statements...................................................... 60-93
G. Quarterly Trends................................................................... 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................................... 94
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 94
Item 11. Executive Compensation......................................................................... 94
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 94
Item 13. Certain Relationships and Related Transactions................................................. 94
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 95
Signatures............................................................................................... 96-98
Exhibit Index............................................................................................ 99-101
4
PART I
ITEM 1. BUSINESS.
First Empire State Corporation ("Registrant" or "First Empire") is a New
York business corporation which is registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended ("BHCA") and under Article
III-A of the New York Banking Law ("Banking Law"). The principal executive
offices of the Registrant are located at One M&T Plaza, Buffalo, New York 14240.
The Registrant was incorporated in November 1969. The Registrant and its direct
and indirect subsidiaries are collectively referred to herein as the "Company".
As of December 31, 1997, the Company had consolidated total assets of $14.0
billion, deposits of $11.2 billion and stockholders' equity of $1.0 billion. The
Company had 4,359 full-time and 724 part-time employees as of December 31, 1997.
At December 31, 1997, the Registrant had two wholly owned bank subsidiaries:
Manufacturers and Traders Trust Company ("M&T Bank") and M&T Bank, National
Association ("M&T Bank, N.A."). The banks offer a wide range of commercial
banking, trust and investment services to their customers. The East New York
Savings Bank ("East New York"), formerly a wholly owned savings bank subsidiary
of the Registrant, was merged with and into M&T Bank on May 24, 1997. At
December 31, 1997, M&T Bank represented 95% of consolidated assets of the
Company.
On October 28, 1997, First Empire entered into a definitive agreement with
ONBANCorp, Inc. ("ONBANCorp"), a bank holding company headquartered in Syracuse,
New York, for a merger between the two companies. ONBANCorp operates two wholly
owned banking subsidiaries, OnBank & Trust Co., which has 59 offices in upstate
New York, and Franklin First Savings Bank in Wilkes-Barre, Pennsylvania, which
has 19 offices in northeastern Pennsylvania. Upon consummation of the merger,
the banking subsidiaries of ONBANCorp will be merged into M&T Bank. At December
31, 1997, ONBANCorp had $5.3 billion of assets. The merger, which will be
accounted for as a purchase, is subject to a number of conditions, including the
approval of stockholders of both companies, and is currently expected to be
consummated on or about April 1, 1998. Under the terms of the merger agreement,
stockholders of ONBANCorp will have the option to receive .161 of a share of
First Empire common stock (and cash in lieu of any fractional share) or $69.50
in cash in exchange for each share of ONBANCorp common stock. The merger
agreement provides that a minimum of 60% and a maximum of 70% of the total
number of shares of ONBANCorp common stock issued and outstanding immediately
prior to the merger will be exchanged for shares of First Empire common stock.
In the event that ONBANCorp's stockholders as a whole elect to receive stock
consideration with respect to fewer than 60% or more than 70% of the total
number of outstanding shares of ONBANCorp common stock, the selection by
ONBANCorp's common stockholders of the method of payment is subject to
allocation and proration to ensure that the number of shares of ONBANCorp common
stock that are converted into shares of First Empire common stock will be not
less than 60% nor more than 70%, as the case may be, of the total number of
shares of ONBANCorp common stock issued and outstanding immediately prior to the
merger. At February 3, 1998 ONBANCorp had 12,712,196 shares of common stock
issued and outstanding. The merger is subject to the approval of stockholders of
both companies and is expected to be completed on or about April 1, 1998.
The Company from time to time considers acquiring banks, thrift
institutions, branch offices or other businesses within markets currently served
or in other nearby markets. 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.
5
SUBSIDIARIES
M&T Bank is a banking corporation which 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. First
Empire 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
First Empire. 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
14240. As of December 31, 1997, M&T Bank had 178 banking offices located
throughout New York State, plus a branch in Nassau, The Bahamas. As of December
31, 1997, M&T Bank had consolidated total assets of $13.4 billion, deposits of
$10.8 billion and stockholder's equity of $1.0 billion. The deposit liabilities
of M&T Bank are insured by the FDIC through either its Bank Insurance Fund
("BIF") or its Savings Association Insurance Fund ("SAIF"). Of M&T Bank's $10.8
billion in assessable deposits at December 31, 1997, 89% were assessed as
BIF-insured and the remainder as SAIF-insured deposits. 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 and on New York-based small and medium-size
businesses, however certain of M&T Bank's subsidiaries conduct lending
activities in markets outside of New York State. M&T Bank, or certain of its
subsidiaries, also offer commercial mortgage loans secured by income producing
properties or properties used by borrowers in a trade or business. Other
financial services are also provided through operating subsidiaries.
M&T Bank, N.A., a national bank and a member of the Federal Reserve System
and the FDIC, commenced operations on October 2, 1995. The deposit liabilities
of M&T Bank, N.A. are insured by the FDIC through the BIF. The main office of
M&T Bank, N.A. is located at 48 Main Street, Oakfield, New York 14125. M&T Bank,
N.A. offers selected deposit and loan products on a nationwide basis, primarily
through direct mail and telephone marketing techniques. M&T Bank, N.A. is also a
licensed insurance agency, and offers long-term care, disability and life
insurance services, primarily through banking offices of M&T Bank. As of
December 31, 1997, M&T Bank, N.A. had total assets of $703 million, deposits of
$651 million and stockholder's equity of $52 million.
M&T Capital Corporation ("M&T Capital"), a wholly owned subsidiary of M&T
Bank, was incorporated as a New York business corporation in January 1968.
M&T Capital is a federally-licensed small business investment company
operating under the provisions of the Small Business Investment Act of 1958,
as amended. During 1997, the Corporation's strategy was to continue the
liquidation of its investments, while managing the remainder of its existing
investment portfolio. Upon liquidation of its only significant remaining
portfolio investment, it is the Company's current intention to surrender its
license to the Small Business Administration. M&T Capital had assets and
stockholder's equity of approximately $2 million as of December 31, 1997, and
recorded approximately $2.9 million of revenues in 1997. The headquarters of
M&T Capital are located at One M&T Plaza, Buffalo, New York 14240.
M&T Credit Corporation ("M&T Credit"), a wholly owned subsidiary of M&T
Bank, was incorporated as a New York business corporation in April 1994. M&T
Credit is a consumer credit company with headquarters at One M&T Plaza, Buffalo,
New York 14240, and offices in Pennsylvania. As of December 31, 1997, M&T Credit
had assets of $291 million and stockholder's equity of $1.4 million. M&T Credit
recorded $24.9 million of revenues during 1997.
M&T Mortgage Corporation ("M&T Mortgage"), the wholly owned mortgage banking
subsidiary of M&T Bank, was incorporated as a New York business corporation
6
in November 1991. M&T Mortgage's principal activities are comprised of the
origination of residential mortgage loans and providing residential mortgage
loan servicing to M&T Bank, M&T Bank, N.A. and others. M&T Mortgage operates
throughout New York State, and also maintains branch offices in Arizona,
Colorado, Massachusetts, Ohio, Oregon, Utah and Washington. M&T Mortgage had
assets of $393 million and stockholder's equity of $101 million as of
December 31, 1997, and recorded approximately $82.0 million of revenues
during 1997. Residential mortgage loans serviced by M&T Mortgage for
non-affiliates totaled $7.5 billion at December 31, 1997. The headquarters of
M&T Mortgage are located at M&T Center, One Fountain Plaza, Buffalo, New York
14203.
M&T Financial Corporation ("M&T Financial"), a New York business
corporation, is a wholly owned subsidiary of M&T Bank which specializes in
capital-equipment leasing. M&T Financial was formed in October 1985, had assets
of $79 million and stockholder's equity of $17 million as of December 31, 1997,
and recorded approximately $1.0 million of revenues in 1997. The headquarters of
M&T Financial are located at One M&T Plaza, Buffalo, New York 14240.
M&T Real Estate, Inc.("M&T Real Estate") is a subsidiary of M&T Bank which
was incorporated as a New York business corporation in August 1995. M&T Bank
owns all of the outstanding common and 87.4% of the preferred stock of M&T Real
Estate. The remaining 12.6% of M&T Real Estate's preferred stock is owned by
officers or former officers of the Company. M&T Real Estate engages in
commercial real estate lending and servicing activities. As of December 31,
1997, M&T Real Estate had assets and stockholder's equity of $4.1 billion. M&T
Real Estate recorded $338 million of revenues in 1997. The headquarters of M&T
Real Estate are located at M&T Center, One Fountain Plaza, Buffalo, New York
14203.
M&T Securities, Inc. ("M&T Securities") is a wholly owned subsidiary of M&T
Bank which 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, and is licensed as an insurance agent. It
provides securities brokerage and investment advisory services. As of December
31, 1997, M&T Securities had assets of $7 million and stockholder's equity of $4
million. M&T Securities recorded $18 million of revenues during 1997. The
headquarters of M&T Securities are located at One M&T Plaza, Buffalo, New York
14240.
Highland Lease Corporation ("Highland Lease"), a wholly owned subsidiary of
M&T Bank, was incorporated as a New York business corporation in October 1994.
Highland Lease is a consumer leasing company with headquarters at One M&T Plaza,
Buffalo, New York 14240. As of December 31, 1997, Highland Lease had assets of
$136 million and stockholder's equity of $10 million. Highland Lease recorded
$10 million of revenues during 1997.
During 1997, the Company formed two Delaware business trusts to issue
preferred capital securities ("Capital Securities"). First Empire Capital Trust
I ("Trust I") issued $150 million of 8.234% Capital Securities on January 17,
1997, and First Empire Capital Trust II ("Trust II") issued $100 million of
8.277% Capital Securities on May 30, 1997. The common securities ("Common
Securities") of Trust I and Trust II are wholly owned by First Empire, and such
securities 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 Trusts and are classified in the Company's
consolidated balance sheet as long-term borrowings, with accumulated
distributions on such securities included in interest expense. Under the Federal
Reserve Board's current risk-based capital guidelines, the Capital Securities
are includable in First Empire's Tier 1 capital. The proceeds from the issuance
of the Capital Securities
7
and the Common Securities were used by the Trusts to purchase junior
subordinated deferrable interest debentures issued by First Empire. The
junior subordinated debentures represent the sole assets of each Trust and
payments under the junior subordinated debentures are the sole source of cash
flow for each Trust. As of December 31, 1997, Trust I had assets of $160
million and stockholders' equity of $155 million, and during 1997 Trust I
recorded $11.7 million of revenues. Trust II had assets of $104 million and
stockholders' equity of $103 million at December 31, 1997, and during 1997
Trust II recorded $4.9 million of revenues.
The Registrant and its banking subsidiaries have a number of other
special-purpose or inactive subsidiaries. These other subsidiaries represented,
individually and collectively, an insignificant portion of the Company's
consolidated assets, net income and stockholders' equity at December 31, 1997.
LINES OF BUSINESS, PRINCIPAL SERVICES, INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
Commercial and retail banking, with activities incidental thereto,
represents the sole significant line and/or segment of business of the Company.
The Company's international activities are discussed in note 14 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 each of
the last three years were lending and investment securities transactions. 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
The banking industry is subject to extensive state and federal regulation
and continues to undergo significant change. In 1991, the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") was enacted. FDICIA
substantially amended the Federal Deposit Insurance Act ("FDI Act") and certain
other statutes. Since FDICIA's enactment, the federal bank regulatory agencies
have adopted regulations to implement its statutory provisions.
The following discussion summarizes certain aspects of the banking laws and
regulations that affect the Company. Proposals to change the laws and
regulations governing the banking industry are frequently raised in Congress, in
state legislatures, and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have on
the Company are impossible to determine with any certainty. A change in
applicable laws or regulations, or a change in the way such laws or regulations
are interpreted by regulatory agencies or courts, may have a material impact on
the business, operations and earnings of the Company. To the extent that the
following information describes statutory or regulatory provisions, it is
qualified entirely by reference to the particular statutory or regulatory
provision.
BANK HOLDING COMPANY REGULATION
As a registered bank holding company, the Registrant and its nonbank
subsidiaries are subject to supervision and regulation under the BHCA by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") and
the New York State Banking Superintendent ("Banking Superintendent"). The
Federal Reserve Board requires regular reports from the Registrant and is
authorized by the BHCA to make regular examinations of the Registrant and its
subsidiaries.
8
Under the BHCA, the Registrant may not acquire direct or indirect ownership
or control of more than 5% of the voting shares of any company, including a
bank, without the prior approval of the Federal Reserve Board, except as
specifically authorized under the BHCA. The Registrant is also subject to
regulation under the Banking Law with respect to certain acquisitions of
domestic banks. Under the BHCA, the Registrant, subject to the approval of the
Federal Reserve Board, may acquire shares of non-banking corporations the
activities of which are deemed by the Federal Reserve Board to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The Federal Reserve Board has enforcement powers over bank holding companies
and their non-banking subsidiaries, among other things, to interdict activities
that represent unsafe or unsound practices or constitute violations of law,
rule, regulation, administrative orders or written agreements with a federal
bank regulator. These powers may be exercised through the issuance of
cease-and-desist orders, civil money penalties or other actions.
Under the Federal Reserve Board's statement of policy with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit all available resources to support such institutions in circumstances
where it might not do so absent such policy. Although this "source of strength"
policy has been challenged in litigation, the Federal Reserve Board continues to
take the position that it has authority to enforce it. For a discussion of
circumstances under which a bank holding company may be required to guarantee
the capital levels or performance of its subsidiary banks, SEE CAPITAL ADEQUACY,
below. The Federal Reserve also has the authority to terminate any activity of a
bank holding company that constitutes a serious risk to the financial soundness
or stability of any subsidiary depository institution or to terminate its
control of any bank or nonbank subsidiaries.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the "Interstate Banking Act") generally permits bank holding companies
to acquire banks in any state, and preempts all state laws restricting the
ownership by a bank holding company of banks in more than one state. The
Interstate Banking Act also permits a bank to merge with an out-of-state bank
and convert any offices into branches of the resulting bank if both states have
not opted out of interstate branching; permits a bank to acquire branches from
an out-of-state bank if the law of the state where the branches are located
permits the interstate branch acquisition; and permits banks to establish and
operate DE NOVO interstate branches whenever the host state opts-in to DE NOVO
branching. Bank holding companies and banks seeking to engage in transactions
authorized by the Interstate Banking Act must be adequately capitalized and
managed.
The Banking Law authorizes interstate branching by merger or acquisition on
a reciprocal basis, and permits the acquisition of a single branch without
restriction, but does not provide for DE NOVO interstate branching.
Bank holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the terms of
the CRA, the Federal Reserve Board (or other appropriate bank regulatory agency)
is required, in connection with its examination of a bank, to assess such bank's
record in meeting the credit needs of the community served by that bank,
including low-and moderate-income neighborhoods. Furthermore, such assessment is
also required of any bank that has applied, among other things, to merge or
consolidate with or acquire the assets or assume the liabilities of a
federally-regulated financial institution, or to open or relocate a branch
office. In the case of a bank holding company
9
applying for approval to acquire a bank or bank holding company, the Federal
Reserve Board will assess the record of each subsidiary bank of the applicant
bank holding company in considering the application. The Banking Law contains
provisions similar to the CRA which are applicable to New York-chartered
banks.
SUPERVISION AND REGULATION OF BANK SUBSIDIARIES
The Registrant's banking subsidiaries are subject to supervision and
regulation, and are examined regularly, by various bank regulatory agencies: M&T
Bank by the Federal Reserve Board and the Banking Superintendent; and M&T Bank,
N.A. by the Comptroller of the Currency (the "OCC"). The Registrant and its
direct non-banking subsidiaries are affiliates, within the meaning of the
Federal Reserve Act, of the Registrant's subsidiary banks and their
subsidiaries. As a result, the Registrant's subsidiary banks and their
subsidiaries are subject to restrictions on loans or extensions of credit to,
purchases of assets from, investments in, and transactions with the Registrant
and its direct non-banking subsidiaries and on certain other transactions with
them or involving their securities.
Under the "cross-guarantee" provisions of the FDI Act, insured depository
institutions under common control are required to reimburse the FDIC for any
loss suffered by either the BIF or SAIF of the FDIC as a result of the default
of a commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. Thus, any insured depository institution subsidiary of First
Empire could incur liability to the FDIC in the event of a default of another
insured depository institution owned or controlled by First Empire. The FDIC's
claim under the cross-guarantee provisions is superior to claims of stockholders
of
the insured depository institution or its holding company 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 BIF or
SAIF or both.
DIVIDENDS FROM BANK SUBSIDIARIES
M&T Bank and M&T Bank, N.A. are subject, under one or more of the banking
laws, to restrictions on the amount and frequency (no more often than quarterly)
of dividend declarations. Future dividend payments to the Registrant by its
subsidiary 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 19 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.
Under FDICIA, 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 below.
10
CAPITAL ADEQUACY
The Federal Reserve Board, the FDIC and the OCC have adopted risk-based
capital adequacy guidelines for bank holding companies and banks under their
supervision. Under these guidelines, the so-called "Tier 1 capital" and "Total
capital" as a percentage of risk-weighted assets and certain off-balance sheet
instruments must be at least 4% and 8%, respectively.
The Federal Reserve Board, the FDIC and the OCC have also imposed a leverage
standard to supplement their risk-based ratios. This leverage standard focuses
on a banking institution's ratio of Tier 1 capital to average total assets,
adjusted for goodwill and certain other items. Under these guidelines, banking
institutions that meet certain criteria, including excellent asset quality, high
liquidity, low interest rate exposure and good earnings, and that have received
the highest regulatory rating must maintain a ratio of Tier 1 capital to total
adjusted average assets of at least 3%. Institutions not meeting these criteria,
as well as institutions with supervisory, financial or operational weaknesses,
along with those experiencing or anticipating significant growth are expected to
maintain a Tier 1 capital to total adjusted average assets ratio equal to at
least 4 to 5%.
As reflected in the following table, the risk-based capital ratios and
leverage ratios of the Registrant, M&T Bank and M&T Bank, N.A. as of December
31, 1997 exceeded the required capital ratios for classification as "well
capitalized," the highest classification under the regulatory capital
guidelines.
CAPITAL COMPONENTS AND RATIOS AT DECEMBER 31, 1997
(DOLLARS IN MILLIONS)
REGISTRANT M&T BANK,
(CONSOLIDATED) M&T BANK N.A.
------------- ----------- -------------
Capital Components
Tier 1 capital........................................................ $ 1,250 $ 1,001 $ 51
Total capital......................................................... 1,558 1,305 55
Risk-weighted assets and off-balance sheet instruments.................. $ 11,699 $ 11,359 $ 345
Risk-based Capital Ratio
Tier 1 capital........................................................ 10.69% 8.81% 14.73%
Total capital......................................................... 13.32% 11.48% 15.98%
Leverage Ratio.......................................................... 9.09% 7.63% 7.11%
FDICIA required the federal banking agencies, including the Federal Reserve
Board and the OCC, to revise their risk-based capital standards in order to
ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risk of nontraditional activities, as well
as reflect the actual performance and expected risk of loss on certain
multifamily housing loans.
Bank regulators periodically propose amendments to the risk-based capital
guidelines and related regulatory framework. While the Company's management
studies such proposals, the timing of adoption, ultimate form and effect of such
proposed amendments on the Company's capital requirements and operations cannot
be predicted.
11
FDICIA requires the federal banking agencies to take "prompt corrective
action" in respect of depository institutions and their bank holding companies
that do not meet minimum capital requirements. FDICIA established five capital
tiers: "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized". A depository
institution's capital tier, or that of its bank holding company, depends upon
where its capital levels are in relation to various relevant capital measures,
including a risk-based capital measure and a leverage ratio capital measure, and
certain other factors.
Under the implementing regulations adopted by the federal banking agencies,
a bank holding company or bank is considered "well capitalized" if it has (i) a
total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv)
is not subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" bank holding
company or bank is defined as one that has (i) a total risk-based capital ratio
of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and
(iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank
with a composite CAMELS rating of 1). A bank holding company or bank is
considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio
of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii)
a leverage ratio of less than 4% (or 3% in the case of a bank with a composite
CAMELS rating of 1); (B) "significantly undercapitalized" if the bank has (i) a
total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based
capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and
(C)"critically undercapitalized" if the bank has a ratio of tangible equity to
total assets equal to or less than 2%. The Federal Reserve Board may reclassify
a "well capitalized" bank holding company or bank as "adequately capitalized" or
subject an "adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower capital category if it
determines that the bank holding company or bank is in an unsafe or unsound
condition or deems the bank holding company or bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency. First Empire, M&T
Bank and M&T Bank, N.A. currently meet the definition of "well capitalized"
institutions.
"Undercapitalized" depository institutions, among other things, are subject
to growth limitations, are prohibited, with certain exceptions, from making
capital distributions, are limited in their ability to obtain funding from a
Federal Reserve Bank and are required to submit a capital restoration plan. The
federal banking agencies may not accept a capital plan without determining,
among other things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan and provide appropriate assurances of
performance. If a depository institution fails to submit an acceptable plan,
including if the holding company refuses or is unable to make the guarantee
described in the previous sentence, it is treated as if it is "significantly
undercapitalized". Failure to submit or implement an acceptable capital plan
also is grounds for the appointment of a conservator or a receiver.
"Significantly undercapitalized" depository institutions may be subject to a
number of additional 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.
Moreover, the parent holding company of a significantly undercapitalized
depository institution may be ordered to divest itself of the institution or of
nonbank subsidiaries of the holding company. "Critically undercapitalized"
institutions, among other things, are prohibited from making any payments of
principal and interest on subordinated debt, and are subject to the appointment
of a receiver or conservator.
12
FDICIA directs, among other things, that each federal banking agency
prescribe standards for depository institutions and depository institution
holding companies relating to internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value for publicly traded shares and other standards as they deem
appropriate. The Federal Reserve Board and OCC have adopted such standards.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, limitations on
the amount of capitalized mortgage servicing rights and purchased credit card
relationships includable in Tier 1 capital, and the requirement that a
depository institution give prior notice to customers and regulatory authorities
before closing any branch. FDICIA also contains a prohibition on the acceptance
or renewal of brokered deposits by depository institutions that are not "well
capitalized" or are "adequately capitalized" and have not received a waiver from
the FDIC.
FDIC DEPOSIT INSURANCE ASSESSMENTS
As institutions with deposits insured by the BIF and the SAIF, M&T Bank and
M&T Bank, N.A. are subject to FDIC deposit insurance assessments. Under current
law the regular insurance assessments to be paid by BIF-insured and SAIF-insured
institutions are specified in schedules issued by the FDIC that specify, at
semiannual intervals, target reserve ratios designed to maintain the reserve
ratios of each of those insurance funds at 1.25% of their estimated insured
deposits. The FDIC is also authorized to impose one or more special assessments.
The FDIC has implemented a risk-based deposit premium assessment system
under which each depository institution is placed in one of nine assessment
categories based on the institution's capital classification under the prompt
corrective action provisions described above, and whether such institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. The adjusted assessment rates for both BIF-insured and
SAIF-insured institutions under the current system range from .00% to .31%
depending upon the assessment category into which the insured institution is
placed. Neither of the Company's banking subsidiaries paid regular insurance
assessments to the FDIC in 1997. However, the FDIC retains the ability to
increase regular BIF and SAIF assessments and to levy special additional
assessments.
In addition to deposit insurance fund assessments, beginning in 1997 the
FDIC assessed BIF-assessable and SAIF-assessable deposits to fund the repayment
of debt obligations of the Financing Corporation ("FICO"). FICO is a government
agency-sponsored entity that was formed to borrow the money necessary to carry
out the closing and ultimate disposition of failed thrift institutions by the
Resolution Trust Corporation. The FDIC is required to set FICO assessments for
BIF-assessable deposits at one-fifth the amount for SAIF-assessable deposits.
The current annualized rates established by the FDIC for BIF-assessable and
SAIF-assessable deposits are 1.26 basis points and 6.28 basis points,
respectively.
Any significant increases in assessment rates or additional special
assessments by the FDIC could have an adverse impact on the results of
operations and capital of M&T Bank or M&T Bank, N.A.
13
GOVERNMENTAL POLICIES
The earnings of the Company are significantly affected by the monetary and
fiscal policies of governmental authorities, including the Federal Reserve
Board. Among the instruments of monetary policy used by the Federal Reserve
Board to implement these objectives 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 Board
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 Board 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.
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 brokers and dealers, insurance
companies and retail merchandising organizations. Furthermore, diversified
financial services companies are able to offer a combination of these services
to their customers on a nationwide basis. Compared to less extensively regulated
financial services companies, the Company's operations are significantly
impacted by state and federal regulations applicable to the banking industry.
Moreover, the provisions of the Interstate Banking Act and the Banking Law may
further ease entry into New York State by out-of-state banking institutions. As
a result, the number of banking organizations with which the Registrant's
subsidiary banks compete may grow in the future.
OTHER LEGISLATIVE INITIATIVES
From time to time, various proposals are introduced in the United States
Congress and in the New York Legislature and before various bank regulatory
authorities which would alter the powers of, and restrictions on, different
types of banking organizations and which would restructure part or all of the
existing regulatory framework for banks, bank holding companies and other
financial institutions.
Moreover, a number of other bills have been introduced in Congress which
would further regulate, deregulate or restructure the financial services
industry. It is not possible to predict whether these or any other proposals
will be enacted into law or, even if enacted, the effect which they may have on
the Company's business and earnings.
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.
14
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED YEAR-END BALANCES
ITEM 1, TABLE 1
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
DOLLARS IN THOUSANDS
Money-market assets
Interest-bearing deposits at banks............. $ 668 47,325 125,500 143 55,044
Federal funds sold and resell agreements....... 53,087 125,326 1,000 3,080 329,429
Trading account................................ 57,291 37,317 9,709 5,438 9,815
---------- ---------- ---------- ---------- ----------
Total money-market assets.................... 111,046 209,968 136,209 8,661 394,288
Investment securities
U.S. Treasury and federal agencies............. 1,081,247 1,023,038 1,087,005 999,407 1,387,395
Obligations of states and political
subdivisions................................. 38,018 41,445 35,250 55,787 49,230
Other.......................................... 605,953 507,215 647,040 735,846 992,527
---------- ---------- ---------- ---------- ----------
Total investment securities.................. 1,725,218 1,571,698 1,769,295 1,791,040 2,429,152
Loans and leases
Commercial, financial, leasing, etc............ 2,406,640 2,206,282 2,013,937 1,680,415 1,510,205
Real estate--construction...................... 254,434 90,563 77,604 53,535 51,384
Real estate--mortgage.......................... 6,765,408 6,199,931 5,648,590 5,046,937 4,540,177
Consumer....................................... 2,339,051 2,623,445 2,133,592 1,666,230 1,337,293
---------- ---------- ---------- ---------- ----------
Total loans and leases....................... 11,765,533 11,120,221 9,873,723 8,447,117 7,439,059
Unearned discount.............................. (268,965) (398,098) (317,874) (229,824) (177,960)
Allowance for possible credit losses........... (274,656) (270,466) (262,344) (243,332) (195,878)
---------- ---------- ---------- ---------- ----------
Loans and leases, net.......................... 11,221,912 10,451,657 9,293,505 7,973,961 7,065,221
Other real estate owned.......................... 8,413 8,523 7,295 10,065 12,222
Total assets..................................... 14,002,935 12,943,915 11,955,902 10,528,644 10,364,958
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Noninterest-bearing deposits..................... 1,458,241 1,352,929 1,184,359 1,087,102 1,052,258
NOW accounts..................................... 346,795 334,787 768,559 748,199 764,690
Savings deposits................................. 3,344,697 3,280,788 2,765,301 3,098,438 3,364,983
Time deposits.................................... 5,762,497 5,352,749 4,596,053 3,106,723 1,982,272
Deposits at foreign office....................... 250,928 193,236 155,303 202,611 189,058
---------- ---------- ---------- ---------- ----------
Total deposits............................... 11,163,158 10,514,489 9,469,575 8,243,073 7,353,261
Short-term borrowings............................ 1,097,324 1,150,187 1,273,206 1,364,850 2,101,667
Long-term borrowings............................. 427,819 178,002 192,791 96,187 75,590
Total liabilities................................ 12,972,669 12,038,256 11,109,649 9,807,648 9,640,964
---------- ---------- ---------- ---------- ----------
Stockholders' equity............................. 1,030,266 905,659 846,253 720,996 723,994
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
STOCKHOLDERS, EMPLOYEES AND OFFICES
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
NUMBER AT YEAR-END
Stockholders........................................................... 3,449 3,654 3,787 3,981 3,985
Employees.............................................................. 5,083 5,180 4,889 4,505 4,400
Offices................................................................ 210 202 181 168 145
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
15
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED EARNINGS
ITEM 1, TABLE 2
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
DOLLARS IN THOUSANDS
INTEREST INCOME
Loans and leases, including fees........................... $ 952,436 881,002 794,181 633,077 608,473
Money-market assets
Deposits at banks........................................ 2,475 2,413 8,181 2,212 6,740
Federal funds sold and resell agreements................. 2,989 2,985 3,007 4,751 20,403
Trading account.......................................... 1,781 980 1,234 361 1,242
Investment securities
Fully taxable............................................ 99,640 107,415 118,791 104,185 101,187
Exempt from federal taxes................................ 5,640 2,637 2,760 2,760 2,584
---------- --------- --------- --------- ---------
Total interest income.................................... 1,064,961 997,432 928,154 747,346 740,629
---------- --------- --------- --------- ---------
INTEREST EXPENSE
NOW accounts............................................... 3,455 9,430 11,902 11,286 13,113
Savings deposits........................................... 90,907 84,822 87,612 84,804 90,392
Time deposits.............................................. 327,611 286,088 239,882 97,067 98,508
Deposits at foreign office................................. 12,160 12,399 6,952 5,894 3,243
Short-term borrowings...................................... 44,341 59,442 84,225 73,868 58,459
Long-term borrowings....................................... 29,619 14,227 11,157 6,287 6,158
---------- --------- --------- --------- ---------
Total interest expense................................... 508,093 466,408 441,730 279,206 269,873
---------- --------- --------- --------- ---------
NET INTEREST INCOME........................................ 556,868 531,024 486,424 468,140 470,756
Provision for possible credit losses....................... 46,000 43,325 40,350 60,536 79,958
---------- --------- --------- --------- ---------
Net interest income after provision for possible credit
losses................................................... 510,868 487,699 446,074 407,604 390,798
---------- --------- --------- --------- ---------
OTHER INCOME
Mortgage banking revenues.................................. 51,547 44,484 37,142 16,002 12,776
Service charges on deposit accounts........................ 43,377 40,659 38,290 35,016 32,291
Trust income............................................... 30,688 27,672 25,477 22,574 23,865
Merchant discount and other credit card fees............... 19,395 18,266 10,675 8,705 7,932
Trading account and foreign exchange gains................. 3,690 2,421 2,783 738 3,518
Gain (loss) on sales of bank investment securities......... (280) (37) 4,479 128 870
Gain on sales of venture capital investments............... 2,677 3,175 2,619 802 2,896
Other revenues from operations............................. 41,973 33,608 28,073 39,774 26,396
---------- --------- --------- --------- ---------
Total other income....................................... 193,067 170,248 149,538 123,739 110,544
---------- --------- --------- --------- ---------
OTHER EXPENSE
Salaries and employee benefits............................. 220,017 208,342 188,222 161,221 154,340
Equipment and net occupancy................................ 53,299 51,346 50,526 49,132 47,823
Printing, postage and supplies............................. 13,747 15,167 14,442 13,516 13,021
Deposit insurance.......................................... 1,935 9,337 14,675 16,442 17,684
Other costs of operations.................................. 132,778 124,786 106,574 96,551 94,951
---------- --------- --------- --------- ---------
Total other expense...................................... 421,776 408,978 374,439 336,862 327,819
---------- --------- --------- --------- ---------
Income before income taxes................................. 282,159 248,969 221,173 194,481 173,523
Income taxes............................................... 105,918 97,866 90,137 77,186 71,531
---------- --------- --------- --------- ---------
NET INCOME................................................. $ 176,241 151,103 131,036 117,295 101,992
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
DIVIDENDS DECLARED
Common................................................... $ 21,207 18,617 16,224 14,743 13,054
Preferred................................................ -- 900 3,600 3,600 3,600
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
16
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
COMMON SHAREHOLDER DATA
ITEM 1, TABLE 3
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Per Share
Net income
Basic......................................................... $ 26.60 22.54 19.61 16.90 14.32
Diluted....................................................... 25.26 21.08 17.98 15.73 13.42
Cash dividends declared......................................... 3.20 2.80 2.50 2.20 1.90
Stockholders' equity at year-end................................ 155.86 135.45 125.33 103.02 99.43
Dividend payout ratio............................................. 12.03% 12.39% 12.73% 12.97% 13.27%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
17
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CHANGES IN INTEREST INCOME AND EXPENSE*
ITEM 1, TABLE 4
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
-------------------------------- --------------------------------
RESULTING FROM RESULTING FROM
CHANGES IN: CHANGES IN:
TOTAL -------------------- TOTAL --------------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
---------- --------- --------- ---------- --------- ---------
INCREASE (DECREASE) IN THOUSANDS
Interest income
Loans and leases, including fees................ $ 71,264 74,326 (3,062) $ 86,509 110,121 (23,612)
Money-market assets
Deposits at banks............................. 62 200 (138) (5,768) (4,669) (1,099)
Federal funds sold and agreements to resell
securities.................................. 4 19 (15) (22) 409 (431)
Trading account............................... 837 1,121 (284) (239) 107 (346)
Investment securities
U.S. Treasury and federal agencies............ (3,055) (4,941) 1,886 (225) (2,555) 2,330
Obligations of states and political
subdivisions................................ 154 137 17 (742) (584) (158)
Other......................................... (384) (1,980) 1,596 (10,390) (11,194) 804
---------- ----------
Total interest income......................... $ 68,882 $ 69,123
---------- ----------
---------- ----------
Interest expense
Interest-bearing deposits
NOW accounts.................................. $ (5,975) (5,416) (559) $ (2,472) (1,523) (949)
Savings deposits.............................. 6,085 12,622 (6,537) (2,790) 1,016 (3,806)
Time deposits................................. 41,523 38,400 3,123 46,206 57,335 (11,129)
Deposits at foreign office.................... (239) (474) 235 5,447 5,500 (53)
Short-term borrowings........................... (15,101) (14,539) (562) (24,783) (15,953) (8,830)
Long-term borrowings............................ 15,392 14,534 858 3,070 3,262 (192)
---------- ----------
Total interest expense........................ $ 41,685 $ 24,678
---------- ----------
---------- ----------
- ------------------------
* 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.
18
ITEM 2. PROPERTIES.
Both First Empire 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 276,000 rentable square feet of space, is owned in fee
by M&T Bank, and was completed in 1967 at a cost of approximately $17 million.
First Empire, M&T Bank and their subsidiaries occupy approximately 73% of the
building and the remainder is leased to non-affiliated tenants. At December 31,
1997, the cost of this property, net of accumulated depreciation, was $10.2
million.
In September 1992, M&T Bank acquired an additional facility in Buffalo, New
York with approximately 365,000 rentable square feet of space at a cost of
approximately $12 million. Approximately 85% of this facility, known as M&T
Center, is occupied by M&T Bank and its subsidiaries, with the remainder leased
to non-affiliated tenants. At December 31, 1997, the cost of this building,
including improvements made subsequent to acquisition and net of accumulated
depreciation, was $15.5 million.
M&T Bank also owns and occupies two 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 223,000 square feet and
their combined cost, net of accumulated depreciation, was $12.8 million.
The cost, net of accumulated depreciation and amortization, of the Company's
premises and equipment is detailed in note 5 of Notes to Financial Statements
filed herewith in Part II, Item 8, "Financial Statements and Supplementary
Data". Of the 178 domestic banking offices of the Registrant's subsidiary banks,
53 are owned in fee and 125 are leased.
ITEM 3. LEGAL PROCEEDINGS.
First Empire and its subsidiaries are subject in the normal course of
business to various pending and threatened legal proceedings in which claims for
monetary damages are asserted. Management, after consultation with legal
counsel, does not anticipate that the aggregate ultimate liability, if any,
arising out of litigation pending against First Empire or its subsidiaries will
be material to First Empire's consolidated financial position, but at the
present time is not in a position to determine whether such litigation will have
a material adverse effect on First Empire's consolidated results of operations
in any future reporting period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Registrant's executive officers is presented
below as of March 5, 1998. Shown parenthetically is the year since which the
officer has held the indicated position with the Registrant or its subsidiaries.
In the case of each such corporation, officers' terms run until the first
meeting of the board of directors after such corporation's annual meeting, and
until their successors are elected and qualified.
ROBERT G. WILMERS, age 63, is chairman of the board (1994), president
(1988), chief executive officer (1983) and a director (1982) of the
Registrant. He is chairman of the board, chief executive officer (1983) and
a director (1982) of M&T Bank, and served as president of M&T Bank from
March 1984 to June 1996. Mr. Wilmers is a director of M&T Financial (1985).
He is chairman of the board and a director of M&T Bank, N.A.(1995).
19
EMERSON L. BRUMBACK, age 46, is an executive vice president (1997) of
the Registrant and M&T Bank, and is in charge of the Company's Retail
Banking Division. Mr. Brumback is president and a director of Highland Lease
(1997). He is a director of M&T Credit (1997), M&T Mortgage (1997),
M&T Securities (1997), and M&T Bank, N.A. (1997). Mr. Brumback was executive
vice president, national retail distribution, at BancOne Corporation prior
to joining the Company
ATWOOD COLLINS, III, age 51, is president and chief executive officer,
and a member of the Directors Advisory Council (1997) of M&T Bank's New York
City Division. Previously, Mr. Collins served as president, chief executive
officer and a director (1995) of East New York. Mr. Collins is an executive
vice president of the Registrant (1997) and M&T Bank (1996). He is a
director of M&T Real Estate (1995). In addition to managing all of M&T
Bank's business segments in the New York City region, Mr. Collins has
responsibility for managing the Company's Facilities Management and Services
group.
MARK J. CZARNECKI, age 42, is an executive vice president of M&T Bank
(1997) and is in charge of M&T Bank's Trust and Investment Services
Division. Mr. Czarnecki is president of M&T Securities, Inc. (1996) and is
an executive vice president of M&T Bank, N.A. Mr. Czarnecki has held a
number of management positions with M&T Bank since 1977, most recently as
senior vice president of the private client services group of the Trust and
Investment Services Division (1994), and prior thereto as an administrative
vice president and regional manager for the Retail Banking Division.
BRIAN E. HICKEY, age 45, is president and a member of the Directors
Advisory Council (1994) of the Rochester Division of M&T Bank and is an
executive vice president of the Registrant (1997) and M&T Bank (1996). Mr.
Hickey is a director of M&T Financial (1996). In addition to managing all of
M&T Bank's business segments in the Rochester market, Mr. Hickey has
responsibility for managing the Company's Western New York Commercial
Banking Division.
JAMES L. HOFFMAN, age 58, is president (1992) of the Hudson Valley
Division of M&T Bank, and is an executive vice president of the Registrant
(1997) and M&T Bank (1996). Mr. Hoffman served as chairman of the board,
president, chief executive officer and a director (1983) of The First
National Bank of Highland, which had been a wholly owned subsidiary of the
Registrant prior to its merger with and into M&T Bank on February 29, 1992.
ADAM C. KUGLER, age 40, is an executive vice president and treasurer
(1997) of the Registrant and M&T Bank, and is in charge of the Company's
Treasury Division. Mr. Kugler is a director of M&T Financial (1997), M&T
Securities (1997) and is an executive vice president, Treasurer and a
director of M&T Bank, N.A. (1997). Mr Kugler was previously a senior vice
president in the Treasury Division of M&T Bank.
JOHN L. PETT, age 49, is an executive vice president (1997) and chief
credit officer (1995) of the Registrant and is an executive vice president
and chief credit officer of M&T Bank (1996). Mr. Pett is chairman of the
board and a director of Highland Lease(1997) and M&T Credit (1997). He is a
director of M&T Bank, N.A. (1996). Mr. Pett served as senior vice president
of the Registrant from 1991 to 1997.
20
MICHAEL P. PINTO, age 42, is an executive vice president and chief
financial officer of the Registrant (1997) and M&T Bank (1996), and is in
charge of the Company's Finance Division. Mr. Pinto is a director of M&T
Capital (1996), M&T Financial (1996), M&T Mortgage (1996) and M&T Real
Estate (1996). He is an executive vice president and chief financial officer
of M&T Bank, N.A. (1996). Mr. Pinto served as senior vice president and
controller of the Registrant from 1993 to 1997.
ROBERT E. SADLER, JR., age 52, is an executive vice president of the
Registrant (1990), president and a director of M&T Bank (1996), and is in
charge of the Company's Commercial Banking Division. Mr. Sadler is chairman
of the board (1987) and a director of M&T Capital (1983); chairman of the
board (1989) and a director of M&T Financial (1985); chairman of the board
and a director of M&T Mortgage (1991); chairman of the board and a director
of M&T Securities (1994); president, chief executive officer and a director
of M&T Bank, N.A.(1995); and chairman of the board, president and a director
of M&T Real Estate (1995).
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Registrant's common stock is traded under the symbol FES on the American
Stock Exchange. See cross-reference sheet for disclosures incorporated elsewhere
in this Annual Report on Form 10-K for market prices of the Registrant's common
stock, approximate number of common stockholders at year-end, frequency and
amounts of dividends on common stock and restrictions on the payment of
dividends.
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
First Empire State Corporation ("First Empire") is a bank holding company
headquartered in Buffalo, New York with consolidated assets of $14.0 billion at
December 31, 1997. First Empire and its consolidated subsidiaries are
hereinafter referred to collectively as "the Company." First Empire's banking
subsidiaries are Manufacturers and Traders Trust Company ("M&T Bank") and M&T
Bank, National Association ("M&T Bank, N.A."), which are wholly owned. M&T Bank,
with total assets of $13.4 billion at December 31, 1997, is a New York-chartered
commercial bank with 178 offices throughout New York State and an office in
Nassau, The Bahamas. M&T Bank, N.A., with $703 million in assets at December 31,
1997, is a national bank with an office in Oakfield, New York.
M&T Bank's subsidiaries include M&T Mortgage Corporation, a residential
mortgage banking company; M&T Securities, Inc., a broker/dealer; M&T Real
Estate, Inc., a commercial mortgage lender; M&T Financial Corporation, a
commercial leasing company; M&T Capital Corporation, a venture capital company;
M&T Credit Corporation, a consumer credit company; and Highland Lease
Corporation, a consumer leasing company.
In October 1997, First Empire entered into a definitive agreement with
ONBANCorp, Inc. ("ONBANCorp"), a bank holding company headquartered in Syracuse,
New York, for a merger between the two companies. ONBANCorp operates two
wholly-owned banking subsidiaries, OnBank & Trust Co., which has 59 offices in
upstate New York and Franklin First Savings Bank in Wilkes-Barre, Pennsylvania
which has 19 offices in Northeastern Pennsylvania. Upon consummation of the
merger, the banking subsidiaries of ONBANCorp will be merged into M&T Bank. At
December 31, 1997, ONBANCorp had approximately $5.3 billion of assets. Under the
terms of the merger agreement, stockholders of ONBANCorp will have the option to
receive .161 of a share of First Empire common stock (and cash in lieu of any
fractional share) or $69.50 in cash in exchange for each share of ONBANCorp
common stock. The merger agreement provides that a minimum of 60% and a maximum
of 70% of the total number of shares of ONBANCorp common stock issued and
outstanding immediately prior to the merger must be exchanged for shares of
First Empire common stock. In the event that ONBANCorp stockholders as a whole
elect to receive stock consideration with respect to fewer than 60% or more than
70% of the total number of outstanding shares of ONBANCorp common stock, the
selection by ONBANCorp common stockholders of the method of payment is subject
to allocation and proration to ensure that the number of shares of ONBANCorp
common stock that are converted into shares of First Empire common stock will be
60% or 70%, as the case may be, of the total number of shares of ONBANCorp
common stock issued and outstanding immediately prior to the merger. At
22
December 31, 1997 ONBANCorp had 12,721,689 shares of common stock issued and
outstanding. The merger, which will be accounted for as a purchase, is
subject to the approval of stockholders of both companies and is expected to
be completed on or about April 1, 1998.
In January and June 1997, First Empire completed separate offerings of trust
preferred securities raising a total of $250 million that qualifies as Tier 1 or
core capital under the Federal Reserve Board's risk-based capital guidelines.
The trust preferred securities are classified as long-term borrowings and
accumulated distributions on the securities are included in interest expense.
On May 24, 1997, The East New York Saving Bank ("East New York"), the former
savings bank subsidiary of First Empire, was merged with and into M&T Bank. East
New York's branch offices and business activities now operate as the New York
City Division of M&T Bank.
OVERVIEW
The Company's net income in 1997 was $176.2 million, representing diluted
earnings per common share of $25.26, increases of 17% and 20%, respectively,
from $151.1 million or diluted earnings per common share of $21.08 in 1996.
Basic earnings per common share rose 18% to $26.60 in 1997 from $22.54 in 1996.
In 1995, net income was $131.0 million while diluted and basic earnings per
common share were $17.98 and $19.61, respectively. The 1995 results include $4.5
million of gains from sales of bank investment securities. The impact from sales
of bank investment securities in 1997 and 1996 was negligible. Excluding the
after-tax impact of gains from sales of bank investment securities, net income
for 1995 was $128.4 million, representing diluted and basic earnings per share
of $17.62 and $19.21, respectively. All earnings per share amounts reflect the
implementation of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 establishes new standards for computing and
presenting earnings per share and is effective for financial statements for both
interim and annual periods ending after December 15, 1997. SFAS No. 128 requires
that all prior period earnings per share data be restated to conform with the
provisions of the statement.
Net income represented a return on average assets in 1997 of 1.32%, compared
with 1.21% in 1996 and 1.14% in 1995. The return on average common stockholders'
equity was 18.49% in 1997, 17.60% in 1996 and 17.16% in 1995. Excluding the
effects of the 1995 securities gains, the return on average assets in 1995 was
1.12% and the return on average common stockholders' equity was 16.81%.
Resulting largely from growth in average loans outstanding,
taxable-equivalent net interest income increased 5% in 1997 to $563 million from
$536 million in 1996. Average loans totaled $11.0 billion in 1997, up 8% from
$10.1 billion in 1996. Similarly, average earning assets increased 7%, to $12.8
billion in 1997 from $12.0 billion in 1996. A 9% increase in average earning
assets, primarily loans, in 1996 was also the most significant factor for the
rise in that year's net interest income from $491 million in 1995. Average loans
and average earning assets in 1995 were $8.9 billion and $11.1 billion,
respectively. Improvement in 1997's net interest income resulting from asset
growth was partially offset by a reduction of the Company's net interest margin,
or taxable-equivalent net interest income expressed as a percentage of average
earning assets. Net interest margin in 1997 was 4.38%, compared with 4.45% in
1996 and 4.43% in 1995.
The provision for possible credit losses was $46.0 million in 1997, compared
with $43.3 million in 1996 and $40.4 million in 1995. Net charge-offs in 1997
were $41.8 million, compared with $35.2 million in 1996 and $21.3 million in
1995. The increase in net charge-offs from prior years
23
reflects higher levels of net consumer loan charge-offs which totaled $35.8
million in 1997, $28.5 million in 1996 and $11.3 million in 1995.
Noninterest income for 1997 totaled $193 million, 13% above the $170 million
in 1996 and 33% above the $145 million in 1995 (excluding gains from sales of
bank investment securities). Higher revenues associated with mortgage banking,
trust activities, sales of mutual funds and annuities, and prior expansion of
the Company's credit card business contributed to the growth of noninterest
income. Noninterest expense was $422 million in 1997, up 3% from $409 million in
1996 and 13% from $374 million in 1995. Expenses associated with expansion of
businesses providing mortgage banking services, indirect automobile loans,
credit cards and the sale of mutual funds and annuities contributed to the rise
in noninterest expense since 1995.
NET INTEREST INCOME/LENDING AND FUNDING ACTIVITIES
Taxable-equivalent net interest income rose 5% to $563 million in 1997 from
$536 million in 1996, largely the result of growth in average earning assets,
which increased $794 million or 7% to $12.8 billion in 1997 from $12.0 billion
in 1996. Taxable-equivalent net interest income and average earning assets in
1995 were $491 million and $11.1 billion, respectively. The growth in average
earning assets in 1997 and 1996 was attributable to increases in average loans
outstanding. Average loans totaled $11.0 billion in 1997, up 8% from $10.1
billion in 1996. Average loans in 1996 were increased 14% from $8.9 billion in
1995. The accompanying table 4 summarizes average loans and leases outstanding
in 1997 and percentage changes in the major components of the loan and lease
portfolio over the past two years.
Loans secured by real estate, excluding $644 million of outstanding home
equity loans and lines of credit which are classified as consumer loans,
represented approximately 58% of the loan and lease portfolio during 1997,
unchanged from 1996, but down from 60% in 1995. At December 31, 1997, the
Company held approximately $4.4 billion of commercial real estate loans and $2.5
billion of consumer real estate loans, compared with $4.0 billion and $2.2
billion, respectively, at December 31, 1996.
Commercial real estate loans originated by the Company are predominately
secured by properties in the New York City metropolitan area, including areas in
neighboring states generally considered to be within commuting distance of New
York City, and Western New York, which includes Buffalo, Niagara Falls,
Rochester and surrounding areas. Commercial real estate loans are also
originated in the Hudson Valley and Southern Tier regions of New York State.
Most commercial real estate loans originated by the Company are fixed-rate
instruments with monthly payments and a balloon payment of the remaining
principal at maturity, usually five years after loan origination. For borrowers
in good standing, the customer may extend the terms of the loan agreement for an
additional five years at the then-current market rate of interest. The
accompanying table 5 presents commercial real estate loans at December 31, 1997
by geographic area, type of collateral and size of the loans outstanding. Of the
$2.4 billion of commercial real estate loans in the New York City metropolitan
area, approximately 62% were secured by multi-family residential properties, 19%
by retail space and 7% by office space. The Company's experience has been that
office space and retail properties tend to demonstrate more volatile
fluctuations in value through economic cycles and changing economic conditions
than do multi-family residential properties. Approximately 51% of the aggregate
dollar amount of New York City area loans were for $3 million or less, while
loans of more than $10 million were approximately 17% of the total. Commercial
real estate loans secured by properties elsewhere in New York State, mostly in
Western New York, 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. Approximately 66% of the aggregate dollar
amount of loans in this segment of the portfolio were for $3 million or less.
24
Commercial real estate loans secured by properties located outside of New
York State and outside of areas of neighboring states considered to be part
of the New York City metropolitan area comprised less than 5% of total
commercial real estate loans.
The Company normally refrains from commercial construction lending, except
when the borrower has obtained a commitment for permanent financing upon project
completion. As a result, the portfolio of commercial construction loans for
which the Company has not committed to provide permanent financing totaled only
$158 million, or 1% of total loans and leases at December 31, 1997.
Real estate loans secured by one-to-four family residential properties
totaled $2.5 billion at December 31, 1997, approximately 62% of which were
secured by properties located in New York State. At December 31, 1997, $189
million of residential real estate loans were held for sale by the Company's
mortgage banking subsidiary, M&T Mortgage Corporation.
Consumer loans and leases represented approximately 21% of the loan
portfolio during 1997, compared with 22% in 1996 and 20% in 1995. Automobile
loans and home equity loans and lines of credit represent the largest
components of the consumer loan portfolio. At December 31, 1997, 66% of the
automobile loan portfolio was to borrowers in New York State, while the
remainder was primarily to borrowers in Pennsylvania. Automobile loans and
leases are generally originated through dealers, however, all applications
submitted by dealers are subject to the Company's normal underwriting and
loan approval procedures. During 1997, automobile loans and leases
represented approximately 9% of the Company's average loan portfolio, while
no other consumer loan product represented more than 6%. During 1997, the
Company securitized and sold $100 million of automobile loans, resulting in a
nominal gain. Growth in average credit card balances in recent years was the
result of direct mail marketing campaigns and co-branding initiatives. Such
initiatives involved developing relationships with retailers and other
enterprises and issuing co-branded credit cards that provide cardholders the
ability to earn rebates on purchases made with the cards. The Company bears
the cost of these rebates. As discussed later, during 1997 the Company either
terminated or agreed to terminate several co-branded credit card programs
that had been initiated in 1996 or late-1995. Average outstanding balances
related to these programs were $73 million in 1997, $76 million in 1996 and
$9 million in 1995. At December 31, 1997, 67% of outstanding credit card
balances were with customers in New York State.
The Company's portfolio of investment securities averaged $1.7 billion in
1997, $1.8 billion in 1996 and $2.0 billion in 1995. The size of the investment
securities portfolio is influenced by such factors as demand for loans, which
generally yield more than investment securities, ongoing repayments, the level
of deposits, and management of balance sheet size and resulting capital ratios.
The investment securities portfolio is largely comprised of adjustable-rate
mortgage-backed securities, collateralized mortgage obligations, and
shorter-term U.S. Treasury notes. When purchasing investment securities, the
Company considers its overall interest-rate risk profile as well as the adequacy
of expected returns relative to prepayment and other risks assumed. The Company
occasionally sells investment securities as a result of changes in interest
rates, actual or anticipated prepayments, or credit risk associated with a
particular security.
The average balance of money-market assets, which are comprised of
interest-bearing deposits at banks, trading account assets, Federal funds sold
and agreements to resell securities, was $165 million in 1997, compared with
$124 million in 1996 and $186 million in 1995.
Core deposits, consisting of noninterest-bearing deposits, interest-bearing
transaction accounts, savings deposits and nonbrokered domestic time deposits
under $100,000 represent the most significant source
25
of funding to the Company. Core deposits generally carry lower interest rates
than wholesale funds of comparable maturities. The Company's New York State
branch network is its principal source of core deposits. Certificates of
deposit under $100,000 generated on a nationwide basis by M&T Bank, N.A. are
also included in core deposits. In 1997, average core deposits totaled $8.3
billion, up from $8.0 billion in 1996 and $7.4 billion in 1995. Average core
deposits of M&T Bank, N.A., which began operations in the fourth quarter of
1995, were $432 million in 1997, $261 million in 1996 and $3 million in 1995.
Funding provided by core deposits totaled 65% of average earning assets in
1997, compared with 66% in 1996 and 67% in 1995. An analysis of changes in
the components of core deposits is presented in the accompanying table 7.
The Company also obtains funding through domestic time deposits of $100,000
or more, deposits originated through the Company's offshore branch office, and
brokered certificates of deposit. Domestic time deposits over $100,000,
excluding brokered certificates of deposit, averaged $1.0 billion in 1997,
compared with $892 million in 1996 and $625 million in 1995. Offshore deposits,
comprised primarily of accounts with balances of $100,000 or more, averaged $230
million in 1997, compared with $239 million and $133 million in 1996 and 1995,
respectively. Brokered deposits averaged $1.4 billion in 1997, $1.1 billion in
1996 and $874 million in 1995, and totaled $1.4 billion at December 31, 1997.
Brokered deposits are used as an alternative to short-term borrowings to
lengthen the average maturity of interest-bearing liabilities. The
weighted-average remaining term to maturity of brokered deposits at December 31,
1997 was 2.5 years. However, certain of the deposits have provisions that allow
early redemption. Additional amounts of brokered deposits may be solicited in
the future depending on market conditions and the cost of funds available from
alternative sources at the time.
In addition to deposits, the Company uses short-term borrowings from banks,
securities dealers, the Federal Home Loan Bank of New York ("FHLB") and others
as sources of funding. Short-term borrowings averaged $853 million in 1997, $1.1
billion in 1996 and $1.4 billion in 1995. In general, short-term borrowings have
been used to fund the Company's discretionary investments in money-market assets
and investment securities, and, if necessary, to replace deposit outflows. Also
providing funding in 1997 were two separate issuances of trust preferred
securities totaling $250 million. In January 1997, First Empire completed an
offering of trust preferred securities that raised $150 million of capital. The
30-year offering of 8.234% fixed-rate cumulative trust preferred securities was
sold through First Empire Capital Trust I. First Empire completed another
offering of trust preferred securities in June 1997 raising $100 million of
capital. This 30-year offering of 8.277% fixed-rate cumulative trust preferred
securities was sold through First Empire Capital Trust II. The preferred
securities provide investors with call protection for ten years. The trusts were
formed solely to issue the trust preferred securities and advance proceeds to
First Empire by purchasing First Empire's junior subordinated debt. The proceeds
of the trust preferred securities qualify as Tier 1 or core capital for First
Empire under the Federal Reserve Board's risk-based capital guidelines. Payments
on the junior subordinated debt of First Empire, which are in turn passed
through the trusts to the holders of the preferred securities, will be serviced
through existing liquidity and cash flow sources of First Empire. Under current
tax law, First Empire will be permitted to deduct interest payments on the
junior subordinated debt in computing taxable income. Further information
regarding the trust preferred securities is provided in note 7 of Notes to
Financial Statements. These securities, along with $175 million of subordinated
capital notes issued in prior years by M&T Bank, of which $75 million mature in
2002 and $100 million mature in 2005, are included in long-term borrowings.
Long-term borrowings averaged $373 million in 1997, $189 million in 1996 and
$146 million in 1995.
26
Net interest income is impacted by changes in the composition of the
Company's earning assets and interest-bearing liabilities, as described herein,
as well as changes in interest rates and spreads. Net interest spread, or the
difference between the yield on earning assets and the rate paid on
interest-bearing liabilities, was 3.70% in 1997, compared with 3.80% in 1996. A
greater proportion of loans, which typically yield more than money-market assets
and investment securities, in the composition of the earning asset portfolio
resulted in the yield on earning assets increasing slightly, to 8.34% in 1997
from 8.32% in 1996. The rate paid on interest-bearing liabilities increased 12
basis points (hundredths of one percent) to 4.64% in 1997 from 4.52% in 1996 due
to generally higher prevailing interest rates and the effect of the previously
discussed issuances of $250 million of trust preferred securities. In 1995, the
net interest spread was 3.77%, the yield on earning assets was 8.42% and the
rate paid on interest-bearing liabilities was 4.65%. A greater proportion of
loans in the composition of earning assets somewhat mitigated a general decrease
in market interest rates in 1996 compared with 1995. Largely due to the changes
in the net interest spread described herein, the Company's net interest margin
was 4.38% in 1997, compared with 4.45% in 1996 and 4.43% in 1995.
Interest-free funds, consisting largely of noninterest-bearing deposits and
stockholders' equity, contributed .68% to net interest margin in 1997, compared
with .65% in 1996 and .66% in 1995. Average interest-free funds were $1.9
billion in 1997, $1.7 billion in 1996 and $1.6 billion in 1995.
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 margin and net interest income.
Management assesses the potential impact of future changes in interest rates
and spreads by projecting net interest income under a number of different
interest rate scenarios. As part of the management of interest rate risk, the
Company utilizes interest rate swap agreements to modify the repricing
characteristics of certain portions of the loan and deposit portfolios.
Revenue and expense arising from these agreements are reflected in either the
yields earned on loans or, as appropriate, the rates paid on interest-bearing
deposits. The notional amount of interest rate swaps entered into for
interest rate risk management purposes as of December 31, 1997 was
approximately $2.7 billion. In general, under the terms of these swaps, the
Company receives payments based on the outstanding notional amount of the
swaps at fixed rates of interest and makes payments at variable rates.
However, under terms of a $33 million swap, the Company pays a fixed rate of
interest and receives a variable rate. The average notional amounts of
interest rate swaps entered into for interest rate risk management purposes
and the related effect on net interest income and margin are presented in the
accompanying table 8.
The Company estimates that as of December 31, 1997 it would have received
approximately $16.4 million if all interest rate swap agreements entered into
for interest rate risk management purposes had been terminated. This estimated
fair value of the interest rate swap portfolio results from the effects of
changing interest rates and should be considered in the context of the entire
balance sheet and the Company's overall interest rate risk profile. Changes in
the estimated fair value of interest rate swaps entered into for interest rate
risk management purposes are not reflected in the consolidated financial
statements. Additional information about interest rate swaps is included in note
15 of Notes to Financial Statements.
The Financial Accounting Standards Board ("FASB") has issued a Proposed
Statement of Financial Accounting Standards ("Proposed Statement") that would
significantly change generally accepted accounting for interest rate swaps,
other derivative financial instruments and hedging activities. The Proposed
Statement would require that an entity recognize all derivatives (including
27
interest rate swaps)as either assets or liabilities on the balance sheet and
measure those instruments at fair value.
PROVISION FOR POSSIBLE CREDIT LOSSES
The purpose of the provision is to replenish or build the Company's
allowance for possible credit losses to a level necessary to maintain an
adequate reserve position. Management regularly assesses the adequacy of the
allowance by performing an ongoing evaluation of the loan and lease portfolio,
including such factors as the differing economic risks associated with each loan
category, the current financial condition of specific borrowers, the economic
environment in which the borrowers operate, the level of delinquent loans and
the value of any collateral. Significant loans are individually analyzed, while
other smaller balance loans are evaluated by loan category. Based upon the
results of such review, management believes that the allowance for possible
credit losses at December 31, 1997 was adequate to absorb credit losses from
existing loans and leases.
The provision for possible credit losses was $46.0 million in 1997, compared
with $43.3 million in 1996 and $40.4 million in 1995. Net charge-offs for 1997
were $41.8 million, compared with $35.2 million in 1996 and $21.3 million in
1995. As a percentage of average loans outstanding, net charge-offs were .38% in
1997, .35% in 1996 and .24% in 1995. Nonperforming loans totaled $80.7 million
or .70% of loans outstanding at December 31, 1997, compared with $97.9 million
or .91% of loans a year earlier and $93.1 million or .97% at December 31, 1995.
The allowance for possible credit losses was $274.7 million or 2.39% of net
loans and leases at the end of 1997, compared with $270.5 million or 2.52% at
December 31, 1996 and $262.3 million or 2.75% at December 31, 1995. The ratio of
the allowance to nonperforming loans was 341%, 276% and 282% at year-end 1997,
1996 and 1995, respectively.
The accompanying table 10 presents a comparative allocation of the allowance
for possible credit losses for each of the past five year-ends. Amounts were
allocated to specific loan categories based upon management's classification
of loans under the Company's internal loan grading system and assessment of
near-term charge-offs and losses existing in specific larger balance loans
that are reviewed in detail by the Company's internal loan review department
and pools of other loans that are not individually analyzed. The unallocated
portion of the allowance is intended to provide for probable losses that are
not otherwise identifiable resulting from (i) generally poor economic
conditions and an unfavorable business climate in market regions served by
the Company, (ii) portfolio concentrations regarding loan type, collateral
type and geographic location, (iii) the effect of expansion into new markets
and/or loan product types and, (iv) the possible use of imprecise estimates
in determining the allocated portion of the allowance. Nevertheless, the
allowance is general in nature and is available to absorb losses from any
loan category. Accordingly, the amounts presented in the table do not
necessarily indicate future losses within the individual loan categories.
Several factors influence the Company's credit loss experience, including
overall economic conditions affecting businesses and consumers, in general, and,
due to the size of the Company's commercial real estate loan portfolio, real
estate valuations, in particular. Nonperforming commercial real estate loans
totaled $17.4 million, $27.1 million and $42.3 million at December 31, 1997,
1996 and 1995, respectively. At December 31, 1997, $7.0 million of nonperforming
commercial real estate loans were secured by properties located in the New York
City metropolitan area, compared with $10.3 million and $16.8 million at
December 31, 1996 and 1995, respectively. Net charge-offs of commercial real
estate loans were $.9 million in 1997, $1.5 million in 1996 and $6.6 million in
1995. Included in these totals are net charge-offs of commercial real estate
loans secured by properties in the
28
New York City metropolitan area of $1.1 million, $.6 million and $3.2 million
in 1997, 1996 and 1995, respectively.
Net charge-offs of consumer loans totaled $35.8 million in 1997, or 1.55% of
average consumer loans outstanding during the year, compared with $28.5 million
or 1.30% in 1996 and $11.3 million or .65% in 1995. Higher charge-offs of credit
card balances and indirect automobile loans were the most significant factors
contributing to the increased level of consumer loan charge-offs in 1997 and
1996 compared with 1995. Net credit card and indirect automobile loan
charge-offs in 1997 were $19.0 million and $11.2 million, respectively, compared
with $15.9 million and $9.6 million, respectively, in 1996 and $6.1 million and
$3.1 million, respectively, in 1995. The increased levels of charge-offs of
credit card and indirect automobile loans in 1997 and 1996 as compared to prior
years can, in part, be attributed to higher levels of consumer bankruptcies and,
in general, is consistent with trends reported by other financial institutions.
Nonperforming consumer loans totaled $21.9 million or .99% of outstanding
consumer loans at December 31, 1997, compared with $17.6 million or .73% at
December 31, 1996 and $13.7 million or .70% at December 31, 1995.
Commercial real estate loans secured by multi-family properties in the New
York City metropolitan area were 13% of loans outstanding at December 31, 1997.
However, the Company had no concentrations of credit extended to any specific
industry that exceeded 10% of total loans at December 31, 1997. Furthermore, the
Company had no exposure to less developed countries, and only $5 million of
foreign loans in total.
Assets taken in foreclosure of defaulted loans totaled $8.4 million at
December 31, 1997, compared with $8.5 million and $7.3 million at the end of
1996 and 1995, respectively.
OTHER INCOME
Excluding the effect from sales of bank investment securities, other income
increased 14% to $193 million in 1997 from $170 million in 1996 and was 33%
higher than the $145 million earned in 1995.
Mortgage banking revenues, which consist of residential mortgage loan
servicing fee income, gains from sales of residential mortgage loans and loan
servicing rights, and other residential mortgage loan-related fees, increased to
$51.5 million in 1997 from $44.5 million in 1996 and $37.1 million in 1995.
Revenues from servicing residential mortgage loans for others were $25.7 million
in 1997, $20.9 million in 1996 and $19.3 million in 1995. Gains from sales of
residential mortgage loans and loan servicing rights increased to $23.1 million
in 1997, compared with $21.6 million and $16.4 million in 1996 and 1995,
respectively. The Company originates residential mortgage loans in New York
State, as well as in Arizona, Colorado, Massachusetts, Ohio, Oregon, Utah and
Washington. Originations of residential mortgage loans were $2.1 billion in
1997, $1.9 billion in 1996 and $1.3 billion in 1995. Residential mortgage loans
serviced for others totaled $7.5 billion, $5.8 billion and $5.7 billion at
December 31, 1997, 1996 and 1995, respectively. Capitalized servicing assets
were $61.1 million at December 31, 1997, compared with $37.8 million at December
31, 1996 and $34.5 million at December 31, 1995.
Service charges on deposit accounts increased 7% to $43.4 million in 1997
from $40.7 million in 1996, and 13% from $38.3 million in 1995. Trust income of
$30.7 million increased 11% from $27.7 million in 1996, and 20% from $25.5
million in 1995. Merchant discount and other credit card fees in 1997 totaled
$19.4 million, compared with $18.3 million in 1996 and $10.7 million in 1995.
Expansion of the Company's credit card business was the primary factor in the
improvement in 1996's fees from 1995. Due to poorer than expected results,
during 1997 the Company either terminated or agreed to
29
terminate during the first quarter of 1998 several of its co-branded credit
card programs. These programs were initiated during 1995 and 1996. Merchant
discount and other credit card fees earned in connection with the programs
were approximately $7 million, $8 million and $1 million in 1997, 1996 and
1995, respectively. Credit card balances related to these programs that
remained outstanding at December 31, 1997 were $61 million, compared with
$122 million a year earlier. Trading account and foreign exchange activity
resulted in gains of $3.7 million in 1997, $2.4 million in 1996 and $2.8
million in 1995. Other revenues from operations totaled $44.7 million in
1997, compared with $36.8 million in 1996 and $30.7 million in 1995. Such
amounts include revenues from sales of mutual funds and annuities of $15.3
million, $13.0 million and $9.4 million in 1997, 1996 and 1995, respectively.
Income earned from venture capital and other investments also contributed to
the increase in other revenues from operations in 1997.
OTHER EXPENSE
Other expense totaled $422 million in 1997, up from $409 million in 1996
when a $7 million charge was recognized for a special assessment to recapitalize
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC"). Other expense totaled $374 million in 1995.
Salaries and employee benefits expense was $220 million in 1997, an increase
of $12 million or 6% from $208 million in 1996. The increase was due largely to
higher incentive-based compensation arrangements, including stock appreciation
rights, and merit salary increases. Personnel costs in 1996 increased $20
million or 11% from $188 million in 1995. Factors contributing to such increase
were merit salary increases, costs associated with the opening of 27 supermarket
banking locations in 1996 and the second half of 1995, and the expansion of
subsidiaries providing residential mortgage banking services, indirect
automobile loans and sales of mutual funds and annuities. The number of
full-time equivalent employees was 4,781 at December 31, 1997, down from 4,832
at December 31, 1996, but up from 4,546 at December 31, 1995.
Nonpersonnel expenses for 1997 totaled $202 million, little changed from
$201 million in 1996, but up 8% from $186 million in 1995. Excluding the $7
million charge in 1996 for the special assessment by the FDIC, nonpersonnel
expense increased 4% in 1997 from 1996. Higher costs associated with the
Company's mortgage banking business, including amortization of capitalized
servicing rights, contributed to the increase. The increase in nonpersonnel
expenses in 1996 from 1995 was largely caused by higher expenses associated with
the expansion of businesses providing mortgage banking services, indirect
automobile loans, credit cards and the sale of mutual funds and annuities,
partially offset by lower deposit insurance expense. Customer rebates and other
expenses based on card usage directly attributable to the terminated co-branded
credit card programs previously noted were approximately $9 million in 1997, $11
million in 1996 and $1 million in 1995.
INCOME TAXES
The provision for income taxes in 1997 was $105.9 million, up from $97.9
million in 1996 and $90.1 million in 1995. The effective tax rates were 38% in
1997, 39% in 1996 and 41% in 1995. 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 11 of Notes to Financial Statements.
INTERNATIONAL ACTIVITIES
The Company's net investment in international assets was $12 million and $55
million at December 31, 1997 and 1996, respectively. Total offshore deposits
30
were $251 million and $193 million at December 31, 1997 and 1996, 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 risk arises whenever the
maturities of financial instruments included in assets and liabilities differ.
Accordingly, a critical element in managing a financial institution is ensuring
that sufficient cash flow and liquid assets are available to satisfy demands for
loans and deposit withdrawals, to fund operating expenses, and to be used for
other corporate purposes. The Company's core deposits have historically provided
a significant source of funds. Such deposits are generated from a large base of
consumer, corporate and institutional customers, which over the past several
years has become more geographically diverse as a result of acquisitions and
expansion of the Company's businesses. Nevertheless, in recent years the Company
has faced increased competition in offering services and products from a large
array of financial market participants, including banks, thrifts, mutual funds,
securities dealers and others. As a result, and consistent with banking industry
experience in general, the Company has experienced a reduction in the percentage
of earning assets funded by core deposits. Core deposits financed 64% of the
Company's earning assets at December 31, 1997, compared with 65% and 67% at
December 31, 1996 and 1995, respectively.
The Company supplements funding from core deposits with various wholesale
borrowings, such as Federal funds purchased and securities sold under agreements
to repurchase, and brokered certificates of deposit. Additionally, M&T Bank has
a credit facility with the FHLB aggregating $959 million, with any borrowings
secured by loans and investment securities. Borrowings outstanding under such
credit facility totaled $22 million and $2 million at December 31, 1997 and
1996, respectively. Although informal and sometimes reciprocal, sources of
funding are available to the Company through various arrangements for unsecured
short-term borrowings from a wide group of banks and other financial
institutions. In addition to deposits and borrowings, other sources of liquidity
include maturities of money-market assets, repayments of loans and investment
securities, and cash generated from operations, such as fees collected for
services.
First Empire's primary source of funds to pay for operating expenses,
dividends and treasury stock repurchases has historically been the receipt of
dividends from its banking subsidiaries, which are subject to various regulatory
limitations. As previously discussed, during 1997 First Empire issued junior
subordinated debt to two special purpose subsidiaries, which provided funding.
Additional information regarding the junior subordinated debt is included in
note 7 of Notes to Financial Statements. First Empire also maintains a $25
million line of credit with an unaffiliated commercial bank, all of which was
available for borrowing at December 31, 1997.
The Company expects to have access to sufficient liquid assets to fund the
cash portion of the previously discussed ONBANCorp acquisition and, accordingly,
management does not anticipate engaging in any activities, either currently or
in the long-term, which would cause a significant strain on liquidity at either
First Empire or its subsidiary banks. Furthermore, management closely monitors
the Company's liquidity position for compliance with internal policies and
believes that available sources of liquidity are adequate to meet anticipated
funding needs.
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Company's financial instruments. The core banking
activities of lending and deposit-taking expose the Company to interest rate
risk. As a result of interest rate risk, net interest income earned by the
Company is subject to the effects of changing interest rates.
31
The Company measures interest rate risk by calculating the variability of net
interest income under various interest rate scenarios using projected
balances for earning assets, interest-bearing liabilities and off-balance
sheet financial instruments. Management's philosophy toward positioning the
Company for interest rate movements is to attempt to limit such variability.
The balances of both on-and off-balance sheet financial instruments used in
the projections are based on expected growth from forecasted business
opportunities, anticipated prepayments of mortgage-related assets and
expected maturities of investment securities, loans and deposits. Management
supplements the modeling technique described above with analyses of market
values of the Company's financial instruments. As part of managing interest
rate risk, the Company has entered into interest rate swap agreements having
an aggregate notional amount of approximately $2.7 billion at December 31,
1997. Information about interest rate swaps entered into for interest rate
risk management purposes is included herein under "Net Interest
Income/Lending and Funding Activities" and in note 15 of Notes to Financial
Statements.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's interest rate sensitivity with the aid of a computer
model which considers the impact of ongoing lending and deposit gathering
activities, as well as statistically derived 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 action, and intends to do so in the future, to
mitigate exposure to interest rate risk through the use of on- or off-balance
sheet financial instruments. 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 entering into or
modifying existing interest rate swap agreements.
The accompanying table 13 displays the estimated impact on net interest
income from non-trading financial instruments resulting from changes in interest
rates during the first modeling year.
The calculation of the impact of changes in interest rates on net interest
income is based upon many assumptions, including 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. The Company also assumes gradual changes in rates of 100 and 200
basis points up and down during a twelve month period. These assumptions 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 due to timing, magnitude, and frequency of interest rate
changes and changes in market conditions, as well as any actions, such as those
previously described, which management may take to counter these changes.
In accordance with industry practice, the accompanying table 15 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 into for interest rate risk management purposes.
Management believes 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.
The Company engages in trading activities to meet the financial needs of
customers and to profit from perceived market opportunities. Trading activities
are conducted utilizing financial instruments that include forward
32
and futures contracts related to foreign currency exchange and
mortgage-backed securities, U.S. Treasury and other government securities,
and interest rate contracts such as swaps. As a result, the Company is
exposed to foreign currency and interest rate risk resulting from its trading
activities. However, the Company generally mitigates exposure arising from
trading activities by entering into offsetting positions. Accordingly, the
Company's exposure to interest rate, foreign exchange or other price risk
related to trading activities as of December 31, 1997 was not considered
material.
CAPITAL
Total stockholders' equity at December 31, 1997 was $1.0 billion or 7.36% of
total assets, compared with $906 million or 7.00% at December 31, 1996 and $846
million or 7.08% at December 31, 1995. On a per share basis, common
stockholders' equity was $155.86 at December 31, 1997, an increase of 15% from
$135.45 at December 31, 1996 and 24% from $125.33 at December 31, 1995. The
ratio of average total stockholders' equity to average total assets was 7.16%,
6.92% and 6.81% in 1997, 1996 and 1995, respectively.
Stockholders' equity at December 31, 1997 was increased by $12.0 million, or
$1.82 per common share, for the net after-tax impact of unrealized gains on
investment securities classified as available for sale, compared with a
reduction for unrealized losses of $2.5 million, or $.37 per common share, at
December 31, 1996 and $3.2 million, or $.49 per common share, at December 31,
1995. The unrealized gains at December 31, 1997 represent the amount by which
the fair value of investment securities classified as available for sale
exceeded amortized cost, net of applicable income taxes. The market valuation of
investment securities should be considered in the context of the entire balance
sheet of the Company. With the exception of investment securities classified as
available for sale, trading account assets and liabilities, and residential
mortgage loans held for sale, the carrying values of financial instruments in
the balance sheet are generally not adjusted for appreciation or depreciation in
market value resulting from changes in interest rates.
Cash dividends on common stock of $21.2 million were paid in 1997, compared
with $18.6 million in 1996 and $16.2 million in 1995. The quarterly common stock
dividend rate remained at $.80 per share throughout 1997. In total, dividends
per common share increased to $3.20 in 1997 from $2.80 in 1996 and $2.50 in
1995. On March 29, 1996, all shares of First Empire's 9% convertible preferred
stock were converted by the holder of such stock into 506,930 shares of First
Empire common stock at a contractual conversion price of $78.90625 per share.
Dividends of $.9 million were paid to the preferred stockholder in 1996,
compared with $3.6 million in 1995.
In February 1997, First Empire announced a plan to repurchase and hold as
treasury stock up to 303,317 shares of common stock for reissuance upon the
possible future exercise of outstanding stock options. As of December 31, 1997,
First Empire had repurchased 178,011 common shares pursuant to such plan at an
average cost of $331.78 per share. Including prior repurchase plans completed in
1997 and 1995, First Empire repurchased common shares totaling 207,073 in 1997,
336,220 in 1996 and 223,530 in 1995. The total cost of these common stock
repurchases was $67.8 million, $80.8 million and $37.4 million in 1997, 1996 and
1995, respectively.
Federal regulators generally require banking institutions to maintain "core
capital" and "total capital" ratios of at least 4% and 8%, respectively, of
risk-adjusted total assets. In addition to the risk-based measures, Federal bank
regulators have also implemented a minimum "leverage" ratio guideline of 3% of
the quarterly average of total assets. Under regulatory guidelines, unrealized
gains or losses on investment securities classified as available for sale are
not recognized in determining regulatory
33
capital. As previously noted, core capital includes the $250 million of trust
preferred securities issued in 1997. As of December 31, 1997 total capital
further includes $160 million of the subordinated notes issued by M&T Bank in
prior years. The capital ratios of the Company and its banking subsidiaries,
M&T Bank and M&T Bank, N.A., as of December 31, 1997 are presented in note 19
of Notes to Financial Statements.
The Company has historically maintained capital ratios in excess of minimum
regulatory guidelines largely through a high rate of internal capital
generation. The rate of internal capital generation, or net income (excluding
the after-tax effects of gains or losses from sales of bank investment
securities) less dividends paid expressed as a percentage of average total
stockholders' equity, was 16.28% in 1997, 15.25% in 1996 and 13.88% in 1995.
YEAR 2000 INITIATIVES
The Company is currently working to resolve the potential impact of "Year
2000" issues on the processing of date-sensitive information by the Company's
computer systems. The Year 2000 problem relates to the ability of computer
systems to be able to distinguish date data between the twentieth and
twenty-first centuries. Management anticipates that the Company's computer
systems will be Year 2000 compliant by the end of 1998 and has a planned program
to test for such compliance. The Company could also be adversely affected if its
customers rely on data processing systems that are not Year 2000 compliant prior
to the end of 1999. The Company, therefore, is taking a proactive role to work
with its data processing vendors and to provide information to its commercial
customers regarding Year 2000 issues. The costs that have been incurred by the
Company in addressing its potential Year 2000 problems have not had a material
adverse impact on the Company's financial position, results of operations or
cash flows. However, the inability of the Company or its customers to resolve
Year 2000 issues in a timely manner could result in a material financial risk.
Accordingly, the Company is devoting appropriate resources to resolve its Year
2000 issues in a timely manner and does not currently expect that doing so will
have a material adverse impact on the Company's financial position, results of
operations or cash flows in the future.
FOURTH QUARTER RESULTS
Net income in the fourth quarter of 1997 was $46.3 million, an increase of
15% from the final quarter of 1996 when net income was $40.4 million. Diluted
earnings per common share increased 17% to $6.66 from $5.70 earned in the
year-earlier quarter. Basic earnings per share increased 16% to $7.01 in 1997's
final quarter from $6.03 in the comparable period in 1996. Taxable-equivalent
net interest income increased to $143.9 million in the fourth quarter of 1997,
up $6.0 million or 4% from $137.9 million in the corresponding 1996 quarter.
Growth in average loans outstanding was the primary factor contributing to the
improvement in net interest income. Average loans for the fourth quarter of 1997
totaled $11.3 billion, an 8% increase from the $10.5 billion average during the
fourth quarter of 1996. In total, earning assets averaged $13.2 billion in the
final quarter of 1997, up 7% from $12.3 billion in the corresponding 1996
quarter. The yield on earning assets increased to 8.34% in the final 1997
quarter from 8.31% in the year-earlier period, while the rate paid on
interest-bearing liabilities increased to 4.70% from 4.54%. The higher rate paid
on interest-bearing liabilities was due to generally higher interest rates and
the effect of the previously discussed issuances of $250 million of trust
preferred securities. The resulting net interest spread was 3.64% in the recent
quarter, compared with 3.77% in the fourth quarter of 1996. Similarly, net
interest margin decreased to 4.33% in the fourth quarter of 1997 from 4.46% in
the year-earlier quarter.
34
The provision for possible credit losses was $12.0 million in the final 1997
quarter, compared with $11.5 million in the fourth quarter of 1996. Net
charge-offs totaled $9.7 million in 1997's fourth quarter, down from $11.5
million in the year-earlier quarter. Net charge-offs as an annualized percentage
of average loans and leases were .34% in the recent quarter, down from .43% in
the corresponding 1996 quarter. Excluding the effects of sales of bank
investment securities, other income rose 10% to $53.0 million in the fourth
quarter of 1997 from $48.1 million in the year-earlier quarter. A $3.0 million
increase in revenues from mortgage banking activities was the leading factor
contributing to the rise. Other expense was $110.7 million in the fourth quarter
of 1997, an increase of 3% from $107.1 million in the fourth quarter of 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125," was issued in December 1996 and defers until January 1,
1998, the effective date for certain provisions of SFAS No. 125 relating to
repurchase agreement, dollar roll, securities lending and similar transactions
and pledged collateral. SFAS No. 127 will be adopted by the Company in the first
quarter of 1998, as required, and is not expected to have a material impact on
the Company's results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components, and requires that all items that are
required to be recognized under accounting standards be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997 and reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt the
provisions of SFAS No. 130 in the first quarter of 1998. When adopted, SFAS No.
130 is not expected to have a material impact on the Company.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," also issued in June 1997, establishes new standards for reporting
information about operating segments in annual and interim financial statements.
SFAS No. 131 also requires descriptive information about the way the operating
segments are determined, the products and services provided by the segments and
the nature of differences between reportable segment measurements and those used
for the consolidated enterprise. SFAS No. 131 is effective for years beginning
after December 15, 1997. SFAS No. 131 need not be applied to interim financial
statements in the initial year of application, but comparative information for
interim periods in the initial year of application is to be reported in the
financial statements for interim periods in the year after initial application.
The Company will apply the provisions of SFAS No. 131 in 1998, as required.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 revises current
disclosure requirements for employers' pensions and other retiree benefits. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997.
FORWARD-LOOKING STATEMENTS
This Financial Review 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. Words such as "anticipates," "believes," "estimates,"
variations of such words and similar expressions are intended to
35
identify such forward-looking statements. 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. First Empire undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Future Factors include changes in interest rates, spreads on earning assets
and interest-bearing liabilities, and interest rate sensitivity; credit losses;
sources of liquidity; regulatory supervision and oversight, including required
capital levels; 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, including environmental
regulations; 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; continued availability of financing; and financial
resources in the amounts, at the times and on the terms required to support the
Company's future businesses. 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 conditions, including interest rate and currency
exchange rate fluctuations, and other Future Factors.
36
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
TABLE 1
1997 1996 CHANGE
---------- --------- -----------
FOR THE YEAR
PERFORMANCE
Net income (thousands)........................................................... $ 176,241 151,103 +17%
Return on
Average assets................................................................. 1.32% 1.21%
Average common equity.......................................................... 18.49% 17.60%
Net interest margin.............................................................. 4.38% 4.45%
Net charge-offs/average loans.................................................... .38% .35%
Efficiency ratio................................................................. 55.79% 57.95%
---------- ---------
PER COMMON SHARE DATA
Basic earnings................................................................... $ 26.60 22.54 +18%
Diluted earnings................................................................. 25.26 21.08 +20%
Cash dividends................................................................... 3.20 2.80 +14%
---------- --------- -----
AT DECEMBER 31
BALANCE SHEET DATA (MILLIONS)
Loans and leases, net of unearned discount....................................... $ 11,497 10,722 +7%
Total assets..................................................................... 14,003 12,944 +8%
Deposits......................................................................... 11,163 10,514 +6%
Stockholders' equity............................................................. 1,030 906 +14%
---------- --------- -----
LOAN QUALITY
Allowance for credit losses/net loans............................................ 2.39% 2.52%
Nonperforming assets ratio....................................................... .77% .99%
---------- ---------
CAPITAL
Tier 1 risk-based capital ratio.................................................. 10.69% 8.40%
Total risk-based capital ratio................................................... 13.32% 11.32%
Leverage ratio................................................................... 9.09% 6.99%
Common equity/total assets....................................................... 7.36% 7.00%
Common equity (book value) per share............................................. $ 155.86 135.45 +15%
Market price per share
Closing........................................................................ 465.00 288.00 +61%
High........................................................................... 468.00 289.63
Low............................................................................ 281.00 209.00
37
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
QUARTERLY TRENDS
TABLE 2
1997 QUARTERS
-----------------------------------
FOURTH THIRD SECOND FIRST
-------- ------- ------- -------
AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE
Taxable-equivalent basis
EARNINGS AND DIVIDENDS
Interest income............................................ $277,166 271,305 265,301 257,029
Interest expense........................................... 133,270 129,768 125,734 119,321
-------- ------- ------- -------
Net interest income........................................ 143,896 141,537 139,567 137,708
Less: provision for possible credit losses................. 12,000 12,000 11,000 11,000
Other income............................................... 52,979 50,182 43,983 45,923
Less: other expense........................................ 110,716 104,706 102,070 104,284
-------- ------- ------- -------
Income before income taxes................................. 74,159 75,013 70,480 68,347
Applicable income taxes.................................... 26,246 27,518 26,329 25,825
Taxable-equivalent adjustment.............................. 1,613 1,604 1,360 1,263
-------- ------- ------- -------
Net income................................................. $ 46,300 45,891 42,791 41,259
-------- ------- ------- -------
Cash dividends on preferred stock.......................... $ -- -- -- --
Per common share data
Net income
Basic.................................................. $ 7.01 6.96 6.46 6.17
Diluted................................................ 6.66 6.62 6.17 5.81
Net income, excluding securities transactions
Basic.................................................. 7.01 6.97 6.47 6.18
Diluted................................................ 6.66 6.63 6.19 5.81
Cash dividends........................................... .80 .80 .80 .80
Average common shares outstanding
Basic.................................................... 6,599 6,592 6,627 6,685
Diluted.................................................. 6,955 6,927 6,928 7,100
-------- ------- ------- -------
BALANCE SHEET DATA
DOLLARS IN MILLIONS, EXCEPT PER
SHARE
Average balances
Total assets............................................. $ 13,785 13,424 13,148 12,866
Earning assets........................................... 13,186 12,950 12,740 12,464
Investment securities.................................... 1,721 1,747 1,715 1,611
Loans and leases, net of unearned discount............... 11,327 11,002 10,842 10,715
Deposits................................................. 11,262 11,170 10,914 10,454
Stockholders' equity..................................... 1,007 962 925 917
-------- ------- ------- -------
At end of quarter
Total assets............................................. $ 14,003 13,675 13,441 13,122
Earning assets........................................... 13,333 13,100 12,903 12,621
Investment securities.................................... 1,725 1,752 1,708 1,693
Loans and leases, net of unearned discount............... 11,497 11,271 10,980 10,803
Deposits................................................. 11,163 11,205 11,186 10,533
Stockholders' equity..................................... 1,030 982 951 912
Equity per common share.................................. $ 155.86 149.31 143.64 137.33
-------- ------- ------- -------
Performance ratios, annualized
Return on
Average assets........................................... 1.33% 1.36% 1.31% 1.30%
Average common stockholders' equity...................... 18.25% 18.92% 18.55% 18.24%
Net interest margin on average earning assets.............. 4.33% 4.34% 4.39% 4.48%
Nonperforming assets to total assets, at end of quarter.... .64% .69% .79% .81%
-------- ------- ------- -------
Market price per common share
High..................................................... $ 468 415 343 1/2 336
Low...................................................... 401 335 303 281
Closing.................................................. 465 415 337 320
-------- ------- ------- -------
-------- ------- ------- -------
1996 QUARTERS
----------------------------------
FOURTH THIRD SECOND FIRST
------- ------- ------- -------
Taxable-equivalent basis
EARNINGS AND DIVIDENDS
Interest income............................................ 257,196 251,336 248,673 244,714
Interest expense........................................... 119,343 117,884 114,996 114,185
------- ------- ------- -------
Net interest income........................................ 137,853 133,452 133,677 130,529
Less: provision for possible credit losses................. 11,475 10,475 11,700 9,675
Other income............................................... 47,641 44,893 41,463 36,251
Less: other expense........................................ 107,082 107,658 97,921 96,317
------- ------- ------- -------
Income before income taxes................................. 66,937 60,212 65,519 60,788
Applicable income taxes.................................... 25,288 23,090 25,790 23,698
Taxable-equivalent adjustment.............................. 1,229 1,251 1,070 937
------- ------- ------- -------
Net income................................................. 40,420 35,871 38,659 36,153
------- ------- ------- -------
Cash dividends on preferred stock.......................... -- -- -- 900
Per common share data
Net income
Basic.................................................. 6.03 5.34 5.66 5.51
Diluted................................................ 5.70 5.05 5.36 4.97
Net income, excluding securities transactions
Basic.................................................. 6.07 5.34 5.65 5.48
Diluted................................................ 5.73 5.05 5.35 4.95
Cash dividends........................................... .70 .70 .70 .70
Average common shares outstanding
Basic.................................................... 6,700 6,722 6,832 6,399
Diluted.................................................. 7,098 7,104 7,212 7,269
------- ------- ------- -------
BALANCE SHEET DATA
Average balances
Total assets............................................. 12,728 12,556 12,486 12,141
Earning assets........................................... 12,308 12,124 12,044 11,695
Investment securities.................................... 1,659 1,798 1,939 1,830
Loans and leases, net of unearned discount............... 10,527 10,253 9,997 9,672
Deposits................................................. 10,609 10,459 10,069 9,496
Stockholders' equity..................................... 891 857 855 849
------- ------- ------- -------
At end of quarter
Total assets............................................. 12,944 12,821 12,542 12,671
Earning assets........................................... 12,504 12,282 12,015 12,129
Investment securities.................................... 1,572 1,753 1,817 2,108
Loans and leases, net of unearned discount............... 10,722 10,437 10,129 9,912
Deposits................................................. 10,514 10,554 10,193 9,719
Stockholders' equity..................................... 906 878 861 847
Equity per common share.................................. 135.45 130.58 126.70 123.76
------- ------- ------- -------
Performance ratios, annualized
Return on
Average assets........................................... 1.26% 1.14% 1.25% 1.20%
Average common stockholders' equity...................... 18.05% 16.64% 18.18% 17.50%
Net interest margin on average earning assets.............. 4.46% 4.38% 4.46% 4.49%
Nonperforming assets to total assets, at end of quarter.... .82% .82% .75% .71%
------- ------- ------- -------
Market price per common share
High..................................................... 289 5/8 258 247 247 3/4
Low...................................................... 250 239 232 209
Closing.................................................. 288 249 241 246
------- ------- ------- -------
------- ------- ------- -------
38
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
EARNINGS SUMMARY
DOLLARS IN MILLIONS
Table 3
INCREASE (DECREASE)*
- ---------------------------
COMPOUND
1996 TO 1997 1995 TO 1996 GROWTH RATE
- ------------ ------------ 5 YEARS
AMOUNT % AMOUNT % 1997 1996 1995 1994 1993 1992 TO 1997
- ------ --- ------ --- ------------------------------------------------- -------- ------- ----- ----- ----- ------------
$68.9 7 $69.1 7 Interest income** $1,070.8 1,001.9 932.8 751.4 744.7 7%
41.7 9 24.7 6 Interest expense 508.1 466.4 441.7 279.2 269.9 9
- ------ --- ------ --- ------------------------------------------------- -------- ------- ----- ----- ----- -----
27.2 5 44.4 9 Net interest income** 562.7 535.5 491.1 472.2 474.8 5
2.7 6 3.0 7 Less: provision for possible credit losses 46.0 43.3 40.4 60.5 80.0 (12)
Gain (loss) on sales of bank investment
(.3) - (4.5) - securities (.3) - 4.5 .1 .9 -
23.1 14 25.2 17 Other income 193.3 170.3 145.1 123.6 109.7 15
Less:
11.7 6 20.1 11 Salaries and employee benefits 220.0 208.3 188.2 161.2 154.3 11
1.1 1 14.4 8 Other expense 201.8 200.7 186.3 175.6 173.5 2
- ------ --- ------ --- ------------------------------------------------- -------- ------- ----- ----- ----- -----
34.5 14 27.6 12 Income before income taxes 287.9 253.5 225.8 198.6 177.6 11
Less:
1.3 30 (.2) (3) Taxable-equivalent adjustment** 5.8 4.5 4.7 4.1 4.1 -
8.1 8 7.7 9 Income taxes 105.9 97.9 90.1 77.2 71.5 10
- ------ --- ------ --- ------------------------------------------------- -------- ------- ----- ----- ----- -----
$25.1 17 $20.1 15 Net income $ 176.2 151.1 131.0 117.3 102.0 12%
- ------ --- ------ --- ------------------------------------------------- -------- ------- ----- ----- ----- -----
- ------ --- ------ --- ------------------------------------------------- -------- ------- ----- ----- ----- -----
- ------------------------
* Changes were calculated from unrounded amounts.
** 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
is primarily to interest received on qualified municipal securities and
industrial revenue financings and is based on a composite income tax rate of
approximately 41% for 1997, 42% for 1996, 1995 and 1993, and 43% for 1994.
39
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
AVERAGE LOANS AND LEASES
(NET OF UNEARNED DISCOUNT)
TABLE 4
PERCENT INCREASE FROM
--------------------------
1997 1996 TO 1997 1995 TO 1996
--------- ------------ ------------
DOLLARS IN MILLIONS
Commercial, financial, etc................................................. $ 2,257 11% 13%
Real estate--commercial.................................................... 4,180 11 8
Real estate--consumer...................................................... 2,228 5 17
Consumer
Automobile............................................................... 1,041 3 41
Home equity.............................................................. 644 6 4
Credit cards............................................................. 268 4 47
Other.................................................................... 355 14 13
--------- ------------ ------------
Total consumer......................................................... 2,308 5 25
--------- ------------ ------------
Total.................................................................... $ 10,973 8% 14%
--------- ------------ ------------
--------- ------------ ------------
40
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
COMMERCIAL REAL ESTATE LOANS
(NET OF UNEARNED DISCOUNT)
DECEMBER 31, 1997
TABLE 5
PERCENT OF DOLLARS OUTSTANDING BY
LOAN SIZE
-------------------------------------
DOLLARS IN MILLIONS OUTSTANDINGS $0-1 $1-3 $3-10 $10+
------------ ---- ---- ----- ----
Metropolitan New York City
Apartments/Multifamily.................................... $ 1,468.7 14% 20% 19% 10%
Office.................................................... 161.9 1 2 3 2
Retail.................................................... 447.9 3 7 6 2
Construction.............................................. 20.4 -- -- -- --
Industrial................................................ 37.6 -- 1 1 --
Other..................................................... 228.0 1 2 3 3
------------ -- -- -- --
Total Metropolitan New York City........................ $ 2,364.5 19% 32% 32% 17%
------------ -- -- -- --
Other New York State
Apartments/Multifamily.................................... $ 340.2 6% 6% 6% 1%
Office.................................................... 564.8 8 9 11 2
Retail.................................................... 196.9 4 4 2 --
Construction.............................................. 133.7 1 2 3 1
Industrial................................................ 156.0 5 2 1 --
Other..................................................... 480.5 10 9 6 1
------------ -- -- -- --
Total other New York State.............................. $ 1,872.1 34% 32% 29% 5%
------------ -- -- -- --
Other
Apartments/Multifamily.................................... $ 87.0 7% 21% 16% --%
Office.................................................... 6.5 1 1 2 --
Retail.................................................... 46.3 -- 6 17 --
Construction.............................................. 3.4 -- -- 1 --
Industrial................................................ 25.7 1 3 8 --
Other..................................................... 30.5 4 3 9 --
------------ -- -- -- --
Total other............................................. $ 199.4 13% 34% 53% --%
------------ -- -- -- --
Total commercial real estate loans...................... $ 4,436.0 25% 32% 32% 11%
------------ -- -- -- --
------------ -- -- -- --
41
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES
TABLE 6
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- --------- ----------- ----------- --------- -----------
1997 1996
----------------------------------- -----------------------------------
AVERAGE BALANCE IN MILLIONS; INTEREST IN THOUSANDS
Assets
Earning assets
Loans and leases, net of unearned
discount*
Commercial, financial, etc.......... $ 2,257 $ 189,455 8.39% 2,031 166,022 8.17%
Real estate......................... 6,408 550,989 8.60 5,893 512,269 8.69
Consumer............................ 2,308 213,942 9.27 2,190 204,831 9.35
----------- --------- --- ----------- --------- ---
Total loans and leases, net....... 10,973 954,386 8.70 10,114 883,122 8.73
----------- --------- --- ----------- --------- ---
Money-market assets
Interest-bearing deposits at
banks............................. 42 2,475 5.95 38 2,413 6.30
Federal funds sold and agreements to
resell securities................. 55 2,989 5.42 55 2,985 5.45
Trading account..................... 68 1,937 2.83 31 1,100 3.62
----------- --------- --- ----------- --------- ---
Total money-market assets......... 165 7,401 4.48 124 6,498 5.26
----------- --------- --- ----------- --------- ---
Investment securities**
U.S. Treasury and federal
agencies.......................... 1,122 70,968 6.33 1,200 74,023 6.17
Obligations of states and political
subdivisions...................... 43 2,832 6.61 41 2,678 6.57
Other............................... 534 35,214 6.59 565 35,598 6.30
----------- --------- --- ----------- --------- ---
Total investment securities....... 1,699 109,014 6.42 1,806 112,299 6.22
----------- --------- --- ----------- --------- ---
Total earning assets.............. 12,837 1,070,801 8.34 12,044 1,001,919 8.32
----------- --------- --- ----------- --------- ---
Allowance for possible credit
losses.............................. (273) (269)
Cash and due from banks............... 308 334
Other assets.......................... 437 370
----------- -----------
Total assets...................... $ 13,309 12,479
----------- -----------
----------- -----------
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts........................ $ 257 3,455 1.34 659 9,430 1.43
Savings deposits.................... 3,420 90,907 2.66 2,956 84,822 2.87
Time deposits....................... 5,818 327,611 5.63 5,137 286,088 5.57
Deposits at foreign office.......... 230 12,160 5.29 239 12,399 5.19
----------- --------- --- ----------- --------- ---
Total interest-bearing deposits... 9,725 434,133 4.46 8,991 392,739 4.37
----------- --------- --- ----------- --------- ---
Short-term borrowings................. 853 44,341 5.20 1,133 59,442 5.25
Long-term borrowings.................. 373 29,619 7.94 189 14,227 7.51
----------- --------- --- ----------- --------- ---
Total interest-bearing
liabilities..................... 10,951 508,093 4.64 10,313 466,408 4.52
----------- --------- --- ----------- --------- ---
Noninterest-bearing deposits.......... 1,228 1,169
Other liabilities..................... 177 134
----------- -----------
Total liabilities................. 12,356 11,616
----------- -----------
Stockholders' equity.................. 953 863
----------- -----------
Total liabilities and
stockholders' equity............ $ 13,309 12,479
----------- -----------
----------- -----------
Net interest spread................... 3.70 3.80
Contribution of interest-free funds... .68 .65
--------- --- --------- ---
Net interest income/margin on earning
assets.............................. $ 562,708 4.38% 535,511 4.45%
--------- --- --------- ---
--------- --- --------- ---
AVERAGE AVERAGE
BALANCE INTEREST RATE
----------- ----------- -----------
1995
------------------------------------------------
Assets
Earning assets
Loans and leases, net of unearned
discount*
Commercial, financial, etc.......... 1,804 155,750 8.63%
Real estate......................... 5,301 471,714 8.90
Consumer............................ 1,752 169,149 9.65
----------- ----------- ---
Total loans and leases, net....... 8,857 796,613 8.99
----------- ----------- ---
Money-market assets
Interest-bearing deposits at
banks............................. 110 8,181 7.44
Federal funds sold and agreements to
resell securities................. 48 3,007 6.29
Trading account..................... 28 1,339 4.78
----------- ----------- ---
Total money-market assets......... 186 12,527 6.75
----------- ----------- ---
Investment securities**
U.S. Treasury and federal
agencies.......................... 1,242 74,248 5.98
Obligations of states and political
subdivisions...................... 50 3,420 6.90
Other............................... 743 45,988 6.19
----------- ----------- ---
Total investment securities....... 2,035 123,656 6.08
----------- ----------- ---
Total earning assets.............. 11,078 932,796 8.42
----------- ----------- ---
Allowance for possible credit
losses.............................. (254)
Cash and due from banks............... 326
Other assets.......................... 335
-----------
Total assets...................... 11,485
-----------
Liabilities and stockholders' equity -----------
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts........................ 761 11,902 1.56
Savings deposits.................... 2,922 87,612 3.00
Time deposits....................... 4,112 239,882 5.83
Deposits at foreign office.......... 133 6,952 5.23
----------- ----------- ---
Total interest-bearing deposits... 7,928 346,348 4.37
----------- ----------- ---
Short-term borrowings................. 1,423 84,225 5.92
Long-term borrowings.................. 146 11,157 7.64
----------- ----------- ---
Total interest-bearing
liabilities..................... 9,497 441,730 4.65
----------- ----------- ---
Noninterest-bearing deposits.......... 1,093
Other liabilities..................... 112
-----------
Total liabilities................. 10,702
-----------
Stockholders' equity.................. 783
-----------
Total liabilities and
stockholders' equity............ 11,485
-----------
Net interest spread................... ----------- 3.77
Contribution of interest-free funds... .66
----------- ----
Net interest income/margin on earning
assets.............................. 491,066 4.43%
----------- ----
----------- ----
- ------------------------
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
(CONTINUED)
42
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES (CONTINUED)
TABLE 6
1994 1993
----------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AVERAGE BALANCE IN MILLIONS; INTEREST IN THOUSANDS BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- --------- ----------- ----------- ----------- -------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc............................... $ 1,487 $ 116,479 7.84% 1,420 112,568 7.93%
Real estate.............................................. 4,562 390,681 8.56 4,387 379,832 8.66
Consumer................................................. 1,378 128,117 9.30 1,175 118,461 10.08
----------- --------- ---- ----------- ----------- -----
Total loans and leases, net............................ 7,427 635,277 8.55 6,982 610,861 8.75
----------- --------- ---- ----------- ----------- -----
Money-market assets
Interest-bearing deposits at banks....................... 48 2,212 4.58 189 6,740 3.56
Federal funds sold and agreements to resell securities... 109 4,751 4.35 610 20,403 3.35
Trading account.......................................... 9 499 5.92 27 1,434 5.32
----------- --------- ---- ----------- ----------- -----
Total money-market assets.............................. 166 7,462 4.50 826 28,577 3.46
----------- --------- ---- ----------- ----------- -----
Investment securities**
U.S. Treasury and federal agencies....................... 1,167 56,685 4.86 1,300 62,420 4.80
Obligations of states and political subdivisions......... 53 3,072 5.77 41 2,600 6.40
Other.................................................... 852 48,933 5.74 832 40,251 4.84
----------- --------- ---- ----------- ----------- -----
Total investment securities............................ 2,072 108,690 5.24 2,173 105,271 4.84
----------- --------- ---- ----------- ----------- -----
Total earning assets................................... 9,665 751,429 7.77 9,981 744,709 7.46
----------- --------- ---- ----------- ----------- -----
Allowance for possible credit losses....................... (223) (174)
Cash and due from banks.................................... 307 304
Other assets............................................... 276 279
----------- -----------
Total assets........................................... $ 10,025 10,390
----------- -----------
----------- -----------
Liabilities and stockholders' equity.......................
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts............................................. $ 746 11,286 1.51 747 13,113 1.75
Savings deposits......................................... 3,274 84,804 2.59 3,500 90,392 2.58
Time deposits............................................ 2,179 97,067 4.45 2,249 98,508 4.38
Deposits at foreign office............................... 156 5,894 3.79 120 3,243 2.71
----------- --------- ---- ----------- ----------- -----
Total interest-bearing deposits........................ 6,355 199,051 3.13 6,616 205,256 3.10
----------- --------- ---- ----------- ----------- -----
Short-term borrowings...................................... 1,772 73,868 4.17 1,922 58,459 3.04
Long-term borrowings....................................... 77 6,287 8.13 76 6,158 8.14
----------- --------- ---- ----------- ----------- -----
Total interest-bearing liabilities..................... 8,204 279,206 3.40 8,614 269,873 3.13
----------- --------- ---- ----------- ----------- -----
Noninterest-bearing deposits............................... 1,011 976
Other liabilities.......................................... 87 130
----------- -----------
Total liabilities...................................... 9,302 9,720
----------- -----------
Stockholders' equity....................................... 723 670
----------- -----------
Total liabilities and stockholders' equity............. $ 10,025 10,390
----------- -----------
----------- -----------
Net interest spread........................................ 4.37 4.33
Contribution of interest-free funds........................ .52 .43
--------- ---- ----------- ----------- -----
Net interest income/margin on earning assets............... $ 472,223 4.89% 474,836 4.76%
--------- ---- ----------- ----------- -----
--------- ---- ----------- ----------- -----
- ------------------------
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
43
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
AVERAGE CORE DEPOSITS
TABLE 7
PERCENT INCREASE
DOLLARS IN MILLIONS (DECREASE) FROM
----------------------------
1997 1996 TO 1997 1995 TO 1996
--------- ------------- -------------
NOW accounts................................................................ $ 257 (61%) (13%)
Savings deposits............................................................ 3,420 16 1
Time deposits under $100,000................................................ 3,435 8 22
Noninterest-bearing deposits................................................ 1,228 5 7
--------- ------ ------
Total..................................................................... $ 8,340 5% 8%
--------- ------ ------
--------- ------ ------
44
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
INTEREST RATE SWAPS
TABLE 8
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1997 1996 1995
----------------------- ----------------------- -----------------------
AMOUNT RATE* AMOUNT RATE* AMOUNT RATE*
------------ --------- ------------ --------- ------------ ---------
Increase (decrease) in:
Interest income................................. $ (142) ---% $ (34) ---% $ (5,831) (.05)%
Interest expense................................ (14,231) (.13) (15,488) (.15) (6,715) (.07)
------------ --------- ------------ --------- ------------ ---------
Net interest income/margin...................... $ 14,089 .11% $ 15,454 .13% $ 884 .01%
------------ --------- ------------ --------- ------------ ---------
Average notional amount**......................... $ 2,691,638 $ 2,410,547 $ 2,536,329
Rate received***.................................. 6.68% 6.66% 6.17%
Rate paid***...................................... 6.16% 6.02% 6.14%
--------- --------- ---------
--------- --------- ---------
- ------------------------
* Computed as an annualized percentage of average earning assets or
interest-bearing liabilities.
** Excludes forward-starting interest rate swaps.
*** Weighted-average rate paid or received on interest rate swaps in effect
during year.
45
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
LOAN CHARGE-OFFS, PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
TABLE 9
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
Allowance for possible credit losses beginning balance.... $ 270,466 262,344 243,332 195,878 151,690
---------- --------- --------- --------- ---------
Charge-offs during year
Commercial, financial, agricultural, etc................ 4,539 6,120 5,475 5,505 14,118
Real estate--construction............................... -- -- -- -- 150
Real estate--mortgage................................... 9,910 7,389 10,750 17,957 22,686
Consumer................................................ 44,880 36,037 14,982 8,981 9,135
---------- --------- --------- --------- ---------
Total charge-offs..................................... 59,329 49,546 31,207 32,443 46,089
---------- --------- --------- --------- ---------
Recoveries during year
Commercial, financial, agricultural, etc................ 2,609 3,671 3,967 7,877 5,403
Real estate--construction............................... -- 50 87 13 --
Real estate--mortgage................................... 5,869 3,049 2,137 4,515 1,772
Consumer................................................ 9,041 7,573 3,678 3,418 3,144
---------- --------- --------- --------- ---------
Total recoveries...................................... 17,519 14,343 9,869 15,823 10,319
---------- --------- --------- --------- ---------
Net charge-offs........................................... 41,810 35,203 21,338 16,620 35,770
Provision for possible credit losses...................... 46,000 43,325 40,350 60,536 79,958
Allowance for possible credit losses acquired during the
year.................................................... -- -- -- 3,538 --
---------- --------- --------- --------- ---------
Allowance for possible credit losses ending balance....... $ 274,656 270,466 262,344 243,332 195,878
---------- --------- --------- --------- ---------
Net charge-offs as a percent of:
Provision for possible credit losses.................... 90.89% 81.25% 52.88% 27.45% 44.74%
Average loans and leases, net of unearned discount...... .38% .35% .24% .22% .51%
---------- --------- --------- --------- ---------
Allowance for possible credit losses as a percent of loans
and leases, net of unearned discount, at year-end....... 2.39% 2.52% 2.75% 2.96% 2.70%
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
46
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES TO LOAN CATEGORIES
TABLE 10
DECEMBER 31
------------------------------------------------------
DOLLARS IN THOUSANDS
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
Commercial, financial, agricultural, etc.................. $ 42,816 39,556 36,793 44,092 42,820
Real estate--mortgage..................................... 70,354 73,879 75,894 72,285 78,823
Consumer.................................................. 57,757 34,224 23,385 17,532 13,630
Unallocated............................................... 103,729 122,807 126,272 109,423 60,605
---------- --------- --------- --------- ---------
Total................................................... $ 274,656 270,466 262,344 243,332 195,878
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
AS A PERCENTAGE OF GROSS LOANS AND LEASES OUTSTANDING
Commercial, financial, agricultural, etc.................. 1.78% 1.79% 1.83% 2.62% 2.84%
Real estate--mortgage..................................... 1.04 1.19 1.34 1.43 1.74
Consumer.................................................. 2.47 1.30 1.10 1.05 1.02
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
47
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NONPERFORMING ASSETS
TABLE 11
DECEMBER 31
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
DOLLARS IN THOUSANDS
Nonaccrual loans............................................. $ 38,588 58,232 75,224 62,787 68,936
Loans past due 90 days or more............................... 30,402 39,652 17,842 11,754 11,122
Renegotiated loans........................................... 11,660 -- -- 2,994 2,195
--------- --------- --------- --------- ---------
Total nonperforming loans.................................... 80,650 97,884 93,066 77,535 82,253
--------- --------- --------- --------- ---------
Other real estate owned...................................... 8,413 8,523 7,295 10,065 12,222
--------- --------- --------- --------- ---------
Total nonperforming assets................................... $ 89,063 106,407 100,361 87,600 94,475
--------- --------- --------- --------- ---------
Government guaranteed nonperforming loans*................... $ 17,712 25,847 7,779 7,883 9,089
--------- --------- --------- --------- ---------
Nonperforming loans to total loans and leases, net of
unearned discount.......................................... .70% .91% .97% .94% 1.13%
Nonperforming assets to total net loans and leases and other
real estate owned.......................................... .77% .99% 1.05% 1.06% 1.30%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
- ------------------------
* Included in total nonperforming loans.
48
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE
TABLE 12
DOLLARS IN THOUSANDS DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------ ----------------------
Under 3 months............................................................................ $ 721,999
3 to 6 months............................................................................. 209,560
6 to 12 months............................................................................ 246,530
Over 12 months............................................................................ 1,204,250
-----------
Total............................................................................... $ 2,382,339
-----------
-----------
49
TABLE 13
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
CALCULATED
INCREASE (DECREASE)
IN PROJECTED NET
INTEREST INCOME
--------------------
(DOLLARS IN
THOUSANDS)
Changes in Interest Rates
+200 basis points........................................................................... $ (4,914)
+100 basis points........................................................................... 748
- -100 basis points........................................................................... 2,434
- -200 basis points........................................................................... 3,768
-------
-------
50
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
MATURITY DISTRIBUTION OF LOANS*
TABLE 14
1999 - AFTER
DECEMBER 31, 1997 DEMAND 1998 2002 2002
- ------------------------------------------------------------------ ------------ --------- ---------- ---------
DOLLARS IN THOUSANDS
Commercial, financial, agricultural, etc.......................... $ 1,501,936 220,314 434,745 151,421
Real estate--construction......................................... 54,370 136,898 60,033 2,975
------------ --------- ---------- ---------
Total........................................................... $ 1,556,306 357,212 494,778 154,396
------------ --------- ---------- ---------
------------ --------- ---------- ---------
Floating or adjustable interest rates............................. $ 381,391 91,867
Fixed or predetermined interest rates............................. 113,387 62,529
---------- ---------
Total........................................................... $ 494,778 154,396
---------- ---------
---------- ---------
- ------------------------
*The data do not include nonaccrual loans.
51
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONTRACTUAL REPRICING DATA
TABLE 15
THREE FOUR TO ONE TO
MONTHS TWELVE FIVE AFTER FIVE
OR LESS MONTHS YEARS YEARS TOTAL
----------- ----------- ---------- ---------- -----------
DOLLARS IN THOUSANDS BY REPRICING DATE
December 31, 1997
Loans and leases, net........................................ $ 4,551,428 1,324,274 3,536,094 2,084,772 11,496,568
Money-market assets.......................................... 98,457 12,589 -- -- 111,046
Investment securities........................................ 346,904 413,317 492,079 472,918 1,725,218
----------- ----------- ---------- ---------- -----------
Total earning assets....................................... 4,996,789 1,750,180 4,028,173 2,557,690 13,332,832
----------- ----------- ---------- ---------- -----------
NOW accounts................................................. 346,795 -- -- -- 346,795
Savings deposits............................................. 3,344,697 -- -- -- 3,344,697
Time deposits................................................ 1,350,062 2,064,157 2,194,503 153,775 5,762,497
Deposits at foreign office................................... 250,928 -- -- -- 250,928
----------- ----------- ---------- ---------- -----------
Total interest-bearing deposits............................ 5,292,482 2,064,157 2,194,503 153,775 9,704,917
----------- ----------- ---------- ---------- -----------
Short-term borrowings........................................ 1,097,324 -- -- -- 1,097,324
Long-term borrowings......................................... 434 63 76,040 351,282 427,819
----------- ----------- ---------- ---------- -----------
Total interest-bearing liabilities......................... 6,390,240 2,064,220 2,270,543 505,057 11,230,060
----------- ----------- ---------- ---------- -----------
Interest rate swaps.......................................... (2,431,777) 380,905 1,934,241 116,631 --
----------- ----------- ---------- ---------- -----------
Periodic gap................................................. $(3,825,228) 66,865 3,691,871 2,169,264
Cumulative gap............................................... (3,825,228) (3,758,363) (66,492) 2,102,772
Cumulative gap as a % of total earning assets................ (28.7)% (28.2)% (0.5)% 15.8%
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
52
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
MATURITY AND TAXABLE-EQUIVALENT YIELD OF INVESTMENT SECURITIES
TABLE 16
ONE YEAR ONE TO FIVE TO OVER
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
----------- ----------- ----------- ----------- ---------
DOLLARS IN THOUSANDS
December 31, 1997
Investment securities available for sale*
U.S. Treasury and federal agencies
Carrying value........................................ $ 111,214 $ 297,843 $ -- $ -- $ 409,057
Yield................................................. 7.12% 5.91% -- -- 6.24%
Mortgage-backed securities**
Government issued or guaranteed
Carrying value........................................ 17,638 93,514 133,203 395,950 640,305
Yield................................................. 6.21% 6.49% 6.69% 6.21% 6.35%
Privately issued
Carrying value........................................ 33,784 97,427 42,159 61,350 234,720
Yield................................................. 6.15% 6.32% 6.22% 6.54% 6.34%
Other debt securities
Carrying value........................................ 18 8,487 -- 147,711 156,216
Yield................................................. 9.50% 6.87% -- 6.02% 6.07%
Equity securities
Carrying value........................................ -- -- -- -- 142,975
Yield................................................. -- -- -- -- 8.13%
----------- ----------- ----------- ----------- ---------
Total investment securities available for sale
Carrying value........................................ $ 162,654 $ 497,271 $ 175,362 $ 605,011 $1,583,273
Yield................................................. 6.82% 6.12% 6.58% 6.20% 6.43%
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Investment securities held to maturity
U.S. Treasury and federal agencies
Carrying value........................................ $ 31,885 $ -- $ -- $ -- $ 31,885
Yield................................................. 6.38% -- -- -- 6.38%
Obligations of states and political subdivisions
Carrying value........................................ 35,291 2,122 565 40 38,018
Yield................................................. 6.32% 9.80% 10.60% 10.76% 6.58%
Other debt securities
Carrying value........................................ 209 -- 13,553 -- 13,762
Yield................................................. 7.37% -- 9.49% -- 9.46%
----------- ----------- ----------- ----------- ---------
Total investment securities held to maturity
Carrying value........................................ $ 67,385 $ 2,122 $ 14,118 $ 40 $ 83,665
Yield................................................. 6.35% 9.80% 9.53% 10.76% 6.98%
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Other investment securities............................... $ -- $ -- $ -- $ -- $ 58,280
----------- ----------- ----------- ----------- ---------
Total investment securities
Carrying value........................................ $ 230,039 $ 499,393 $ 189,480 $ 605,051 $1,725,218
Yield................................................. 6.68% 6.13% 6.80% 6.20% 6.24%
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
- ------------------------
* Investment securities available for sale are presented at estimated fair
value. Yields on such securities are based on amortized cost.
** 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.
53
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Incorporated by
reference to the discussion contained under the captions "Liquidity, Market Risk,
and Interest Rate Sensitivity" and "Capital," and Table 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial Statements and
Supplementary Data consist of the financial statements as indexed and presented
below and Table 2 "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 of Independent Accountants
Consolidated Balance Sheet -
December 31, 1997 and 1996
Consolidated Statement of Income -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statement of Changes in
Stockholders' Equity--Years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
First Empire State Corporation:
We have audited the accompanying consolidated balance sheet of First Empire
State Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of First Empire State
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ PRICE WATERHOUSE LLP
Buffalo, New York
January 9, 1998
55
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31
---------------------------
1997 1996
------------- ------------
DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
ASSETS
Cash and due from banks........................................................... $ 333,805 324,659
Money-market assets
Interest-bearing deposits at banks.............................................. 668 47,325
Federal funds sold and agreements to resell securities.......................... 53,087 125,326
Trading account................................................................. 57,291 37,317
------------- ------------
Total money-market assets..................................................... 111,046 209,968
------------- ------------
Investment securities
Available for sale (cost: $1,563,055 in 1997; $1,400,976 in 1996)............... 1,583,273 1,396,672
Held to maturity (market value: $84,176 in 1997; $119,316 in 1996).............. 83,665 118,616
Other (market value:$58,280 in 1997; $56,410 in 1996)........................... 58,280 56,410
------------- ------------
Total investment securities................................................... 1,725,218 1,571,698
------------- ------------
Loans and leases.................................................................. 11,765,533 11,120,221
Unearned discount............................................................... (268,965) (398,098)
Allowance for possible credit losses............................................ (274,656) (270,466)
------------- ------------
Loans and leases, net......................................................... 11,221,912 10,451,657
------------- ------------
Premises and equipment............................................................ 121,984 128,521
Accrued interest and other assets................................................. 488,970 257,412
------------- ------------
Total assets.................................................................. $ 14,002,935 12,943,915
------------- ------------
------------- ------------
LIABILITIES
Noninterest-bearing deposits...................................................... $ 1,458,241 1,352,929
NOW accounts...................................................................... 346,795 334,787
Savings deposits.................................................................. 3,344,697 3,280,788
Time deposits..................................................................... 5,762,497 5,352,749
Deposits at foreign office........................................................ 250,928 193,236
------------- ------------
Total deposits................................................................ 11,163,158 10,514,489
------------- ------------
Federal funds purchased and agreements to repurchase securities................... 930,775 1,015,408
Other short-term borrowings....................................................... 166,549 134,779
Accrued interest and other liabilities............................................ 284,368 195,578
Long-term borrowings.............................................................. 427,819 178,002
------------- ------------
Total liabilities............................................................. 12,972,669 12,038,256
------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par, 1,000,000 shares authorized, none outstanding............ -- --
Common stock, $5 par, 15,000,000 shares authorized, 8,097,472 shares issued....... 40,487 40,487
Additional paid-in capital........................................................ 103,233 96,597
Retained earnings................................................................. 1,092,106 937,072
Unrealized investment gains (losses), net......................................... 12,016 (2,485)
Treasury stock--common, at cost--1,487,123 shares in 1997;1,411,286 shares in
1996............................................................................ (217,576) (166,012)
------------- ------------
Total stockholders' equity.................................................... 1,030,266 905,659
------------- ------------
Total liabilities and stockholders' equity.................................... $ 14,002,935 12,943,915
------------- ------------
------------- ------------
See accompanying notes to financial statements.
56
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
DOLLARS IN THOUSANDS, EXCEPT PER
SHARE
Interest income
Loans and leases, including fees........................................... $ 952,436 881,002 794,181
Money-market assets
Deposits at banks........................................................ 2,475 2,413 8,181
Federal funds sold and agreements to resell securities................... 2,989 2,985 3,007
Trading account.......................................................... 1,781 980 1,234
Investment securities
Fully taxable............................................................ 99,640 107,415 118,791
Exempt from federal taxes................................................ 5,640 2,637 2,760
----------- ----------- -----------
Total interest income.................................................. 1,064,961 997,432 928,154
----------- ----------- -----------
Interest expense
NOW accounts............................................................... 3,455 9,430 11,902
Savings deposits........................................................... 90,907 84,822 87,612
Time deposits.............................................................. 327,611 286,088 239,882
Deposits at foreign office................................................. 12,160 12,399 6,952
Short-term borrowings...................................................... 44,341 59,442 84,225
Long-term borrowings....................................................... 29,619 14,227 11,157
----------- ----------- -----------
Total interest expense................................................. 508,093 466,408 441,730
----------- ----------- -----------
Net interest income........................................................ 556,868 531,024 486,424
Provision for possible credit losses....................................... 46,000 43,325 40,350
----------- ----------- -----------
Net interest income after provision for possible credit losses............. 510,868 487,699 446,074
----------- ----------- -----------
Other income
Mortgage banking revenues.................................................. 51,547 44,484 37,142
Service charges on deposit accounts........................................ 43,377 40,659 38,290
Trust income............................................................... 30,688 27,672 25,477
Merchant discount and other credit card fees............................... 19,395 18,266 10,675
Trading account and foreign exchange gains................................. 3,690 2,421 2,783
Gain (loss) on sales of bank investment securities......................... (280) (37) 4,479
Other revenues from operations............................................. 44,650 36,783 30,692
----------- ----------- -----------
Total other income..................................................... 193,067 170,248 149,538
----------- ----------- -----------
Other expense
Salaries and employee benefits............................................. 220,017 208,342 188,222
Equipment and net occupancy................................................ 53,299 51,346 50,526
Printing, postage and supplies............................................. 13,747 15,167 14,442
Deposit insurance.......................................................... 1,935 9,337 14,675
Other costs of operations.................................................. 132,778 124,786 106,574
----------- ----------- -----------
Total other expense.................................................... 421,776 408,978 374,439
----------- ----------- -----------
Income before income taxes................................................. 282,159 248,969 221,173
Income taxes............................................................... 105,918 97,866 90,137
----------- ----------- -----------
Net income................................................................. $ 176,241 151,103 131,036
----------- ----------- -----------
----------- ----------- -----------
Net income per common share
Basic.................................................................... $ 26.60 22.54 19.61
Diluted.................................................................. 25.26 21.08 17.98
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to financial statements.
57
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
DOLLARS IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. $ 176,241 $ 151,103 $ 131,036
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for possible credit losses...................................... 46,000 43,325 40,350
Depreciation and amortization of premises and equipment................... 20,745 19,457 18,530
Amortization of capitalized servicing rights.............................. 14,366 10,509 7,251
Amortization of goodwill.................................................. 7,291 6,292 6,294
Provision for deferred income taxes....................................... (7,331) (3,901) (7,360)
Asset write-downs......................................................... 1,501 1,043 3,852
Net gain on sales of assets............................................... (1,002) (1,539) (12,121)
Net change in accrued interest receivable, payable........................ 11,806 1,248 4,381
Net change in other accrued income and expense............................ 80,439 23,808 54,911
Net change in loans held for sale......................................... 4,234 (8,662) (136,303)
Net change in trading account assets and liabilities...................... 5,094 (8,508) (2,288)
---------- ---------- ----------
Net cash provided by operating activities............................... 359,384 234,175 108,533
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities
Available for sale........................................................ 217,221 275,627 448,532
Held to maturity.......................................................... -- -- 990
Proceeds from maturities of investment securities
Available for sale........................................................ 255,498 390,563 244,862
Held to maturity.......................................................... 89,161 125,480 115,986
Other..................................................................... -- 721 --
Purchases of investment securities
Available for sale........................................................ (628,168) (532,106) (418,507)
Held to maturity.......................................................... (54,218) (58,274) (295,582)
Other..................................................................... (3,936) (2,776) (3,408)
Net (increase) decrease in interest-bearing deposits at banks............... 46,657 78,175 (125,357)
Additions to capitalized servicing rights................................... (29,818) (14,846) (13,141)
Net increase in loans and leases............................................ (820,335) (1,189,033) (1,189,108)
Capital expenditures, net................................................... (13,270) (20,333) (17,520)
Acquisitions, net of cash acquired:
Deposits and banking offices.............................................. 123,043 -- 77,245
Mortgage banking operations............................................... -- -- (24,947)
Purchases of bank owned life insurance...................................... (200,000) -- --
Other, net.................................................................. (356) 19,278 17,219
---------- ---------- ----------
Net cash used by investing activities................................... (1,018,521) (927,524) (1,182,736)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.................................................... 508,930 1,042,108 1,139,555
Net decrease in short-term borrowings....................................... (77,931) (145,281) (124,644)
Proceeds from issuance of subordinated debt................................. -- -- 100,000
Proceeds from issuance of trust preferred securities........................ 250,000 -- --
Payments on long-term borrowings............................................ (189) (14,900) (3,529)
Purchases of treasury stock................................................. (67,771) (80,810) (37,374)
Dividends paid--common...................................................... (21,207) (18,617) (16,224)
Dividends paid--preferred................................................... -- (900) (3,600)
Other, net.................................................................. 4,212 (2,385) 3,277
---------- ---------- ----------
Net cash provided by financing activities............................... 596,044 779,215 1,057,461
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........................ $ (63,093) $ 85,866 $ (16,742)
Cash and cash equivalents at beginning of year.............................. 449,985 364,119 380,861
Cash and cash equivalents at end of year.................................... $ 386,892 $ 449,985 $ 364,119
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest received during the year........................................... $1,051,556 $ 985,287 $ 909,005
Interest paid during the year............................................... 487,576 459,963 408,221
Income taxes paid during the year........................................... 43,562 83,929 68,237
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Real estate acquired in settlement of loans................................. $ 9,142 $ 8,214 $ 7,372
Conversion of preferred stock to common stock............................... -- 40,000 --
---------- ---------- ----------
See accompanying notes to financial statements.
58
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED
INVESTMENT
ADDITIONAL GAINS
PREFERRED COMMON PAID-IN RETAINED (LOSSES), TREASURY
STOCK STOCK CAPITAL EARNINGS NET STOCK TOTAL
----------- ----------- ----------- --------- ----------- --------- -----------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE
1995
Balance--January 1, 1995............ $ 40,000 40,487 98,014 694,274 (50,555) (101,224) $ 720,996
Net income.......................... -- -- -- 131,036 -- -- 131,036
Preferred stock cash dividends...... -- -- -- (3,600) -- -- (3,600)
Common stock cash dividends --
$2.50 per share................... -- -- -- (16,224) -- -- (16,224)
Exercise of stock options........... -- -- 643 -- -- 3,376 4,019
Purchases of treasury stock......... -- -- -- -- -- (37,374) (37,374)
Unrealized losses on investment
securities available for sale,
net............................... -- -- -- -- 47,400 -- 47,400
----------- ----------- ----------- --------- ----------- --------- -----------
Balance--December 31, 1995.......... $ 40,000 40,487 98,657 805,486 (3,155) (135,222) $ 846,253
----------- ----------- ----------- --------- ----------- --------- -----------
1996
Net income.......................... -- -- -- 151,103 -- -- 151,103
Preferred stock cash dividends...... -- -- -- (900) -- -- (900)
Common stock cash dividends --
$2.80 per share................... -- -- -- (18,617) -- -- (18,617)
Exercise of stock options........... -- -- 4,474 -- -- 3,486 7,960
Purchases of treasury stock......... -- -- -- -- -- (80,810) (80,810)
Conversion of preferred stock into
506,930 shares of common stock.... (40,000) -- (6,534) -- -- 46,534 --
Unrealized gains on investment
securities available for sale,
net............................... -- -- -- -- 670 -- 670
----------- ----------- ----------- --------- ----------- --------- -----------
Balance--December 31, 1996.......... $ -- 40,487 96,597 937,072 (2,485) (166,012) $ 905,659
----------- ----------- ----------- --------- ----------- --------- -----------
1997
Net income.......................... -- -- -- 176,241 -- -- 176,241
Common stock cash dividends --
$3.20 per share................... -- -- -- (21,207) -- -- (21,207)
Exercise of stock options........... -- -- 6,636 -- -- 16,207 22,843
Purchases of treasury stock......... -- -- -- -- -- (67,771) (67,771)
Unrealized gains on investment
securities available for sale,
net............................... -- -- -- -- 14,501 -- 14,501
----------- ----------- ----------- --------- ----------- --------- -----------
Balance--December 31, 1997.......... $ -- 40,487 103,233 1,092,106 12,016 (217,576) $ 1,030,266
----------- ----------- ----------- --------- ----------- --------- -----------
See accompanying notes to financial statements.
59
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
First Empire State Corporation ("First Empire") is a bank holding company
headquartered in Buffalo, New York. Through subsidiaries, First Empire provides
individuals, corporations and institutions with commercial and retail banking
services, including loans and deposits, trust, mortgage banking, asset
management and other financial services. Banking activities are largely focused
on consumers residing in New York State and in New York-based small and
medium-size businesses. However, certain subsidiaries conduct activities in
markets outside of New York State. The preparation of financial statements in
conformity with generally accepted accounting principles 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 accounting and reporting policies of First Empire State Corporation and
subsidiaries ("the Company") conform to generally accepted accounting principles
and to general practices within the banking industry. The more significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include First Empire and all of its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The financial statements of First Empire included
in note 20 report investments in subsidiaries under the equity method.
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of this statement, cash and due from banks, Federal funds sold
and agreements to resell securities are considered cash and cash equivalents.
TRADING ACCOUNT
Financial instruments used for trading purposes are stated at fair value.
Realized gains and losses and unrealized changes in fair value 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 other debt securities and equity
securities having readily determinable fair values are classified as available
for sale and stated at estimated fair value. Unrealized gains or losses related
to investment securities available for sale are reflected in stockholders'
equity, net of applicable income taxes.
Other securities include stock of the Federal Reserve Bank of New York and
the Federal Home Loan Bank of New York and are stated at cost.
Amortization of premiums and accretion of discounts for investment
securities available for sale and held to maturity are included in interest
income. The cost basis of individual securities is written down to estimated
fair value through a charge to earnings when declines in value below
60
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES (CONTINUED)
amortized 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
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.
Loan balances are charged off when it becomes evident that such balances are not
fully collectible. 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. Loans held for sale are carried at the lower of aggregate
cost or fair market value. Valuation adjustments made on these loans 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 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. Impaired loans are classified as either nonaccrual or as loans
renegotiated at below market rates. Loans less than 90 days delinquent are
deemed to have a minimum 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 applied to reduce the carrying value of the loan or, if principal is
considered fully collectible, recognized as interest income.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The allowance for possible credit losses represents the amount which, in
management's judgment, will be adequate to absorb credit losses from existing
loans and leases. The adequacy of the allowance is determined by management's
evaluation of the loan 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, any
delinquency in payments, and the value of any collateral.
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.
61
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SERVICING RIGHTS
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," not
deferred by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125." SFAS No. 125 supersedes SFAS No. 122, "Accounting
for Mortgage Servicing Rights." As a result, the Company recognizes as separate
assets or liabilities rights to service financial instruments for others.
Retroactive application of the provisions of SFAS No. 125 to prior years is not
permitted.
Servicing rights retained in a sale or securitization of financial assets
are measured at the date of transfer by allocating the previous carrying
amount between the assets transferred and the servicing rights based on their
relative fair values. Servicing assets purchased or servicing liabilities
assumed are initially measured at fair value. Capitalized servicing assets
are included in other assets and amortized 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 predominant risk characteristics of 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.
GOODWILL
The excess of the cost of acquired entities or operations over the fair
value of identifiable assets acquired less liabilities assumed is recorded as
goodwill and included in other assets. Goodwill is amortized on a straight-line
basis over periods which may vary depending on the circumstances of each
acquisition. For acquisitions completed through December 31, 1997, such
amortization periods have generally not exceeded five years. The Company
periodically assesses whether events or changes in circumstances indicate that
the carrying amount of goodwill may be impaired. Impairment is measured using
estimates of future cash flows or earnings potential of the operations acquired.
The aggregate amount of goodwill totaled $17,288,000 and $18,923,000 at December
31, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION
Compensation expense is not recognized for stock option awards to employees
under the Company's stock option plan since the exercise price of options is
equal to the market price of the underlying stock at the date of grant.
Compensation expense for stock appreciation rights issued separately from
62
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
stock options is recognized based upon changes in the quoted market value of
First Empire's common stock. The pro forma effects of stock-based
compensation arrangements are based on the estimated grant date fair value of
stock options that are expected to vest calculated pursuant to the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation." Pro forma
compensation expense, net of applicable income tax effect, is recognized over
the vesting period, which is generally four years.
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. Investment tax credits related to leveraged leasing property
are amortized into income tax expense over the life of the lease agreement.
FINANCIAL FUTURES
Outstanding financial futures contracts represent future commitments and are
not included in the Consolidated Balance Sheet. Futures contracts used in
trading activities are marked to market and the resulting gains or losses are
recognized in trading account and foreign exchange gains. On occasion the
Company uses interest rate futures contracts as part of its management of
interest rate risk. Gains and losses on futures contracts designated as hedges
are amortized as an adjustment to interest income or expense over the life of
the item hedged.
INTEREST RATE SWAP AGREEMENTS
For interest rate swap agreements used to manage interest rate risk arising
from financial assets and liabilities, amounts receivable or payable are
recognized as accrued under the terms of the agreement and the net interest
differential, including any amortization of premiums paid or accretion of
discounts received, is recorded as an adjustment to interest income or expense
of the related asset or liability. To qualify for such accounting treatment, an
interest rate swap must (i) be designated as having been entered into for
interest rate risk management purposes and linked to a specific financial
instrument or pool of similar financial instruments in the Company's
Consolidated Balance Sheet and (ii) have interest rate and repricing
characteristics that have a sufficient degree of correlation with the
corresponding characteristics of the designated on-balance sheet financial
instrument. Gains or losses resulting from early termination of interest rate
swap agreements used to manage interest rate risk are amortized over the shorter
of the remaining term or estimated life of the agreement or the on-balance sheet
financial instrument to which the swap had been linked. Agreements and
commitments that do not satisfy the requirements noted above, including those
entered into for trading purposes, are marked to market with resulting gains or
losses recorded in trading account and foreign exchange gains.
63
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," in the fourth
quarter of 1997. SFAS No. 128 establishes new standards for computing and
presenting earnings per share and is effective for financial statements for both
interim and annual periods ending after December 15, 1997. SFAS No. 128 requires
that all prior period earnings per share data be restated to conform with the
provisions of the statement. SFAS No. 128 eliminates primary earnings per share
and fully diluted earnings per share and requires the presentation of basic and
diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects 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 First Empire common stock at the average market price during the
period, as required by the "treasury stock method" of accounting.
TREASURY STOCK
Repurchases of shares of First Empire common stock are recorded at cost as a
reduction of stockholders' equity. Reissuances of shares of treasury stock are
recorded at average cost.
64
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities were as
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ----------
(IN THOUSANDS)
DECEMBER 31, 1997
Investment securities available for sale:
U.S. Treasury and federal agencies........................... $ 408,462 595 -- 409,057
Mortgage-backed securities
Government issued or guaranteed............................ 641,266 8,805 9,766 640,305
Privately issued....................................... 234,144 922 346 234,720
Other debt securities........................................ 157,568 326 1,678 156,216
Equity securities............................................ 121,615 21,460 100 142,975
------------ ----------- ----------- ----------
1,563,055 32,108 11,890 1,583,273
------------ ----------- ----------- ----------
Investment securities held to maturity:
U.S. Treasury and federal agencies........................... 31,885 139 -- 32,024
Obligations of states and political subdivisions............. 38,018 289 16 38,291
Other debt securities........................................ 13,762 99 -- 13,861
------------ ----------- ----------- ----------
83,665 527 16 84,176
------------ ----------- ----------- ----------
Other securities............................................... 58,280 -- -- 58,280
------------ ----------- ----------- ----------
Total.......................................................... $ 1,705,000 32,635 11,906 1,725,729
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
65
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1996
Investment securities available for sale:
U.S. Treasury and federal agencies........................... $ 458,570 1,751 867 459,454
Mortgage-backed securities
Government issued or guaranteed............................ 494,515 3,801 11,408 486,908
Privately issued........................................... 400,216 758 2,961 398,013
Other debt securities........................................ 1,311 21 -- 1,332
Equity securities............................................ 46,364 4,625 24 50,965
------------ ----------- ----------- ----------
1,400,976 10,956 15,260 1,396,672
------------ ----------- ----------- ----------
Investment securities held to maturity:
U.S. Treasury and federal agencies........................... 76,676 429 -- 77,105
Obligations of states and political subdivisions............. 41,445 302 31 41,716
Other debt securities........................................ 495 -- -- 495
------------ ----------- ----------- ----------
118,616 731 31 119,316
------------ ----------- ----------- ----------
Other securities............................................... 56,410 -- -- 56,410
------------ ----------- ----------- ----------
Total.......................................................... $ 1,576,002 11,687 15,291 1,572,398
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
No investment in securities of a single non-U.S. Government or government
agency issuer exceeded ten percent of stockholders' equity at December 31, 1997.
As of December 31, 1997, the latest available investment ratings of all
privately issued mortgage-backed securities were AA or better.
Investment securities issued by U.S. Treasury and federal agencies and
classified as held to maturity at December 31, 1997 and 1996 consisted of
structured notes issued by the Federal Home Loan Banks.
The amortized cost and estimated fair value of collateralized mortgage
obligations included in mortgage-backed securities were as follows:
DECEMBER 31
---------------------
1997 1996
---------- ---------
(IN THOUSANDS)
Amortized cost......................................................... $ 284,943 406,498
Estimated fair value................................................... 278,588 396,808
---------- ---------
---------- ---------
66
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
Gross realized gains on the sale of investment securities available for sale
were $1,179,000 in 1997, $820,000 in 1996 and $5,113,000 in 1995. Gross realized
losses on the sale of investment securities available for sale were $1,459,000
in 1997, $857,000 in 1996 and $624,000 in 1995.
During 1995, the Company sold a municipal bond with an amortized cost of
$1,000,000 that had been classified as held to maturity. Such bond was sold for
an insignificant loss immediately following the downgrading of the
municipality's credit rating by several rating agencies.
At December 31, 1997, the amortized cost and estimated fair value of debt
securities by contractual maturity were as follows:
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ ----------
(IN THOUSANDS)
Debt securities available for sale:
Due in one year or less.............................................................. $ 111,008 111,232
Due after one year through five years................................................ 305,757 306,330
Due after five years through ten years............................................... -- --
Due after ten years.................................................................. 149,265 147,711
------------ ----------
566,030 565,273
Mortgage-backed securities available for sale.......................................... 875,410 875,025
------------ ----------
$ 1,441,440 1,440,298
------------ ----------
------------ ----------
Debt securities held to maturity:
Due in one year or less.............................................................. $ 67,385 67,565
Due after one year through five years................................................ 2,122 2,263
Due after five years through ten years............................................... 14,118 14,300
Due after ten years.................................................................. 40 48
------------ ----------
$ 83,665 84,176
------------ ----------
------------ ----------
At December 31, 1997, investment securities with a carrying value of
$891,675,000, including $856,408,000 of investment securities available for
sale, were pledged to secure demand notes issued to the U.S. Treasury,
borrowings from the Federal Home Loan Bank of New York, repurchase
agreements, governmental deposits and interest rate swap agreements.
67
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LOANS AND LEASES
Total gross loans and leases outstanding were comprised of the following:
DECEMBER 31
---------------------------
1997 1996
------------- ------------
(IN THOUSANDS)
Loans
Commercial, financial, agricultural, etc......................... $ 2,318,468 2,122,903
Real estate:
Residential.................................................... 2,457,508 2,267,174
Commercial..................................................... 4,307,900 3,932,757
Construction................................................... 254,434 90,563
Consumer......................................................... 2,203,890 2,465,856
------------- ------------
Total loans.................................................... 11,542,200 10,879,253
------------- ------------
Leases
Commercial..................................................... 88,172 83,379
Consumer....................................................... 135,161 157,589
------------- ------------
Total leases................................................... 223,333 240,968
------------- ------------
Total loans and leases........................................... $ 11,765,533 11,120,221
------------- ------------
------------- ------------
One-to-four family residential mortgage loans held for sale were $189.4
million at December 31, 1997 and $193.6 million at December 31, 1996.
One-to-four family residential mortgage loans serviced for others totaled
approximately $7.5 billion and $5.8 billion at December 31, 1997 and 1996,
respectively. As of December 31, 1997, approximately $13.0 million of
one-to-four family residential mortgage loans serviced for others have been sold
with recourse. The total credit loss exposure resulting from loans sold with
recourse was considered negligible.
Included in the preceding table are nonperforming loans (loans on which
interest was not being accrued, or which were ninety days or more past due or
had been renegotiated at below-market interest rates) of $80,650,000 at
December 31, 1997 and $97,884,000 at December 31, 1996. If nonaccrual and
renegotiated loans had been accruing interest at their originally contracted
terms, interest income on these loans would have amounted to $7,264,000 in
1997 and $6,854,000 in 1996. The actual amount included in interest income
during 1997 and 1996 on these loans was $2,445,000 and $1,506,000,
respectively.
The recorded investment in loans considered impaired was $32,772,000 and
$40,218,000 at December 31, 1997 and 1996, respectively. The recorded
investment in loans for which there was a related valuation allowance for
possible impairment included in the allowance for possible credit losses and
the amount of such impairment allowance were $23,963,000 and $3,095,000,
respectively, at December 31, 1997 and $35,608,000 and $4,652,000,
respectively, at December 31, 1996. The recorded investment in loans
considered impaired for which there was no related valuation allowance for
possible impairment was $8,809,000 and $4,610,000 at December 31, 1997 and
1996, respectively. The average recorded investment in impaired loans during
1997, 1996 and 1995 was $37,732,000, $48,146,000 and $52,357,000,
respectively. Interest income recognized on impaired loans totaled
$2,051,000, $1,571,000 and $1,151,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
68
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LOANS AND LEASES (CONTINUED)
Borrowings by directors and certain officers of First Empire and its banking
subsidiaries, and by associates of such persons, exclusive of loans aggregating
less than $60,000, amounted to $29,870,000 and $51,603,000 at December 31, 1997
and 1996, respectively. During 1997, new borrowings by such persons amounted to
$3,754,000 (including borrowings of new directors or officers that were
outstanding at the time of their election) and repayments and other reductions
equaled $25,487,000.
At December 31, 1997, approximately $25 million of one-to-four family
residential mortgage loans were pledged to secure borrowings.
4. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Changes in the allowance for possible credit losses were as follows:
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Beginning balance........................................... $ 270,466 262,344 243,332
Provision for possible credit losses........................ 46,000 43,325 40,350
Net charge-offs
Charge-offs............................................... (59,329) (49,546) (31,207)
Recoveries................................................ 17,519 14,343 9,869
---------- --------- ---------
Net charge-offs........................................... (41,810) (35,203) (21,338)
---------- --------- ---------
Ending balance.............................................. $ 274,656 270,466 262,344
---------- --------- ---------
---------- --------- ---------
5. PREMISES AND EQUIPMENT
The detail of premises and equipment was as follows:
DECEMBER 31
---------------------
1997 1996
---------- ---------
(IN THOUSANDS)
Land................................................................... $ 12,050 12,741
Buildings-owned........................................................ 91,486 91,406
Buildings-capital leases............................................... 1,773 1,773
Leasehold improvements................................................. 31,103 29,349
Furniture and equipment-owned.......................................... 127,687 128,317
Furniture and equipment-capital leases................................. 429 429
---------- ---------
264,528 264,015
Less: accumulated depreciation and amortization
Owned assets......................................................... 140,644 133,695
Capital leases....................................................... 1,900 1,799
---------- ---------
142,544 135,494
---------- ---------
---------- ---------
Premises and equipment, net............................................ $ 121,984 128,521
---------- ---------
---------- ---------
69
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PREMISES AND EQUIPMENT (CONTINUED)
Net lease expense for all operating leases totaled $16,983,000 in 1997,
$12,223,000 in 1996 and $13,091,000 in 1995. The Company occupies certain
banking offices and uses certain equipment under noncancellable operating lease
agreements expiring at various dates over the next 20 years. Minimum lease
payments under noncancellable operating leases are summarized as follows:
(IN
THOUSANDS)
-------------
Year ending December 31:
1998......................................................................... $ 10,786
1999......................................................................... 10,814
2000......................................................................... 9,650
2001......................................................................... 7,792
2002......................................................................... 6,153
Later years.................................................................. 44,440
-------------
Total minimum lease payments required.......................................... $ 89,635
-------------
-------------
Payments required under capital leases are not material.
6. CAPITALIZED SERVICING ASSETS
Changes in capitalized servicing assets were as follows:
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Beginning balance............................................. $ 38,890 35,588 10,048
Originations.................................................. 7,819 11,060 12,515
Purchases..................................................... 26,262 3,786 22,980
Amortization.................................................. (14,366) (10,509) (7,251)
Sales......................................................... -- (1,035) (2,704)
Write-downs................................................... (802) -- --
Reclassification of excess servicing receivables.............. 4,074 -- --
---------- --------- ---------
61,877 38,890 35,588
Valuation allowance........................................... (798) (1,100) (1,100)
---------- --------- ---------
Ending balance, net........................................... $ 61,079 37,790 34,488
---------- --------- ---------
---------- --------- ---------
As a result of impairment of certain strata of capitalized servicing
assets, additions to the valuation allowance totaling $500,000 and $1,100,000
were recorded during 1997 and 1996, respectively. During 1997, the valuation
allowance was reduced by $802,000 to reflect the write-down of the recorded
value of certain capitalized servicing assets related to loans that had been
repaid by borrowers. There were no additions or reductions to the valuation
allowance recorded during 1996. SFAS No. 125 requires that for each servicing
contract in existence before January 1, 1997 previously recognized servicing
rights and excess servicing receivables that do not exceed contractually
specified servicing fees be combined. The carrying value of such excess
servicing receivables at January 1, 1997 was $4,074,000. The estimated fair
value of capitalized servicing rights was approximately $84 million at
December 31, 1997 and $59 million at December 31, 1996. Such amounts were
estimated using discounted cash flows that reflect current prepayment and
discount rate assumptions as of each year-end.
70
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. BORROWINGS
The amount and interest rate of short-term borrowings were as follows:
FEDERAL FUNDS
PURCHASED AND OTHER
REPURCHASE SHORT-TERM
AGREEMENTS BORROWINGS TOTAL
------------- ----------- ----------
(DOLLARS IN THOUSANDS)
At December 31, 1997
Amount outstanding..................................................... $ 930,775 166,549 1,097,324
Weighted-average interest rate......................................... 6.51% 3.90% 6.11%
For the year ended December 31, 1997
Highest amount at a month-end.......................................... $ 930,775 344,363
Daily-average amount outstanding....................................... 611,689 241,626 853,315
Weighted-average interest rate......................................... 5.43% 4.60% 5.20%
------------- ----------- ----------
------------- ----------- ----------
At December 31, 1996
Amount outstanding..................................................... $ 1,015,408 134,779 1,150,187
Weighted-average interest rate......................................... 7.03% 3.89% 6.66%
For the year ended December 31, 1996
Highest amount at a month-end.......................................... $ 1,550,880 337,168
Daily-average amount outstanding....................................... 1,014,923 117,528 1,132,451
Weighted-average interest rate......................................... 5.29% 4.90% 5.25%
------------- ----------- ----------
------------- ----------- ----------
At December 31, 1995
Amount outstanding..................................................... $ 1,213,372 59,834 1,273,206
Weighted-average interest rate......................................... 5.83% 5.32% 5.81%
For the year ended December 31, 1995
Highest amount at a month-end.......................................... $ 1,944,924 524,359
Daily-average amount outstanding....................................... 1,176,935 246,560 1,423,495
Weighted-average interest rate......................................... 5.91% 5.95% 5.92%
------------- ----------- ----------
------------- ----------- ----------
71
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. BORROWINGS (CONTINUED)
In general, Federal funds purchased and repurchase agreements outstanding
at December 31, 1997 mature within two days following year-end. Other
short-term borrowings consisted of trading account liabilities and borrowings
from the U.S. Treasury, the Federal Home Loan Bank of New York and others
having original maturities of one year or less. Noninterest-bearing trading
account liabilities included in other short-term borrowings were $46,416,000,
$22,271,000 and $3,194,000 at December 31, 1997, 1996 and 1995, respectively,
and averaged $41,312,000, $10,993,000 and $7,383,000 in 1997, 1996 and 1995,
respectively.
At December 31, 1997, First Empire and Manufacturers and Traders Trust
Company ("M&T Bank"), a wholly owned subsidiary of First Empire, had lines of
credit under formal agreements as follows:
FIRST M&T
EMPIRE BANK
--------- ---------
(IN THOUSANDS)
Outstanding borrowings.................................................. $ -- 22,375
Unused.................................................................. 25,000 936,907
--------- ---------
--------- ---------
Long-term borrowings were as follows:
DECEMBER 31
---------------------
1997 1996
---------- ---------
(IN THOUSANDS)
Subordinated notes of M&T Bank:
8 1/8% due 2002...................................................... $ 75,000 75,000
7% due 2005.......................................................... 100,000 100,000
Preferred capital securities:
First Empire Capital Trust I
-- 8.234%............................................................ 150,000 --
First Empire Capital Trust II
-- 8.277%............................................................ 100,000 --
Advances from Federal Home Loan Bank of New York..................... 2,375 2,370
Other.................................................................. 444 632
---------- ---------
$ 427,819 178,002
---------- ---------
---------- ---------
The subordinated notes of M&T Bank are unsecured and are subordinate to the
claims of depositors and other creditors of M&T Bank. Long-term borrowings from
the Federal Home Loan Bank of New York had fixed rates of interest ranging from
7.72% to 8.45% at December 31, 1997 and 1996. Such advances mature at various
dates through 2006 and are secured by residential mortgage loans.
In January 1997, First Empire Capital Trust I ("Trust I"), a Delaware
business trust organized by the Company on January 17, 1997, issued $150 million
of 8.234% preferred capital securities. In June 1997, First Empire Capital Trust
II ("Trust II" and, together with Trust I, the "Trusts"), a Delaware business
trust organized by the Company on May 30, 1997, issued $100 million of 8.277%
preferred capital securities.
72
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. BORROWINGS (CONTINUED)
Other than the following payment terms (and the redemption terms
described below), the preferred capital securities issued by the Trusts
("Capital Securities") are identical in all material respects:
DISTRIBUTION
TRUST RATE DISTRIBUTION DATES
- --------- ------------- ----------------------------
Trust I 8.234% February 1 and August 1
Trust II 8.277% June 1 and December 1
The common securities of each Trust ("Common Securities") are wholly owned
by First Empire, and such securities 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 and are
classified in the Company's consolidated balance sheet as long-term borrowings,
with accumulated distributions on such securities included in interest expense.
Under the Federal Reserve Board's current risk-based capital guidelines, the
Capital Securities are includable in First Empire's Tier 1 capital.
The proceeds from the issuances of the Capital Securities and Common
Securities were used by the Trusts to purchase the following amounts of
junior subordinated deferrable interest debentures ("Junior Subordinated
Debentures") issued by First Empire:
CAPITAL COMMON
TRUST SECURITIES SECURITIES JUNIOR SUBORDINATED DEBENTURES
- --------- -------------- --------------- ----------------------------------------------------------------------
Trust I $ 150 million $ 4.64 million $154.64 million aggregate liquidation amount of 8.234% Junior
Subordinated Debentures due February 1, 2027.
Trust II $ 100 million $ 3.09 million $103.09 million aggregate liquidation amount of 8.277% Junior
Subordinated Debentures due June 1, 2027.
The Junior Subordinated Debentures represent the sole assets of each Trust
and payments under the Junior Subordinated Debentures are the sole source of
cash flow for each Trust.
Holders of the Capital Securities receive preferential cumulative cash
distributions semi-annually on each distribution date at the stated distribution
rate unless First Empire exercises its right to extend the payment of interest
on the Junior Subordinated Debentures for up to ten semi-annual periods, in
which case payment of distributions on the Capital Securities will be deferred
for a comparable period. During an extended interest period, First Empire may
not pay dividends or distributions on, or repurchase, redeem or acquire any
shares of its capital stock. The agreements governing the Capital Securities, in
the aggregate, provide a full, irrevocable and unconditional guarantee by First
Empire of the payment of distributions on, the redemption of, and any
liquidation distribution with respect to the Capital Securities. The obligations
of First Empire under
73
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. BORROWINGS (CONTINUED)
such guarantee and the Capital Securities are subordinate and junior in right
of payment to all senior indebtedness of First Empire.
The Capital Securities are mandatorily redeemable in whole, but not in
part, upon repayment at the stated maturity dates of the Junior Subordinated
Debentures or the earlier redemption of the Junior Subordinated Debentures in
whole upon the occurrence of one or more events ("Events") set forth in the
indentures relating to the Capital Securities, and in whole or in part at any
time after the stated optional redemption dates (February 1, 2007 in the case
of Trust I and June 1, 2007 in the case of Trust II) contemporaneously with
First Empire's optional redemption of the related Junior Subordinated
Debentures in whole or in part. The Junior Subordinated Debentures are
redeemable prior to their stated maturity dates at First Empire's option (i)
on or after the stated optional redemption dates, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time within
90 days following the occurrence and during the continuation of one or more
of the Events, in each case subject to possible regulatory approval. The
redemption price of the Capital Securities upon early redemption will be
expressed as a percentage of the liquidation amount plus accumulated but
unpaid distributions. In the case of Trust I, such percentage adjusts
annually and ranges from 104.117% at February 1, 2007 to 100.412% for the
annual period ending January 31, 2017, after which the percentage is 100%
subject to a make-whole amount if the early redemption occurs prior to
February 1, 2007. In the case of Trust II, such percentage adjusts annually
and ranges from 104.139% at June 1, 2007 to 100.414% for the annual period
ending May 31, 2017, after which the percentage is 100%, subject to a
make-whole amount if the early redemption occurs prior to June 1, 2007.
Long-term borrowings at December 31, 1997 mature as follows:
(IN
THOUSANDS)
-------------
Year ending December 31:
1998......................................................................... $ 497
1999......................................................................... 108
2000......................................................................... 319
2001......................................................................... 317
2002......................................................................... 75,296
Later years.................................................................. 351,282
-------------
$ 427,819
-------------
-------------
8. PREFERRED STOCK
On March 29, 1996, the holder of all of the then outstanding shares of First
Empire's 9% convertible preferred stock converted such shares into 506,930
shares of First Empire common stock at a contractual conversion price of
$78.90625 per common share. Dividends paid on the 40,000 shares of preferred
stock, which had been issued on March 15, 1991 for $40 million, were deducted
from net income in calculating basic earnings per share. Calculations of diluted
earnings per common share for periods prior to the conversion reflect the
assumption that the preferred stock had been converted to 506,930 shares of
common stock at issuance and that no preferred stock dividends were paid.
74
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS
STOCK OPTION PLAN
The stock option plan allows the grant of stock options and stock
appreciation rights (either in tandem with options or independently) at
prices which may not be less than the fair market value of the common stock
on the date of grant. Awards granted under the stock option plan generally
vest over four years and are exercisable over terms not exceeding ten years
and one day. When exercisable, the stock appreciation rights issued in tandem
with stock options entitle grantees to receive cash, stock or a combination
equal to the amount of stock appreciation between the dates of grant and
exercise. Stock appreciation rights issued independently of stock options
contain similar terms as the stock options, although upon exercise the holder
is only entitled to receive cash instead of purchasing shares of First
Empire's common stock. Of the stock options outstanding at December 31, 1997,
751,606 were granted with limited stock appreciation rights attached thereto.
A summary of related activity follows:
WEIGHTED-AVERAGE
EXERCISE PRICE
CASH-ONLY ------------------------
STOCK APPRECIATION CASH-ONLY
OPTIONS RIGHTS STOCK APPRECIATION
OUTSTANDING OUTSTANDING OPTIONS RIGHTS
----------- ----------- --------- -------------
1995
Beginning balance........................................... 611,237 90,600 $ 95.58 $ 60.17
Granted..................................................... 165,185 -- 143.39 --
Exercised................................................... (47,175) (29,000) 66.57 60.69
Canceled.................................................... (9,250) -- 133.82 --
----------- ----------- --------- ------
At year-end............................................... 719,997 61,600 107.96 59.93
1996
Granted..................................................... 173,246 -- 211.42 --
Exercised................................................... (115,378) (6,650) 109.14 56.48
Canceled.................................................... (8,650) -- 155.86 --
----------- ----------- --------- ------
At year-end............................................... 769,215 54,950 130.54 60.34
1997
Granted..................................................... 151,077 -- 297.37 --
Exercised................................................... (138,723) (8,500) 87.66 57.00
Canceled.................................................... (4,375) -- 221.65 --
----------- ----------- --------- ------
At year-end............................................... 777,194 46,450 170.11 60.95
----------- ----------- --------- ------
----------- ----------- --------- ------
Exercisable at:
December 31, 1997........................................... 344,757 46,450 110.39 60.95
----------- ----------- --------- ------
----------- ----------- --------- ------
December 31, 1996........................................... 352,571 54,950 86.17 60.34
----------- ----------- --------- ------
----------- ----------- --------- ------
December 31, 1995........................................... 315,612 61,600 71.02 59.93
----------- ----------- --------- ------
----------- ----------- --------- ------
At December 31, 1997 and 1996, respectively, there were 170,488 and 317,190
shares available for future grant. During 1995, the number of shares authorized
for issuance under the stock option plan was increased to 2,000,000 shares from
1,500,000.
75
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
A summary of stock options at December 31, 1997 follows:
WEIGHTED AVERAGE WEIGHTED
STOCK ------------------------ STOCK AVERAGE
RANGE OF OPTIONS EXERCISE LIFE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING PRICE (IN YEARS) EXERCISABLE PRICE
- --------------------------- ----------- --------- ------------- ----------- ---------
$ 40.25 to $105.13......... 159,233 $ 71.68 2.3 159,233 $ 71.68
133.88 to 198.00......... 317,213 140.25 6.3 171,820 138.20
211.00 to 368.50......... 300,748 253.73 8.6 13,704 211.53
----------- --------- --- ----------- ---------
777,194 $ 170.11 6.4 344,757 $ 110.39
----------- --------- --- ----------- ---------
----------- --------- --- ----------- ---------
The Company used a binomial option pricing model to estimate the grant date
present value of stock options granted in 1997, 1996 and 1995. The estimated
value per option was $79.26 in 1997, $49.75 in 1996 and $44.36 in 1995. The
values were calculated using the following assumptions: an option term of 6.5
years (representing the estimated period between grant date and exercise date
based on historical data since inception of the plan), a risk-free interest rate
of 6.37% in 1997, 5.48% in 1996 and 7.70% in 1995 (representing the yield on a
U.S. Treasury security with a remaining term equal to the expected option term),
expected volatility of 14% in 1997, 15% in 1996 and 16% in 1995, and estimated
dividend yields of 0.97% in 1997, 1.28% in 1996 and 1.70% in 1995 (representing
the approximate annualized cash dividend rate paid with respect to a share of
common stock at or near the grant date). The Company also deducted 10% to
reflect an estimate of the probability of forfeiture prior to vesting. The
estimated forfeiture rate was based on historical data since inception of the
stock option plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
the stock option plan. Accordingly, no compensation expense was recognized in
1997, 1996 and 1995 for stock option awards since the exercise price of stock
options granted under the stock option plan was not less than the fair market
value of the common stock at date of grant. Compensation expense recognized for
cash-only stock appreciation rights was $8,510,000 in 1997, $3,974,000 in 1996
and $6,002,000 in 1995. Had compensation expense for stock option awards granted
in 1997, 1996 and 1995 been determined consistent with SFAS No. 123, net income
and earnings per share would be reduced to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE)
Net income:
As reported............................................... $ 176,241 151,103 131,036
Pro forma................................................. 169,432 146,394 128,776
Basic earnings per share:
As reported............................................... $ 26.60 22.54 19.61
Pro forma................................................. 25.57 21.83 19.26
Diluted earnings per share:
As reported............................................... $ 25.26 21.08 17.98
Pro forma................................................. 24.40 20.53 17.74
76
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The pro forma effects presented above are in accordance with the
requirements of SFAS No. 123, however, such effects are not representative of
the effects to be reported in future years due to the fact that options vest
over several years and additional awards generally are made each year.
DEFERRED BONUS PLAN
In connection with the deferred bonus plan, the Company provides a deferred
bonus plan to eligible employees which allows such employees to elect to defer
all or a portion of their current annual incentive compensation awards and
allocate such awards to several investment options, including First Empire
common stock. Participants may elect the timing of distributions from the plan.
Such distributions are payable in cash, with the exception of balances allocated
to First Empire common stock which effective January 1, 1998, will be
distributable in the form of First Empire common stock. As of January 1, 1998,
$3,281,000 was distributable in the form of 7,056 shares of First Empire common
stock. In connection with the deferred bonus plan, 15,000 shares of First Empire
common stock are authorized for issuance.
DIRECTORS' STOCK PLAN
Effective January 1, 1998, the Company initiated a compensation plan for
non-employee directors which provides that annual compensation payable to such
directors shall be paid fifty percent in cash and fifty percent in shares of
First Empire common stock. In connection with the directors' stock plan, 5,000
shares of First Empire common stock are authorized for issuance.
10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has a noncontributory defined benefit pension plan covering
substantially all full-time employees. Pension benefits accrue to participants
based on their level of compensation and number of years of service. With
respect to employees added as a result of acquisitions, service with the
acquired entities has generally been counted in the pension formula for vesting,
but not for benefit accrual purposes. The Company contributes to the pension
plan amounts sufficient to meet Internal Revenue Code funding standards.
Net periodic pension cost consisted of the following:
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Service cost................................................. $ 4,931 4,298 3,304
Interest cost on projected benefit obligation................ 6,657 6,491 6,026
Actual return on assets...................................... (28,497) (16,865) (19,666)
Net amortization and deferral................................ 17,871 7,886 11,390
---------- --------- ---------
Net periodic pension cost.................................... $ 962 1,810 1,054
---------- --------- ---------
---------- --------- ---------
77
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Data relating to the funding position of the pension plan were as follows:
1997 1996
----------- ---------
(IN THOUSANDS)
Vested accumulated benefit obligation................................. $ (78,332) (71,915)
Total accumulated benefit obligation.................................. (84,917) (76,448)
Projected benefit obligation.......................................... (105,043) (93,526)
Plan assets at fair value............................................. 144,893 120,856
----------- ---------
Plan assets in excess of projected benefit obligation................. 39,850 27,330
Unrecognized net asset................................................ (344) (1,202)
Unrecognized past service cost........................................ (403) (448)
Unrecognized net gain................................................. (29,650) (15,265)
----------- ---------
Pension asset......................................................... $ 9,453 10,415
----------- ---------
----------- ---------
Plan assets included common stock of First Empire with a fair value of
$13,072,000 and $8,096,000 at December 31, 1997 and 1996, respectively.
The assumed rates used in the actuarial computations were as follows:
1997 1996
--------- ---------
Discount rate................................................................ 7.00% 7.25%
Rate of increase in future compensation levels............................... 5.10% 5.00%
Long-term rate of return on assets........................................... 9.00% 9.00%
--- ---
--- ---
In addition, the Company has an unfunded supplemental pension plan for
certain key executives. Net periodic pension cost was $186,000, $253,000 and
$290,000 in 1997, 1996 and 1995, respectively.
The Company also provides health care and life insurance benefits for
qualified retired employees who reached the age of 55 while working for the
Company. Substantially all salaried employees are covered in the plan.
Net postretirement benefit cost consisted of the following:
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Service cost........................................................ $ 146 147 94
Interest cost on projected benefit obligation....................... 996 1,062 1,022
Actual return on assets............................................. (34) (360) (547)
Net amortization and deferral....................................... (465) (50) 16
--------- --------- ---------
Net postretirement benefit cost..................................... $ 643 799 585
--------- --------- ---------
--------- --------- ---------
78
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Data relating to the funding position of the plan were as follows:
1997 1996
--------- ---------
(IN THOUSANDS)
Accumulated benefit obligation:
Retirees............................................................... $ 11,532 13,038
Active employees
Fully eligible....................................................... 1,123 1,043
Other................................................................ 1,278 1,263
Plan assets at fair value................................................ (5,147) (6,325)
--------- ---------
Accumulated benefit obligation in excess of plan assets.................. 8,786 9,019
Unrecognized net loss.................................................... (1,202) (2,151)
Unrecognized past service cost........................................... 2,039 2,243
--------- ---------
Accrued postretirement benefit cost...................................... $ 9,623 9,111
--------- ---------
--------- ---------
The Company on occasion funds a portion of these postretirement benefit
obligations through contributions to a Voluntary Employee Benefit Association
trust account.
The assumed rates used in the actuarial computations were as follows:
1997 1996
--------- ---------
Discount rate.............................................................. 7.00% 7.25%
Long-term rate of return on assets......................................... 8.00% 8.00%
Medical inflation rate..................................................... 9.00% 11.00%
--------- ---------
--------- ---------
The medical inflation rate was assumed to gradually reduce to 5% over eight
years.
The Company's 1997 service cost, interest cost and accumulated benefit
obligation assuming a 1% increase in the medical inflation rate assumption are
as follows:
(IN
THOUSANDS)
-------------
Accumulated postretirement benefit obligation.................................. $ 14,797
Service cost................................................................... 146
Interest cost.................................................................. 1,055
-------------
-------------
The Company has a retirement savings plan ("Savings Plan") that is a defined
contribution plan in which eligible employees of the Company may defer up to 10%
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.
The Company's contributions to the Savings Plan totaled $5,221,000, $4,724,000
and $4,086,000 in 1997, 1996 and 1995, respectively.
79
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The components of income tax expense (benefit) were as follows:
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Current
Federal.................................................... $ 96,819 85,220 79,194
State and city............................................. 16,430 16,547 18,303
---------- --------- ---------
Total current............................................ 113,249 101,767 97,497
---------- --------- ---------
Deferred
Federal.................................................... (5,334) (3,155) (7,875)
State and city............................................. (1,997) (746) 515
---------- --------- ---------
Total deferred........................................... (7,331) (3,901) (7,360)
---------- --------- ---------
Total income taxes applicable to pre-tax income.......... $ 105,918 97,866 90,137
---------- --------- ---------
---------- --------- ---------
The Company files a consolidated federal income tax return reflecting
taxable income earned by all subsidiaries. Prior to 1996, applicable federal
tax law allowed First Empire the option of deducting as bad debt expense for
tax purposes, under the reserve method, 8% of taxable income resulting from
the banking operations of a subsidiary. Effective January 1, 1996, the
reserve method is no longer available and deductions for bad debts for
federal income tax purposes are now limited to actual losses. Recapture of
the bad debt reserve established by prior application of the reserve 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, 1997 the bad debt reserve
resulting from application of the reserve method for which no federal income
taxes have been provided was $46,717,000. No actions are planned which would
cause this reserve to become wholly or partially taxable.
The portion of income taxes attributable to gains or losses on sales of bank
investment securities was a benefit of $114,000 in 1997 and an expense of
$1,872,000 in 1995. The effect on income taxes from sales of bank investment
securities was insignificant in 1996. No alternative minimum tax expense was
recognized in 1997, 1996 or 1995.
Total income taxes differed from the amount computed by applying the
statutory federal income tax rate to pre-tax income as follows:
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Income taxes at statutory rate................................ $ 98,756 87,139 77,411
Increase (decrease) in taxes:
Tax-exempt income........................................... (3,794) (2,000) (2,195)
State and city income taxes, net of federal income tax
effect.................................................... 9,381 10,271 12,232
Other....................................................... 1,575 2,456 2,689
---------- --------- ---------
$ 105,918 97,866 90,137
---------- --------- ---------
---------- --------- ---------
80
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) were comprised of the following at
December 31:
1997 1996 1995
----------- ---------- ---------
(IN THOUSANDS)
Interest on loans............................................................. $ 5,165 5,603 5,335
Depreciation and amortization................................................. 8,130 7,900 5,943
Losses on loans and other assets.............................................. 105,190 105,338 102,183
Postretirement and other supplemental employee benefits....................... 7,163 7,434 7,041
Incentive compensation plans.................................................. 12,302 9,090 10,932
Unrealized investment losses.................................................. -- 1,819 2,343
Other......................................................................... 11,140 10,060 6,990
----------- ---------- ---------
Gross deferred tax assets................................................... 149,090 147,244 140,767
----------- ---------- ---------
Retirement benefits........................................................... (3,459) (4,457) (5,194)
Leasing transactions.......................................................... (83,347) (81,300) (71,717)
Restructured interest rate swap agreements.................................... (3,999) (8,564) (13,746)
Capitalized servicing rights.................................................. (7,448) (7,597) (7,981)
Unrealized investment gains................................................... (8,202) -- --
Other......................................................................... (45) (46) (226)
----------- ---------- ---------
Gross deferred tax liabilities.............................................. (106,500) (101,964) (98,864)
----------- ---------- ---------
Net deferred tax asset........................................................ $ 42,590 45,280 41,903
----------- ---------- ---------
----------- ---------- ---------
The Company believes that it is more likely than not that the net deferred
tax asset will be realized through taxable earnings or alternative tax
strategies.
The income tax credits shown in the Statement of Income of First Empire in
note 20 arise principally from operating losses before dividends from
subsidiaries.
12. EARNINGS PER SHARE
The computations of basic earnings per share follow:
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE)
Net income.................................................. $ 176,241 151,103 131,036
Less: preferred stock dividends............................. -- (900) (3,600)
---------- --------- ---------
Income available to common stockholders..................... 176,241 150,203 127,436
Weighted-average shares outstanding......................... 6,625 6,663 6,499
Basic earnings per share.................................... $ 26.60 22.54 19.61
81
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. EARNINGS PER SHARE (CONTINUED)
The computations of diluted earnings per share follow:
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- --------- ---------
Income available to common stockholders..................... $ 176,241 150,203 127,436
Plus: preferred stock dividends............................. -- 900 3,600
---------- --------- ---------
Income available to common stockholders plus assumed
conversion................................................ 176,241 151,103 131,036
Weighted-average shares outstanding......................... 6,625 6,663 6,499
Plus: incremental shares from assumed conversions of
-- stock options.......................................... 352 385 282
-- preferred stock........................................ -- 122 507
---------- --------- ---------
Adjusted weighted-average shares outstanding................ 6,977 7,170 7,288
Diluted earnings per share.................................. $ 25.26 21.08 17.98
13. OTHER INCOME AND OTHER EXPENSE
The following items, which exceeded 1% of total revenues in the respective
period, were included in either other revenues from operations or other costs of
operations in the Consolidated Statement of Income:
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Other income:
Mutual fund and annuity sales............................. $ 15,336 13,000
Other expense:
Professional services..................................... 22,845 20,402 22,522
Advertising............................................... 11,933
---------- --------- ---------
---------- --------- ---------
14. INTERNATIONAL ACTIVITIES
The Company engages in certain international activities consisting
primarily of purchasing Eurodollar placements, collecting Eurodollar deposits
and engaging in foreign currency trading. Net assets identified with
international activities amounted to $11,514,000 and $55,420,000 at December
31, 1997 and 1996, respectively.
82
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. DERIVATIVE FINANCIAL INSTRUMENTS
As part of managing interest rate risk, the Company has entered into several
interest rate swap agreements. The swaps modify the repricing characteristics of
certain portions of the Company's loan and deposit portfolios. Under terms of
most of the agreements the Company receives a fixed rate of interest and pays a
variable rate based on London Inter-Bank Offered Rates ("LIBOR"). Interest rate
swap agreements are generally entered into with counterparties that meet
established credit standards and most contain collateral provisions protecting
the at-risk party. The Company considers the credit risk inherent in these
contracts to be negligible. Information about interest rate swaps entered into
for interest rate risk management purposes summarized by type of financial
instrument the swaps were intended to modify follows:
WEIGHTED-AVERAGE RATE ESTIMATED
NOTIONAL AVERAGE ------------------------ FAIR VALUE-
AMOUNT MATURITY FIXED VARIABLE GAIN (LOSS)
------------- ------------- ----- ----------- -------------
(IN (IN
THOUSANDS) (IN YEARS) THOUSANDS)
DECEMBER 31, 1997
Variable rate loans:
Amortizing.................... $ 99,287 0.2 5.82% 5.75% $ 28
Non-amortizing................ 1,147,731 1.7 6.00% 5.84% 2,888
------------- --- --- --- -------------
1,247,018 1.6 5.99% 5.83% 2,916
Fixed rate loans:
Amortizing(a)................. 33,061 9.5 7.17% 5.97% (2,394)
Fixed rate time deposits:
Non-amortizing................ 1,439,500 2.8 6.69% 5.73% 15,915
------------- --- --- --- -------------
$ 2,719,579 2.3 6.37% 5.78% $ 16,437
------------- --- --- --- -------------
------------- --- --- --- -------------
DECEMBER 31, 1996
Variable rate loans:
Amortizing.................... $ 237,972 .9 5.91% 5.51% $ 54
Non-amortizing................ 909,576 2.2 5.78% 5.52% (4,777)
------------- --- --- --- -------------
1,147,548 1.9 5.81% 5.52% (4,723)
Fixed rate loans:
Amortizing(a)................. 33,841 10.2 7.17% 5.56% (1,226)
Fixed rate time deposits:
Non-amortizing................ 1,181,000 1.8 6.75% 5.39% 11,473
------------- --- --- --- -------------
$ 2,362,389 2.0 6.30% 5.45% $ 5,524
------------- --- --- --- -------------
------------- --- --- --- -------------
- ------------------------
(a) Under the terms of this swap, the Company receives interest at a variable
rate and pays at a fixed rate. Under all other swap agreements, the Company
receives interest at a fixed rate and pays at a variable rate.
83
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of interest rate swap agreements represents the
amount the Company would have expected to receive (pay) to terminate such
contracts. Since these swaps have been entered into for interest rate risk
management purposes, the estimated market appreciation or depreciation should be
considered in the context of the entire balance sheet of the Company. The
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes is not recognized in the consolidated financial statements.
The notional amount of the amortizing swap linked to fixed rate loans
declines by the amount of scheduled principal payments of the loans. The
notional amounts of other amortizing swaps may, following an initial lock-out
period, vary depending on the level of interest rates or the repayment behavior
of mortgage-backed securities to which individual swaps are indexed. The
notional amount of a non-amortizing swap does not change during the term of an
agreement.
At December 31, 1997 the notional amount of interest rate swaps outstanding
mature as follows:
AMORTIZING NON-AMORTIZING
----------- --------------
(IN THOUSANDS)
Year ending December 31:
1998........................................................... $ 100,139 437,231
1999........................................................... 930 674,000
2000........................................................... 1,016 845,000
2001........................................................... 1,110 213,000
2002........................................................... 1,213 213,000
Later years.................................................... 27,940 205,000
----------- --------------
$ 132,348 2,587,231
----------- --------------
----------- --------------
The net effect of interest rate swaps was to increase net interest income by
$14,089,000 in 1997, $15,454,000 in 1996 and $884,000 in 1995. The average
notional amount of interest rate swaps impacting net interest income which were
entered into for interest rate risk management purposes were $2,691,638,000 in
1997, $2,410,547,000 in 1996 and $2,536,329,000 in 1995.
During 1995 and 1994, the Company restructured several interest rate swap
agreements with notional amounts of $260 million and $500 million, respectively,
from amortizing to non-amortizing. The purpose of the restructurings was to
enhance the effectiveness of the swaps in managing the Company's exposure to
changing interest rates in future years. Losses resulting from the early
termination of the amortizing swaps and equal amounts of purchase discount
received on the restructured non-amortizing swaps were recognized as a result of
these transactions and included in the carrying amount of loans which the swaps
modified. The deferred losses and purchase discounts totaled $9.5 million and
$15.8 million, respectively, at December 31, 1997 and $20.8 million and $25.4
million, respectively, at December 31, 1996. The deferred losses are being
amortized and the purchase discounts accreted to interest income over the
remaining terms of the original swaps and restructured swaps, respectively. Such
amortization and accretion were $11.3 million and $9.6 million, respectively, in
1997, $12.1 million and $9.8 million, respectively, in 1996 and $11.1 million
and $8.8 million, respectively, in 1995.
84
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The net increase (decrease) in interest income in future years from
amortization and accretion of balances resulting from interest rate swap
restructurings is as follows:
(IN
THOUSANDS)
-------------
YEAR ENDING DECEMBER 31:
1998......................................................................... $ (104)
1999......................................................................... 5,960
2000......................................................................... 403
Derivative financial instruments used for trading purposes included foreign
exchange and other option contracts, foreign exchange forward and spot
contracts, interest rate swap agreements and financial futures. The following
table includes information about the estimated fair value of derivative
financial instruments used for trading purposes:
1997 1996
--------- ---------
(IN THOUSANDS)
December 31:
Gross unrealized gains................................................. $ 46,343 23,780
Gross unrealized losses................................................ 46,405 22,261
Year ended December 31:
Average gross unrealized gains......................................... $ 41,701 13,565
Average gross unrealized losses........................................ 41,302 10,983
--------- ---------
--------- ---------
Net gains arising from derivative financial instruments used for trading
purposes were $2,072,000 in 1997, $2,689,000 in 1996 and $1,375,000 in 1995.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated "fair value" of financial instruments.
"Fair value" is generally defined as the price a willing buyer and a willing
seller would exchange for a financial instrument in other than a distressed sale
situation. Disclosures related to fair value presented herein are as of December
31, 1997 and 1996.
With the exception of marketable securities, certain off-balance sheet
financial instruments and one-to-four family residential mortgage loans
originated for sale, the Company's financial instruments are not readily
marketable and market prices do not exist. The Company, in attempting to
comply with the provisions of SFAS No. 107, 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 estimated fair value of investments in readily marketable debt and
equity securities were based on quoted market prices at the respective year-end.
In arriving at estimated fair value of other financial instruments, the Company
generally used calculations based upon discounted cash flows of the related
financial instruments. In general, discount rates used for loan products were
based on the Company's pricing at the respective year-end. A
85
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
higher discount rate was assumed with respect to estimated cash flows
associated with nonaccrual loans.
As more fully described in note 2, the carrying value and estimated fair
value of investment securities were as follows:
CARRYING ESTIMATED
VALUE FAIR VALUE
------------ ------------
(IN THOUSANDS)
DECEMBER 31
1997............................................................ $ 1,725,218 1,725,729
1996............................................................ 1,571,698 1,572,398
------------ ------------
------------ ------------
The following table presents the carrying value and calculated estimates of
fair value of loans and commitments related to loans originated for sale:
CARRYING CALCULATED
VALUE ESTIMATE
------------- ------------
(IN THOUSANDS)
DECEMBER 31, 1997
Commercial loans and leases.................................... $ 2,378,827 2,378,248
Commercial real estate loans................................... 4,436,014 4,487,740
Residential real estate loans.................................. 2,462,945 2,484,377
Consumer loans and leases...................................... 2,218,782 2,207,609
------------- ------------
$ 11,496,568 11,557,974
------------- ------------
------------- ------------
DECEMBER 31, 1996
Commercial loans and leases.................................... $ 2,182,034 2,178,530
Commercial real estate loans................................... 3,956,184 3,975,921
Residential real estate loans.................................. 2,185,749 2,182,508
Consumer loans and leases...................................... 2,398,156 2,424,384
------------- ------------
$ 10,722,123 10,761,343
------------- ------------
------------- ------------
The allowance for possible credit losses represents the Company's assessment
of the overall level of credit risk inherent in the loan and lease portfolio and
totaled $274,656,000 and $270,466,000 at December 31, 1997 and 1996,
respectively.
As described in note 17, 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. Commitments generally have fixed
expiration dates and contain termination and other clauses which provide for
relief from funding in the event of significant deterioration in the credit
quality of the customer. The rates and terms of the Company's loan commitments,
credit guarantees and letters of credit are competitive with other financial
institutions operating in markets served by the Company. The Company believes
that the carrying amounts are reasonable estimates of the fair value of these
financial instruments. Such carrying amounts, comprised principally of
unamortized fee income, are included in other liabilities and totaled $4,911,000
and $3,619,000 at December 31, 1997 and 1996, respectively.
SFAS No. 107 requires that the estimated fair value ascribed to
noninterest-bearing deposits, savings deposits and NOW accounts be established
at carrying value because of the customers' ability to withdraw funds
86
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
immediately. Additionally, time deposit accounts are required to be revalued
based upon prevailing market interest rates for similar maturity instruments.
The following summarizes the results of these calculations:
CARRYING CALCULATED
VALUE ESTIMATE
------------ ----------
(IN THOUSANDS)
DECEMBER 31, 1997
Noninterest-bearing deposits..................................... $ 1,458,241 1,458,241
Savings deposits and NOW accounts................................ 3,691,492 3,691,492
Time deposits.................................................... 5,762,497 5,792,345
Deposits at foreign office....................................... 250,928 250,928
------------ ----------
------------ ----------
DECEMBER 31, 1996
Noninterest-bearing deposits..................................... $ 1,352,929 1,352,929
Savings deposits and NOW accounts................................ 3,615,575 3,615,575
Time deposits.................................................... 5,352,749 5,367,028
Deposits at foreign office....................................... 193,236 193,236
------------ ----------
------------ ----------
The Company believes that deposit accounts have a value greater than that
prescribed by SFAS No. 107. 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
the expected deposit attrition which is customary in acquisitions. Accordingly,
estimating the fair value of deposits with any degree of certainty is not
practical.
As more fully described in note 15, the Company had entered into interest
rate swap agreements for purposes of managing the Company's exposure to changing
interest rates. The estimated fair value of interest rate swap agreements
represents the amount the Company would have expected to receive or pay to
terminate such swaps. The following table includes information about the
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes:
ESTIMATED
GROSS GROSS FAIR VALUE-
NOTIONAL UNREALIZED UNREALIZED GAIN
AMOUNT GAINS LOSSES (LOSS)
------------ ----------- ----------- -----------
(IN THOUSANDS)
DECEMBER 31
1997..................................... $ 2,719,579 22,060 (5,623) 16,437
1996..................................... 2,362,389 15,013 (9,489) 5,524
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
As described in note 15, the Company also uses certain derivative financial
instruments as part of its trading activities. Interest rate swaps entered into
for trading purposes had notional values and estimated fair value gains of $210
million and $152,000, respectively, at December 31, 1997 and notional values and
estimated fair value losses of $50 million and $42,000, respectively, at
December 31, 1996. The Company also entered into foreign exchange and other
option and futures contracts totaling approximately $3.3 billion and $1.6
billion at December 31, 1997 and 1996, respectively. Such contracts were valued
at losses of $214,000 at December 31, 1997 and gains of $1,561,000 at December
31, 1996. All trading account assets and liabilities
87
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
are recorded in the Consolidated Balance Sheet at estimated fair value.
Due to the near maturity of other money-market assets and short-term
borrowings, the Company estimates that the carrying value of such instruments
approximates estimated fair value. The carrying value and estimated fair
value of long-term borrowings were $427,819,000 and $453,113,000,
respectively, at December 31, 1997 and $178,002,000 and $180,793,000,
respectively, at December 31, 1996.
The Company does not believe that the estimated fair value 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 fair value 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, since 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.
17. COMMITMENTS AND CONTINGENCIES
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as commitments to extend credit guarantees
and "standby" letters of credit (approximately $193,838,000 and $171,420,000
at December 31, 1997 and 1996, respectively) which are not reflected in the
consolidated financial statements. No material losses are expected as a
result of these transactions. Additionally, the Company had outstanding loan
commitments of approximately $2.9 billion and $2.7 billion at December 31,
1997 and 1996, respectively. Because many loan commitments and almost all
credit guarantees and "standby" letters of credit expire without being funded
in whole or part, the contract amounts are not estimates of future cash
flows. Commitments to sell one-to-four family residential mortgage loans
totaled $266,145,000 at December 31, 1997 and $251,110,000 at December 31,
1996.
In October 1997, First Empire entered into a definitive agreement with
ONBANCorp, Inc. ("ONBANCorp"), a bank holding company headquartered in Syracuse,
New York, for a merger between the two companies. At December 31, 1997,
ONBANCorp had $5.3 billion of assets. The merger, which will be accounted for as
a purchase, is subject to the approval of stockholders of both companies and is
expected to be accomplished on or about April 1, 1998. Under the terms of the
merger agreement, stockholders of ONBANCorp will have the option to receive .161
of a share of First Empire common stock (and cash in lieu of any fractional
share) or $69.50 in cash in exchange for each share of ONBANCorp common stock.
The merger agreement provides that a minimum of 60% and a maximum of 70% of the
total number of shares of ONBANCorp common stock issued and outstanding
immediately prior to the merger must be exchanged for shares of First Empire
common stock. In the event that ONBANCorp
88
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
stockholders as a whole elect to receive stock consideration with respect to
fewer than 60% or more than 70% of the total number of outstanding shares of
ONBANCorp common stock, the selection by ONBANCorp common stockholders of the
method of payment is subject to allocation and proration to ensure that the
number of shares of ONBANCorp common stock that are converted into shares of
First Empire common stock will be 60% or 70%, as the case may be, of the
total number of shares of ONBANCorp common stock issued and outstanding
immediately prior to the merger. At December 31, 1997 ONBANCorp had
12,721,689 shares of common stock issued and outstanding.
First Empire and its subsidiaries are subject in the normal course of
business to various pending and threatened legal proceedings in which claims for
monetary damages are asserted. Management, after consultation with legal
counsel, does not anticipate that the aggregate ultimate liability, if any,
arising out of litigation pending against First Empire or its subsidiaries will
be material to the Company's consolidated financial position, but at the present
time is not in a position to determine whether such litigation will have a
material adverse effect on the Company's consolidated results of operations in
any future reporting period.
18. REVOLVING CREDIT AGREEMENT OF FIRST EMPIRE
First Empire has a revolving credit agreement with an unaffiliated
commercial bank whereby First Empire may borrow up to $25,000,000 at its
discretion through November 24, 1998. The agreement provides for a facility fee
assessed on the entire amount of the commitment (whether or not utilized)
ranging from .08% to .187% depending on the credit rating of the subordinated
notes of M&T Bank. A usage fee equal to .10% per annum is assessed if the
balance of outstanding loans exceeds 50% of the commitment amount during any
quarter. Under the revolving credit agreement, First Empire may borrow at either
a variable rate based upon the higher of the Federal funds rate plus 1/2 of 1%
or the lender's prime rate, or a fixed rate based upon a premium over LIBOR
ranging from .15% to .30% depending on the credit rating of the subordinated
notes of M&T Bank. At December 31, 1997 and 1996, there were no outstanding
balances under such agreement.
19. REGULATORY MATTERS
Payment of dividends by First Empire's banking subsidiaries is restricted by
various legal and regulatory limitations. Dividends from any banking subsidiary
to First Empire 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, 1997, approximately $262,187,000 was available for payment of
dividends to First Empire from banking subsidiaries without prior regulatory
approval.
Banking regulations prohibit extensions of credit by the subsidiary banks to
First Empire unless appropriately secured by assets. Securities of affiliates
are not eligible as collateral for this purpose.
The banking subsidiaries are required to maintain noninterest-earning
reserves against certain deposit liabilities. During the maintenance periods
that included December 31, 1997 and 1996, cash and due from banks included a
daily average of $124,132,000 and $128,398,000, respectively, for such purpose.
89
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
19. REGULATORY MATTERS (CONTINUED)
Federal regulators have adopted capital adequacy guidelines for bank
holding companies and banks. 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. Under the capital adequacy guidelines, the
so-called "Tier 1 capital" and "Total capital" as a percentage of
risk-weighted assets and certain off-balance sheet financial instruments must
be at least 4% and 8%, respectively. In addition to these risk-based
measures, regulators also require banking institutions that meet certain
qualitative criteria to maintain a minimum "leverage" ratio of "Tier 1
capital" to average total assets, adjusted for goodwill and certain other
items, of at least 3% to be considered adequately capitalized. As of December
31, 1997, First Empire and each of its banking subsidiaries exceeded all
applicable capital adequacy requirements.
As of December 31, 1997 and 1996, the most recent notifications from
federal regulators categorized each of First Empire's banking subsidiaries as
well capitalized under the regulatory framework for prompt corrective action.
To be considered well capitalized, a banking institution must maintain Tier 1
risk-based capital, total risk-based capital and leverage ratios of at least
6%, 10% and 5%, respectively. Management is unaware of any conditions or
events since the latest notifications from federal regulators that have
changed the capital adequacy category of First Empire's banking subsidiaries.
90
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
19. REGULATORY MATTERS (CONTINUED)
The capital ratios and amounts of the Company and its banking subsidiaries
as of December 31, 1997 and 1996 are presented below:
FIRST EMPIRE M&T M&T
(CONSOLIDATED) BANK(d) BANK,N.A.
------------- ---------- -----------
(DOLLARS IN THOUSANDS)
As of December 31, 1997:
TIER 1 CAPITAL
Amount.............................................. $ 1,250,330 1,000,963 50,771
Ratio(a)............................................ 10.69% 8.81% 14.73%
Minimum required amount(b).......................... 467,942 454,353 13,787
TOTAL CAPITAL
Amount.............................................. 1,558,147 1,304,528 55,084
Ratio(a)............................................ 13.32% 11.48% 15.98%
Minimum required amount(b).......................... 935,884 908,705 27,574
LEVERAGE
Amount.............................................. 1,250,330 1,000,963 50,771
Ratio(c)............................................ 9.09% 7.63% 7.11%
Minimum required amount(b).......................... 412,649 393,602 21,429
As of December 31, 1996:
TIER 1 CAPITAL
Amount.............................................. $ 889,221 822,319 33,754
Ratio(a)............................................ 8.40% 7.92% 15.23%
Minimum required amount(b).......................... 423,594 415,244 8,864
TOTAL CAPITAL
Amount.............................................. 1,198,299 1,128,768 36,542
Ratio(a)............................................ 11.32% 10.87% 16.49%
Minimum required amount(b).......................... 847,188 830,487 17,727
LEVERAGE
Amount.............................................. 889,221 822,319 33,754
Ratio(c)............................................ 6.99% 6.61% 6.59%
Minimum required amount(b).......................... 381,394 373,224 15,370
- ------------------------
(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.
(c) The ratio of capital to average assets, as defined by regulation.
(d) M&T Bank's capital ratio information as of December 31, 1996 has been
restated to include The East New York Savings Bank, which was merged with
and into M&T Bank on May 24, 1997.
91
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
20. PARENT COMPANY FINANCIAL STATEMENTS
See other notes to financial statements.
CONDENSED BALANCE SHEET
DECEMBER 31
-----------------------
1997 1996
------------ ---------
DOLLARS IN THOUSANDS
ASSETS
Cash
In subsidiary bank.................................................. $ 1,015 434
Other............................................................... 19 19
------------ ---------
Total cash........................................................ 1,034 453
------------ ---------
Due from subsidiaries
Money-market assets................................................. 172,237 18,056
Current income tax receivable....................................... 12,927 3,183
------------ ---------
Total due from subsidiaries....................................... 185,164 21,239
Investments in subsidiaries
Banks............................................................... 1,071,258 870,423
Other............................................................... 7,736 109
Other assets.......................................................... 34,887 13,683
------------ ---------
Total assets...................................................... $ 1,300,079 905,907
------------ ---------
------------ ---------
LIABILITIES
Accrued expenses and other liabilities................................ $ 12,080 248
Long-term borrowings.................................................. 257,733 --
------------ ---------
Total liabilities................................................. 269,813 248
------------ ---------
STOCKHOLDERS' EQUITY.................................................. 1,030,266 905,659
------------ ---------
Total liabilities and stockholders' equity............................ $ 1,300,079 905,907
------------ ---------
------------ ---------
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
---------- ---------- ---------
DOLLARS IN THOUSANDS, EXCEPT PER
SHARE
INCOME
Dividends from bank subsidiaries...................................... $ 192 116,038 88,358
Other income.......................................................... 8,558 933 812
---------- ---------- ---------
Total income........................................................ 8,750 116,971 89,170
---------- ---------- ---------
EXPENSE
Interest on short-term borrowings..................................... -- 242 556
Interest on long-term borrowings...................................... 16,762 -- --
Other expense......................................................... 2,710 1,968 2,365
---------- ---------- ---------
Total expense....................................................... 19,472 2,210 2,921
---------- ---------- ---------
Income (loss) before income taxes and equity in undistributed income
of subsidiaries..................................................... (10,722) 114,761 86,249
Income tax credits.................................................... 4,496 552 944
---------- ---------- ---------
Income (loss) before equity in undistributed income of subsidiaries... (6,226) 115,313 87,193
---------- ---------- ---------
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
Net income
Bank subsidiaries................................................... 182,659 151,724 132,201
Other subsidiaries.................................................. -- 104 --
Less: dividends received.............................................. (192) (116,038) (88,358)
---------- ---------- ---------
Equity in undistributed income of subsidiaries........................ 182,467 35,790 43,843
---------- ---------- ---------
Net income............................................................ $ 176,241 151,103 131,036
---------- ---------- ---------
Net income per common share
Basic............................................................... $ 26.60 22.54 19.61
Diluted............................................................. 25.26 21.08 17.98
92
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
20. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
----------- --------- ---------
DOLLARS IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 176,241 151,103 131,036
Adjustments to reconcile net income to net cash provided by operating
activities
Equity in undistributed income of subsidiaries............................... (182,467) (35,790) (43,843)
Dividend-in-kind from subsidiary............................................. (83) (1,538) (11,858)
Provision for deferred income taxes.......................................... 810 (153) (221)
Net gain on sales of assets.................................................. -- -- (179)
Net change in accrued income and expense..................................... (327) 530 7,616
----------- --------- ---------
Net cash provided (used) by operating activities............................... (5,826) 114,152 82,551
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary....................................................... (19,734) (7,000) (20,248)
Other, net..................................................................... (767) (39) 871
----------- --------- ---------
Net cash used by investing activities.......................................... (20,501) (7,039) (19,377)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in short-term borrowings.......................................... -- -- (3,000)
Proceeds from issuance of junior subordinated debt to subsidiaries............. 257,733 -- --
Purchases of treasury stock.................................................... (67,771) (80,810) (37,374)
Dividends paid--common......................................................... (21,207) (18,617) (16,224)
Dividends paid--preferred...................................................... -- (900) (3,600)
Other, net..................................................................... 12,334 4,329 2,968
----------- --------- ---------
Net cash provided (used) by financing activities............................... 181,089 (95,998) (57,230)
----------- --------- ---------
Net increase in cash and cash equivalents...................................... $ 154,762 11,115 5,944
Cash and cash equivalents at beginning of year................................. 18,509 7,394 1,450
Cash and cash equivalents at end of year....................................... $ 173,271 18,509 7,394
----------- --------- ---------
----------- --------- ---------
Supplemental disclosure of cash flow information
Interest received during the year.............................................. $ 4,743 686 279
Interest paid during the year.................................................. 10,550 242 558
Income taxes received during the year.......................................... 2,027 507 7,393
93
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The term in
office of the following director of the Registrant will end on May 19, 1998,
and he is not a nominee for reelection to the Board of Directors at the 1998
Annual Meeting of Stockholders:
Raymond D. Stevens, Jr., age 71, has been a director of First Empire
since 1970, and of M&T Bank since 1963. He retired as chairman and a
director of Pratt & Lambert United, Inc. upon the consummation of its merger
with The Sherwin-Williams Company on January 10, 1996. Mr. Stevens is a
Director of M&T Bank.
The identification of the Registrant's directors is incorporated by
reference to the caption "NOMINEES FOR DIRECTOR" contained in the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission on or before April 10,
1998. The identification of the Registrant'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.
Disclosure of compliance with Section 16(a) of the Securities Exchange Act
of 1934, as amended, by the Registrant's directors and executive officers, and
persons who are the beneficial owners of more than 10% of the Registrant's
common stock, is incorporated by reference to the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders which
will be filed with the Securities and Exchange Commission on or before April 10,
1998.
ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference to the
Registrant's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
on or before April 10, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Registrant's definitive Proxy Statement for
its 1998 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission on or before April 10, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by
reference to the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission on or before April 10, 1998.
94
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(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) Reports on Form 8-K.
On November 7, 1997, the Registrant filed a Current Report on Form 8-K dated
October 28, 1997, reporting on its October 28, 1997 public announcement that the
Registrant would acquire ONBANCorp, Inc.
(c) Exhibits required by Item 601 of Regulation S-K.
The exhibits listed on the Exhibit Index on pages 99 through 101 of this
Annual Report on Form 10-K have been previously filed, are filed herewith or are
incorporated herein by reference to other filings.
(d) Additional financial statement schedules.
None.
95
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 5th day
of March, 1998.
FIRST EMPIRE STATE CORPORATION
By: /s/ ROBERT G. WILMERS
-----------------------------------------
Robert G. Wilmers
Chairman of the Board,
President 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 TITLE DATE
- ------------------------------ --------------------------- -------------------
Principal Executive Officer:
/s/ ROBERT G. WILMERS Chairman of the Board, March 5, 1998
- ------------------------------ President and
Robert G. Wilmers Chief Executive Officer
Principal Financial Officer:
/s/ MICHAEL P. PINTO Executive Vice President March 5, 1998
- ------------------------------ and Chief Financial
Michael P. Pinto Officer
Principal Accounting Officer:
/s/ MICHAEL R. SPYCHALA Administrative Vice March 5, 1998
- ------------------------------ President
Michael R. Spychala and Controller
96
A majority of the board of directors:
- ---------------------------------------------------------
Brent D. Baird
/s/ JOHN H. BENISCH March 5, 1998
- ---------------------------------------------------------
John H. Benisch
/s/ C. ANGELA BONTEMPO March 5, 1998
- ---------------------------------------------------------
C. Angela Bontempo
/s/ ROBERT T. BRADY March 5, 1998
- ---------------------------------------------------------
Robert T. Brady
/s/ PATRICK J. CALLAN March 5, 1998
- ---------------------------------------------------------
Patrick J. Callan
- ---------------------------------------------------------
Richard E. Garman
/s/ JAMES V. GLYNN March 5, 1998
- ---------------------------------------------------------
James V. Glynn
- ---------------------------------------------------------
Roy M. Goodman
/s/ PATRICK W.E. HODGSON March 5, 1998
- ---------------------------------------------------------
Patrick W.E. Hodgson
- ---------------------------------------------------------
Samuel T. Hubbard, Jr.
/s/ LAMBROS J. LAMBROS March 5, 1998
- ---------------------------------------------------------
Lambros J. Lambros
/s/ WILFRED J. LARSON March 5, 1998
- ---------------------------------------------------------
Wilfred J. Larson
/s/ JORGE G. PEREIRA March 5, 1998
- ---------------------------------------------------------
Jorge G. Pereira
/s/ RAYMOND D. STEVENS, JR. March 5, 1998
- ---------------------------------------------------------
Raymond D. Stevens, Jr.
97
- ---------------------------------------------------------
Herbert L. Washington
/s/ JOHN L. WEHLE, JR. March 5, 1998
- ---------------------------------------------------------
John L. Wehle. Jr.
/s/ ROBERT G. WILMERS March 5, 1998
- ---------------------------------------------------------
Robert G. Wilmers
98
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization dated as of October 28, 1997, by
and among First Empire State Corporation, Olympia Financial Corp. and
ONBANCorp, Inc. Incorporated by reference to Exhibit No. 2 to the Form
8-K dated October 28, 1997 (File No. 1-9861).
2.2 Stock Option Agreement dated as of October 28, 1997 by and between
First Empire State Corporation and ONBANCorp, Inc. Incorporated by
reference to Exhibit No. 99.1 to the Form 8-K dated October 28, 1997
(File No. 1-9861).
2.3 Agreement and Plan of Merger dated as of October 28, 1997, by and
among First Empire State Corporation, Olympia Financial Corp. and
ONBANCorp, Inc. Incorporated by references to Exhibit No. 2 to the
Form 8-K dated January 9, 1998 (File No. 1-9861).
3.1 Restated Certificate of Incorporation of First Empire State
Corporation dated May 7, 1997. Incorporated by reference to Exhibit
No. 3.1 to the Form 10-Q for the quarter ended March 31, 1997 (File
No. 1-9861).
3.2 By-Laws of First Empire State Corporation as last amended on July 16,
1991. Incorporated by reference to Exhibit No. 3.2 to the Form 10-K
for the year ended December 31, 1991 (File No. 1-9861).
4.1 Instruments defining the rights of security holders, including
indentures. Incorporated by reference to Exhibit Nos. 3.1, 3.2, 10.1
and 10.2 hereof.
4.2 Amended and Restated Trust Agreement dated as of January 31, 1997 by
and among First Empire State Corporation, Bankers Trust Company,
Bankers Trust (Delaware), and the Administrators named therein.
Incorporated by reference to Exhibit No. 4.1 to the Form 8-K dated
January 31, 1997 (File No. 1-9861).
4.3 Junior Subordinated Indenture dated as of January 31, 1997 by and
between First Empire State Corporation and Bankers Trust Company.
Incorporated by reference to Exhibit No. 4.2 to the Form 8-K dated
January 31, 1997 (File No. 1-9861).
4.4 Guarantee Agreement dated as of January 31, 1997 by and between First
Empire State Corporation and Bankers Trust Company. Incorporated by
reference to Exhibit No. 4.3 to Form 8-K dated January 31, 1997 (File
No. 1-9861).
4.5 Amended and Restated Trust Agreement dated as of June 6, 1997 by and
among First Empire State Corporation, Bankers Trust Company, Bankers
Trust (Delaware), and the Administrators named therein. Incorporated
by reference to Exhibit No. 4.1 to the Form 8-K dated June 6, 1997
(File No. 1-9861).
4.6 Junior Subordinated Indenture dated as of June 6, 1997 by and between
First Empire State Corporation and Bankers Trust Company. Incorporated
by reference to Exhibit No. 4.2 to the Form 8-K dated June 6, 1997
(File No. 1-9861).
99
4.7 Guarantee Agreement dated as of June 6, 1997 by and between First
Empire State Corporation and Bankers Trust Company. Incorporated by
reference to Exhibit No. 4.3 to Form 8-K dated June 6, 1997 (File No.
1-9861).
10.1 Revolving Credit Agreement, dated as of November 24, 1995, between
First Empire State Corporation and The First National Bank of Boston.
Incorporated by reference to Exhibit No. 10.1 to the Form 10-K for the
year ended December 31, 1995 (File No. 1-9861).
10.2 First Empire State Corporation 1983 Stock Option Plan as amended and
restated (File No. 1-9861). Filed herewith.
10.3 First Empire State Corporation Annual Executive Incentive Plan.
Incorporated by reference to Exhibit No. 10.4 to the Form 10-K for the
year ended December 31, 1992 (File No. 1 -9861).
Supplemental Deferred Compensation Agreements between Manufacturers
and Traders Trust Company and:
10.4 Robert E. Sadler, Jr. dated as of March 7, 1985. Incorporated by
reference to Exhibit Nos. (10)(d) (A) and (B), respectively, to the
Form 10-K for the year ended December 31, 1984 (File No. 0-4561);
10.5 Brian E. Hickey dated as of July 21, 1994. Incorporated by reference
to Exhibit No. 10.8 to the Form 10-K for the year ended December 31,
1995 (File No. 1-9861).
10.6 Supplemental Deferred Compensation Agreement, dated July 17, 1989,
between The East New York Savings Bank and Atwood Collins, III.
Incorporated by reference to Exhibit No. 10.11 to the Form 10-K for
the year ended December 31, 1991 (File No. 1-9861).
10.7 First Empire State Corporation Supplemental Pension Plan. Incorporated
by reference to Exhibit No. 10.12 to the Form 10-K for the year ended
December 31, 1994 (File No. 1-9861).
10.8 First Empire State Corporation Supplemental Retirement Savings Plan.
Incorporated by reference to Exhibit No. 10.13 to the Form 10-K for
the year ended December 31, 1994 (File No. 1-9861).
10.9 First Empire State Corporation Deferred Bonus Plan, as amended and
restated. Incorporated by reference to Exhibit 4.1 to the Form S-8
dated December 24, 1997 (File No. 333-43175).
10.10 First Empire State Corporation Directors' Stock Plan. Incorporated by
reference to Exhibit 4.1 to the Form S-8 dated December 24, 1997 (File
No. 333-43171).
11.1 Statement re: Computation of Earnings Per Common Share. Filed herewith.
21.1 Subsidiaries of the Registrant. Incorporated by reference to the
caption "Subsidiaries" contained in Part I, Item 1 hereof.
100
23.1 Consent of Price Waterhouse re: Registration Statement Nos. 33-32044
and 333-16077. Filed herewith.
23.2 Consent of Price Waterhouse re: Registration Statements Nos. 33-12207,
33-58500, 33-63917, 333-43171 and 333-43175. Filed herewith.
27.1 Article 9 Financial Data Schedule for the year ended December 31,
1997. Filed herewith.
99.1 First Empire State Corporation Retirement Savings Plan and Trust
Financial Statements and Additional Information for the years ended
December 31, 1997 and 1996. Filed herewith.
101