UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9861
M&T BANK CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One M & T Plaza
Buffalo, New York 14240
(Address of principal (Zip Code)
executive offices)
(716) 842-5445
(Registrant's telephone number, including area code)
FIRST EMPIRE STATE CORPORATION
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Number of shares of the registrant's Common Stock, $5 par value, outstanding as
of the close of business on August 7, 1998: 7,984,895 shares.
M&T BANK CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 1998
Table of Contents of Information Required in Report Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEET -
June 30, 1998 and December 31, 1997 3
CONSOLIDATED STATEMENT OF INCOME -
Three and six months ended
June 30, 1998 and 1997 4
CONSOLIDATED STATEMENT OF CASH FLOWS -
Six months ended June 30, 1998 and 1997 5
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY - Six months ended
June 30, 1998 and 1997 6
CONSOLIDATED SUMMARY OF CHANGES IN
ALLOWANCE FOR POSSIBLE CREDIT LOSSES -
Six months ended June 30, 1998 and 1997 6
NOTES TO FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 29
Part II. OTHER INFORMATION 29
Item 1. Legal Proceedings. 29
Item 2. Changes in Securities and Use of Proceeds. 29
Item 3. Defaults Upon Senior Securities. 29
Item 4. Submission of Matters to a Vote of Security
Holders. 29
Item 5. Other Information. 30
Item 6. Exhibits and Reports on Form 8-K. 30
SIGNATURES 32
EXHIBIT INDEX 33
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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M&T BANK CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET (Unaudited)
June 30, December 31,
Dollars in thousands, except per share 1998 1997
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Assets Cash and due from banks $ 511,273 333,805
Money-market assets
Interest-bearing deposits at banks 670 668
Federal funds sold and agreements to resell securities 336,410 53,087
Trading account 167,454 57,291
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Total money-market assets 504,534 111,046
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Investment securities
Available for sale (cost: $2,450,378 at June 30, 1998;
$1,563,055 at December 31, 1997) 2,461,545 1,583,273
Held to maturity (market value: $127,230 at June 30, 1998;
$84,176 at December 31, 1997) 126,488 83,665
Other (market value: $118,542 at June 30, 1998;
$58,280 at December 31, 1997) 118,542 58,280
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Total investment securities 2,706,575 1,725,218
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Loans and leases 15,487,386 11,765,533
Unearned discount (242,607) (268,965)
Allowance for possible credit losses (310,811) (274,656)
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Loans and leases, net 14,933,968 11,221,912
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Premises and equipment 173,678 121,984
Goodwill and core deposit intangible 566,878 17,288
Accrued interest and other assets 741,139 471,682
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Total assets $ 20,138,045 14,002,935
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Liabilities Noninterest-bearing deposits $ 2,096,105 1,458,241
NOW accounts 476,381 346,795
Savings deposits 4,525,942 3,344,697
Time deposits 7,407,806 5,762,497
Deposits at foreign office 306,725 250,928
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Total deposits 14,812,959 11,163,158
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Federal funds purchased and agreements
to repurchase securities 2,177,388 930,775
Other short-term borrowings 394,736 166,549
Accrued interest and other liabilities 399,360 284,368
Long-term borrowings 694,594 427,819
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Total liabilities 18,479,037 12,972,669
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Stockholders' equity Preferred stock, $1 par, 1,000,000 shares authorized,
none outstanding -- --
Common stock, $5 par, 15,000,000 shares
authorized, 8,101,539 shares issued at June 30, 1998;
8,097,472 issued at December 31, 1997 40,508 40,487
Common stock issuable, 8,315 shares at June 30, 1998 3,885 --
Additional paid-in capital 487,926 103,233
Retained earnings 1,172,399 1,092,106
Accumulated other comprehensive income 6,642 12,016
Treasury stock - common, at cost -
102,295 shares at June 30, 1998;
1,487,123 shares at December 31, 1997 (52,352) (217,576)
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Total stockholders' equity 1,659,008 1,030,266
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Total liabilities and stockholders' equity $ 20,138,045 14,002,935
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-3-
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M&T BANK CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three months ended June 30 Six months ended June 30
Amounts in thousands, except per share 1998 1997 1998 1997
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Interest income Loans and leases, including fees $ 315,307 235,226 $ 564,501 464,801
Money-market assets
Deposits at banks 364 816 370 1,525
Federal funds sold and agreements
to resell securities 1,247 860 2,969 1,265
Trading account 467 410 605 631
Investment securities
Fully taxable 42,238 25,409 65,868 49,207
Exempt from federal taxes 2,101 1,220 3,673 2,278
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Total interest income 361,724 263,941 637,986 519,707
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Interest expense NOW accounts 1,189 835 2,144 1,755
Savings deposits 30,636 22,495 53,243 44,743
Time deposits 105,500 82,254 186,134 156,011
Deposits at foreign office 3,562 2,873 6,801 6,112
Short-term borrowings 30,969 10,230 49,566 23,930
Long-term borrowings 12,788 7,047 21,341 12,504
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Total interest expense 184,644 125,734 319,229 245,055
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Net interest income 177,080 138,207 318,757 274,652
Provision for possible credit losses 13,200 11,000 25,200 22,000
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Net interest income after provision
for possible credit losses 163,880 127,207 293,557 252,652
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Other income Mortgage banking revenues 18,466 12,172 32,336 24,247
Service charges on deposit accounts 14,180 10,726 25,414 21,111
Trust income 9,938 7,233 19,423 14,136
Merchant discount and other credit card fees 4,330 4,234 8,568 9,465
Trading account and foreign exchange gains 506 596 2,285 1,945
Gain (loss) on sales of bank investment securities 322 (188) 322 (233)
Other revenues from operations 18,668 9,210 48,458 19,235
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Total other income 66,410 43,983 136,806 89,906
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Other expense Salaries and employee benefits 69,930 53,561 128,263 109,120
Equipment and net occupancy 17,878 13,155 31,357 26,388
Printing, postage and supplies 5,029 3,472 8,599 6,823
Amortization of goodwill and core deposit intangible 10,875 1,859 12,700 3,642
Other costs of operations 51,292 30,023 107,958 60,381
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Total other expense 155,004 102,070 288,877 206,354
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Income before income taxes 75,286 69,120 141,486 136,204
Income taxes 30,587 26,329 47,832 52,154
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Net income $ 44,699 42,791 $ 93,654 84,050
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Net income per common share
Basic $ 5.55 6.46 $ 12.72 12.63
Diluted 5.32 6.17 12.16 11.98
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Cash dividends per common share 1.00 .80 1.80 1.60
Average common shares outstanding
Basic 8,051 6,627 7,363 6,656
Diluted 8,409 6,928 7,699 7,014
-4-
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M&T BANK CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six months ended June 30
Dollars In thousands 1998 1997
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Cash flows from Net income $ 93,654 84,050
operating activities Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 25,200 22,000
Depreciation and amortization of premises
and equipment 11,897 10,294
Amortization of capitalized servicing rights 9,708 6,804
Amortization of goodwill and core deposit intangible 12,700 3,642
Provision for deferred income taxes (6,262) (5,123)
Asset write-downs 3,166 619
Net gain on sales of assets (700) (1,229)
Net change in accrued interest receivable, payable 1,936 4,668
Net change in other accrued income and expense 13,250 22,116
Net change in loans held for sale (134,486) 39,835
Net change in trading account assets and liabilities (123,711) 10,124
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Net cash provided (used) by operating activities (93,648) 197,800
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Cash flows from Proceeds from sales of investment securities
investing activities Available for sale 112,890 200,942
Proceeds from maturities of investment securities
Available for sale 502,169 118,275
Held to maturity 28,092 46,936
Other 7,930 -
Purchases of investment securities
Available for sale (35,514) (472,516)
Held to maturity (18,969) (17,337)
Other (21,873) (3,576)
Net increase in interest-bearing
deposits at banks (2) (48,791)
Additions to capitalized servicing rights (6,469) (12,917)
Net increase in loans and leases (659,515) (318,388)
Capital expenditures, net (12,954) (5,650)
Acquisitions, net of cash acquired:
ONBANCorp, Inc. 26,264 -
Deposits and banking offices - 123,043
Purchases of bank owned life insurance (150,000) -
Other, net (2,963) (3,907)
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Net cash used by investing activities (230,914) (393,886)
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Cash flows from Net increase (decrease) in deposits (115,908) 539,565
financing activities Net increase (decrease) in short-term borrowings 978,727 (536,492)
Proceeds from issuance of trust preferred securities - 250,000
Payments on long-term borrowings (1,591) (86)
Purchases of treasury stock (74,711) (48,702)
Dividends paid - common (13,345) (10,652)
Other, net 12,181 (2,129)
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Net cash provided by financing activities 785,353 191,504
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Net increase (decrease) in cash and cash equivalents $ 460,791 (4,582)
Cash and cash equivalents at beginning of period 386,892 449,985
Cash and cash equivalents at end of period $ 847,683 445,403
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Supplemental Interest received during the period $ 633,831 511,184
disclosure of cash Interest paid during the period 317,942 233,728
flow information Income taxes paid during the period 47,233 37,784
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Supplemental schedule of Real estate acquired in settlement of loans $ 3,387 3,941
noncash investing and Acquisition of ONBANCorp, Inc:
financing activities Common stock issued 587,819 --
Fair value of:
Assets acquired (noncash) 5,204,863 --
Liabilities assumed 4,618,411 --
Stock options 19,424 --
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-5-
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M&T BANK CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
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Common Additional
Preferred Common stock paid-in Retained
Dollars in thousands, except per share stock stock issuable capital earnings
- --------------------------------------------------------------------------------------------------------------------------------
1997
Balance - January 1, 1997 $ -- 40,487 -- 96,597 937,072
Comprehensive income:
Net income -- -- -- -- 84,050
Other comprehensive income,
net of tax:
Unrealized gains on investment
securities, net of reclassification
adjustment -- -- -- -- --
Exercise of stock options -- -- -- 4,721 --
Purchases of treasury stock -- -- -- -- --
Common stock cash dividends -
$1.60 per share -- -- -- -- (10,652)
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Balance - June 30, 1997 $ - 40,487 - 101,318 1,010,470
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- --------------------------------------------------------------------------------------------------------------------------------
1998
Balance - January 1, 1998 $ -- 40,487 -- 103,233 1,092,106
Comprehensive income:
Net income -- -- -- -- 93,654
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment -- -- -- -- --
Exercise of stock options -- 11 -- 837 --
Purchases of treasury stock -- -- -- -- --
Acquisition of ONBANCorp:
Common stock issued -- 10 -- 364,427 --
Fair value of stock options -- -- -- 19,424 --
Deferred bonus plan:
Deferred stock awards, net -- -- 3,869 5 --
Dividend equivalents -- -- 16 -- (16)
Common stock cash dividends -
$1.80 per share -- -- -- -- (13,345)
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Balance - June 30,1998 $ - 40,508 3,885 487,926 1,172,399
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Accumulated
other
comprehensive Treasury
Dollars in thousands, except per share income stock Total
- ------------------------------------------------------------------------------------------------------------------
Balance - January 1, 1997 (2,485) (166,012) $ 905,659
Comprehensive income:
Net income -- -- 84,050
Other comprehensive income,
net of tax:
Unrealized gains on investment
securities, net of reclassification
adjustment 5,913 -- 5,913
----------
89,963
Exercise of stock options -- 10,048 14,769
Purchases of treasury stock -- (48,702) (48,702)
Common stock cash dividends -
$1.60 per share -- -- (10,652)
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Balance - June 30, 1997 3,428 (204,666) $ 951,037
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1998
Balance - January 1, 1998 12,016 (217,576) $1,030,266
Comprehensive income:
Net income -- -- 93,654
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment (5,374) -- (5,374)
----------
88,280
Exercise of stock options -- 16,551 17,399
Purchases of treasury stock -- (74,711) (74,711)
Acquisition of ONBANCorp:
Common stock issued -- 223,382 587,819
Fair value of stock options -- -- 19,424
Deferred bonus plan:
Deferred stock awards, net -- 2 3,876
Dividend equivalents -- -- --
Common stock cash dividends -
$1.80 per share -- -- (13,345)
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Balance - June 30,1998 6,642 (52,352) $1,659,008
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CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES
(Unaudited)
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Six months ended June 30
Dollars in thousands 1998 1997
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Beginning balance $ 274,656 270,466
Provision for possible credit losses 25,200 22,000
Allowance obtained through acquisition 27,905 --
Net charge-offs
Charge-offs (25,292) (29,883)
Recoveries 8,342 9,350
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Total net charge-offs (16,950) (20,533)
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Ending balance $ 310,811 271,933
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6
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
In May 1998, First Empire State Corporation ("First Empire") changed its name to
M&T Bank Corporation ("M&T"). The consolidated financial statements of M&T and
subsidiaries ("the Company") were compiled in accordance with the accounting
policies set forth in Note 1 of Notes to Financial Statements on pages 39
through 41 of the Company's 1997 Annual Report to stockholders, except as
described below. In the opinion of management, all adjustments necessary for a
fair presentation have been made and were all of a normal recurring nature.
2. Earnings per share
The computations of basic earnings per share follow:
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
(in thousands, except per share)
Income available to common stockholders:
Net income $44,699 42,791 93,654 84,050
Weighted-average shares
outstanding (including common
stock issuable) 8,051 6,627 7,363 6,656
Basic earnings per share $ 5.55 6.46 12.72 12.63
The computations of diluted earnings per share follow:
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
(in thousands, except per share)
Income available to common
stockholders $44,699 42,791 93,654 84,050
Weighted-average shares
outstanding (including common
stock issuable) 8,051 6,627 7,363 6,656
Plus: incremental shares from
assumed conversions of
stock options 358 301 336 358
------ ------ ------ ------
Adjusted weighted-average shares
outstanding 8,409 6,928 7,699 7,014
Diluted earnings per share $ 5.32 6.17 12.16 11.98
3. Comprehensive income
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components. Financial statements presented for periods prior to 1998 are
required to be reclassified to reflect application of the provisions of SFAS No.
130.
-7-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Comprehensive income, continued
The following table displays the components of other comprehensive income:
Six months ended June 30, 1998
Before-tax Income
amount taxes Net
Unrealized losses on investment securities:
Unrealized holding
losses during period(a) $(8,729) 3,546 (5,183)
Less: reclassification
adjustment for gains
realized in net income 322 (131) 191
------- ----- ------
Net unrealized losses $(9,051) 3,677 (5,374)
====== ===== ======
(a) Including the effect of the contribution of appreciated investment
securities described in note 4.
Six months ended June 30, 1997
Before-tax Income
amount taxes Net
Unrealized gains on investment securities:
Unrealized holding
gains during period $ 9,786 (4,011) 5,775
Add: reclassification
adjustment for losses
realized in net income 233 95 138
------ ----- -----
Net unrealized gains $10,019 (4,106) 5,913
====== ===== =====
4. Contribution of appreciated investment securities
In January 1998, M&T contributed appreciated investment securities with a fair
value of $24.6 million to an affiliated, tax-exempt private charitable
foundation. As a result of this transfer, the Company recognized tax-exempt
other income of $15.3 million and incurred charitable contributions expense of
$24.6 million. These amounts are included in the Consolidated Statement of
Income in "Other revenues from operations" and "Other costs of operations,"
respectively. The transfer provided an income tax benefit of approximately $10.0
million and, accordingly, resulted in an after-tax increase in net income of
$0.7 million.
5. Acquisition of ONBANCorp, Inc.
On April 1, 1998, M&T consummated the merger ("Merger") of ONBANCorp, Inc.
("ONBANCorp") with and into Olympia Financial Corp.("Olympia"), a wholly owned
subsidiary of M&T. Following the Merger, OnBank & Trust Co., Syracuse, New York,
and Franklin First Savings Bank, Wilkes-Barre, Pennsylvania, both wholly owned
subsidiaries of ONBANCorp, were merged with and into Manufacturers and Traders
Trust Company ("M&T Bank"), M&T's principal banking subsidiary.
After application of the election, allocation and proration procedures contained
in the merger agreement with ONBANCorp, M&T paid $266.3 million in cash and
issued 1,429,998 shares of common stock in exchange for the ONBANCorp common
shares outstanding at the time of acquisition. In addition, based on the merger
agreement and the exchange ratio provided for therein, M&T converted outstanding
and unexercised stock options granted by ONBANCorp into options to purchase
61,772 shares of M&T common stock. The purchase price of the transaction was
approximately $873.6 million based on the cash paid to ONBANCorp stockholders,
the market price of M&T common shares on October 28, 1997 before the terms of
the Merger were agreed to and announced by M&T and ONBANCorp, and the estimated
fair
-8-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. Acquisition of ONBANCorp, Inc., continued
value of ONBANCorp stock options converted into M&T stock options.
Acquired assets, loans and deposits of ONBANCorp on April 1, 1998 totaled
approximately $5.5 billion, $3.0 billion and $3.8 billion, respectively. The
transaction has been accounted for as a purchase and, accordingly, operations
acquired from ONBANCorp have been included in the Company's financial results
since the acquisition date. In connection with the acquisition, the Company
recorded approximately $501 million of goodwill and $61 million of core deposit
intangible. The goodwill is being amortized on a straight-line basis over twenty
years and the core deposit intangible is being amortized on an accelerated basis
over ten years. The Company incurred expenses related to systems conversions and
other costs of integrating and conforming the acquired operations with and into
the Company of approximately $16.7 million and $18.4 million during the three
and six month periods ended June 30, 1998, respectively. The Company expects to
incur additional integration costs during the remainder of 1998 which will be
expensed as incurred.
Presented below is certain pro forma information as if ONBANCorp had been
acquired on January 1, 1997. These results combine the historical results of
ONBANCorp into the Company's Consolidated Statement of Income and, while
certain adjustments were made for the estimated impact of purchase accounting
adjustments and other acquisition-related activity, they are not necessarily
indicative of what would have occurred had the acquisition taken place at
that time. In particular, expenses related to systems conversions and other
costs of integration are included in the 1998 periods in which such costs
were incurred and, additionally, the Company expects to achieve further
operating cost savings as a result of the Merger which are not reflected in
the pro forma amounts presented below.
Pro forma
Six months ended June 30
1998 1997
(in thousands, except per share)
Interest income $714,756 $691,102
Other income 143,874 110,087
Net income 83,736 85,543
Diluted earnings per common share $ 10.33 $ 10.50
6. Borrowings
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"), a Delaware business trust organized by the Company on May 30,
1997, issued $100 million of 8.277% preferred capital securities. As a result of
the ONBANCorp acquisition, the Company assumed responsibility for similar
preferred capital securities previously issued by a special-purpose subsidiary
of ONBANCorp. In February 1997, OnBank Capital Trust I ("OnBank Trust I" and,
together with Trust I and Trust II, the "Trusts"), a Delaware business trust
organized by ONBANCorp on January 24, 1997, issued $60 million of 9.25%
preferred capital securities.
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 Distribution
Trust Rate Dates
Trust I 8.234% February 1 and August 1
Trust II 8.277% June 1 and December 1
OnBank Trust I 9.25% February 1 and August 1
-9-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Borrowings, continued
The common securities of Trust I and Trust II are wholly owned by M&T and the
common securities of OnBank Trust I are wholly owned by Olympia. The common
securities of each trust ("Common 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 the Company'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 M&T
in the case of Trust I and Trust II and Olympia in the case of OnBank Trust I:
Capital Common Junior Subordinated
Trust Securities Securities 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.
OnBank
Trust I $60 million $1.856 million $61.856 million aggregate
liquidation amount of 9.25%
Junior Subordinated Debentures
due February 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 M&T, in the case of Trust I and Trust II, or
Olympia, in the case of OnBank Trust I, exercise the 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 respective
Capital Securities will be deferred for a comparable period. During an
extended interest period, M&T and/or Olympia may not pay dividends or
distributions on, or repurchase, redeem or acquire any shares of the
respective company's capital stock. The agreements governing the Capital
Securities, in the aggregate, provide a full, irrevocable and unconditional
guarantee by M&T in the case of Trust I and Trust II and Olympia in the case
of OnBank Trust I of the payment of distributions on, the redemption of, and
any liquidation distribution with respect to the Capital Securities. The
obligations under such guarantee and the Capital Securities are subordinate
and junior in right of payment to all senior indebtedness of M&T and Olympia.
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 OnBank Trust I, and June 1, 2007 in the case of Trust II)
contemporaneously with the Company'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 M&T's option in the
case of Trust I and Trust II
-10-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Borrowings, continued
and Olympia's option in the case of OnBank Trust I (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 their 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. In the case of OnBank Trust I, such percentage adjusts annually and ranges
from 104.625% at February 1, 2007 to 100.463% 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.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Effective May 29, 1998, First Empire State Corporation changed its name to M&T
Bank Corporation ("M&T"). M&T's common stock began trading on the New York Stock
Exchange under the symbol "MTB" on June 1, 1998.
On April 1, 1998, M&T completed its acquisition of ONBANCorp, Inc.
("ONBANCorp"), a bank holding company headquartered in Syracuse, New York.
Immediately after the acquisition, ONBANCorp's two banking subsidiaries,
OnBank & Trust Co. in Syracuse, which operated 59 offices in upstate New
York, and Franklin First Savings Bank in Wilkes-Barre, Pennsylvania, which
operated 19 offices in northeastern Pennsylvania, were merged with and into
Manufacturers and Traders Trust Company ("M&T Bank"), M&T's principal banking
subsidiary. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the operations acquired from ONBANCorp have been
included in the financial results of M&T and its consolidated subsidiaries
("the Company") since the acquisition date. ONBANCorp's stockholders received
$266.3 million in cash and 1,429,998 shares of M&T common stock in exchange
for ONBANCorp shares outstanding at the time of acquisition. A summary of
assets acquired and liabilities assumed on April 1, 1998 in connection with
the ONBANCorp transaction follows (in thousands):
Assets
Investment securities $1,576,604
Loans and leases, net of unearned discount 2,970,306
Allowance for loan loss (27,905)
---------
Loans and leases, net 2,942,401
Goodwill and core deposit intangible 562,290
Other assets 410,666
---------
Total assets $5,491,961
Liabilities
Deposits $3,767,729
Short-term borrowings 543,734
Long-term borrowings 268,617
Other liabilities 38,331
---------
Total liabilities $4,618,411
In connection with the acquisition, the Company recorded approximately
$562 million of goodwill and core deposit intangible, and incurred significant
nonrecurring expenses related to systems conversions and other costs of
integrating and conforming the acquired operations with and into M&T Bank. Such
expenses totaled $16.7 million and $18.4 million during the three and six month
periods ended June 30, 1998, respectively. The Company expects to incur
additional integration costs during the remainder of 1998 which will be expensed
as incurred.
M&T's net income for the second quarter of 1998 was $44.7 million, up 4%
from $42.8 million in the second quarter of 1997. Diluted earnings per common
share were $5.32 in the recent quarter, a decrease of 14% from $6.17 in the
year-earlier quarter. Net income was $49.0 million or $7.01 of diluted earnings
per share in the first quarter of 1998. Basic earnings per share also declined
14% to $5.55 in the second quarter of 1998 from $6.46 in the corresponding 1997
quarter. Basic earnings per share were $7.34 in the initial 1998 quarter. The
after-tax impact on the second quarter of 1998 of nonrecurring expenses
associated with merging the operations of ONBANCorp into the Company was $11.3
million or $1.34 of diluted earnings per share and $1.40 of basic earnings per
share. For the six months ended June 30, 1998, net income was $93.7 million or
$12.16 per diluted share, up 11% and 2%, respectively, from $84.1 million or
$11.98 per share during the first half of 1997. Basic earnings per share were
$12.72 in the first six months of 1998, up from $12.63 in the corresponding 1997
period. Nonrecurring merger-related
-12-
expenses lowered net income during the first half of 1998 by $12.3 million and
diluted and basic earnings per share by $1.59 and $1.66, respectively.
The annualized rate of return on average assets for the Company in the
second quarter of 1998 was .92%, compared with 1.31% and 1.41% in the second
quarter of 1997 and the first quarter of 1998, respectively. The annualized rate
of return on average common stockholders' equity was 10.77% in the recent
quarter, down from 18.55% in the year-earlier quarter and 18.86% in the initial
1998 quarter. During the first six months of 1998, the annualized rates of
return on average assets and average common stockholders' equity were 1.12% and
13.89%, respectively, compared with 1.30% and 18.40%, respectively, in the
corresponding 1997 period. Excluding the impact of merger-related expenses, the
annualized returns on average assets and average common equity were 1.15% and
13.50%, respectively, during the second quarter of 1998 and 1.27% and 15.70%,
respectively, during 1998's first half.
Cash Operating Results
As a result of the acquisition of ONBANCorp on April 1, 1998 and, to a
significantly lesser extent, acquisitions of other entities in prior years, M&T
had recorded as assets at June 30, 1998 goodwill and core deposit intangible
totaling $566.9 million. Since the amortization of goodwill and core deposit
intangible does not result in a cash expense, M&T believes that reporting its
operating results on a "cash" basis (which excludes the after-tax effect of
amortization of goodwill and core deposit intangible and the related asset
balances) represents a more relevant measure of financial performance and better
reflects the cash return on the investments made by M&T to improve and expand
its franchise. Cash basis data presented herein do not exclude the effect of
non-cash operating expenses such as depreciation, provision for possible credit
losses, or deferred income taxes associated with the results of operations.
Cash net income, excluding nonrecurring merger-related expenses, was
$65.4 million in the second quarter of 1998, up 48% from $44.4 million in the
year-earlier quarter. On the same basis, diluted earnings per share for the
recent quarter were $7.78, an increase of 22% from $6.40 in the second quarter
of 1997. Cash net income and diluted earnings per share, excluding one-time
expenses, were $51.4 million and $7.37, respectively, in the first quarter of
1998. For the first half of 1998, excluding merger-related expenses, cash net
income and diluted cash earnings per share were $116.9 million and $15.18,
respectively, up 34% and 22%, respectively, from $87.1 million and $12.42 in the
corresponding 1997 period.
Cash return on average tangible assets, excluding nonrecurring
merger-related expenses, was an annualized 1.38% in the recent quarter, compared
with 1.36% in the second quarter of 1997 and 1.49% in the initial 1998 quarter.
Cash return on average tangible common equity, also before one-time expenses,
was an annualized 23.50% in the second quarter of 1998, up from 19.70% in the
year-earlier quarter and 20.13% in the first quarter of 1998. For the first six
months of 1998, excluding one-time merger-related expenses, the annualized cash
return on average tangible assets and average tangible common stockholders'
equity was 1.43% and 21.89%, respectively, compared with 1.35% and 19.55%,
respectively, in the corresponding 1997 period. As noted earlier, the after-tax
impact of merger-related expenses on net income and diluted earnings per share
was $11.3 million and $1.34, respectively, in the second quarter of 1998 and
$12.3 million and $1.59, respectively, in 1998's first half. Including the
effect of merger-related expenses, the cash return on average tangible assets
for the three and six month periods ended June 30, 1998 was 1.14% and 1.28%,
respectively, and the cash return on average tangible common stockholders'
equity was 19.45% and 19.60%, respectively.
Taxable-equivalent Net Interest Income
Taxable-equivalent net interest income increased to $178.9 million in the second
quarter of 1998, up $39.3 million or 28% from $139.6 million in the year-earlier
quarter and $35.6 million higher than the $143.2 million earned
-13-
in the first quarter of 1998. The most significant factor contributing to the
improvement in net interest income was growth in average loans and leases.
Average loans and leases increased $4.1 billion, or 38%, to $15.0 billion in the
second quarter of 1998 from $10.8 billion in the year-earlier quarter. Average
loans and leases in the recent quarter were $3.4 billion, or 29%, higher than
the first quarter of 1998. The primary reason for the higher loan balances was
the $3.0 billion of loans obtained on April 1, 1998 in the ONBANCorp
acquisition, including approximately $450 million of commercial loans, $380
million of commercial real estate loans, $1.2 billion of residential mortgage
loans and $930 million of consumer loans. The accompanying table summarizes
quarterly changes in the major components of the loan and lease portfolio.
AVERAGE LOANS AND LEASES
(net of unearned discount)
Percent increase
Dollars in millions (decrease) from
2nd Qtr. 2nd Qtr. 1st Qtr.
1998 1997 1998
-------- -------- ------
Commercial, financial, etc. $ 2,954 31 % 23 %
Real estate - commercial 5,005 22 11
Real estate - consumer 3,946 84 57
Consumer
Automobile 1,386 29 51
Home equity 750 17 15
Credit cards 216 (15) (12)
Other 721 111 89
------ --- --
Total consumer 3,073 33 40
------ --- --
Total $14,978 38 % 29 %
-------- -------- -----
-------- -------- -----
For the first six months of 1998, taxable-equivalent net interest
income was $322.1 million, up from $277.3 million in the corresponding 1997
period. An increase in average loans and leases of $2.5 billion, including
approximately $1.5 billion attributable to the loans acquired in the ONBANCorp
transaction, was the leading factor contributing to this improvement.
Including approximately $1.4 billion acquired in the ONBANCorp
transaction, average investment securities increased to $2.9 billion in the
recent quarter from $1.7 billion in the second quarter of 1997. Holdings of
investment securities averaged $1.6 billion in the first quarter of 1998.
Money-market assets averaged $156 million in 1998's second quarter, compared
with $143 million in the year-earlier quarter and $141 million in the initial
quarter of 1998. In general, the size of the investment securities and
money-market assets portfolios are influenced by such factors as demand for
loans, which generally yield more than investment securities and money-market
assets, ongoing repayments, the levels of deposits, and management of balance
sheet size and resulting capital ratios.
As a result of the changes described herein, average earning assets
increased 42% to $18.0 billion in the second quarter of 1998 from $12.7 billion
in the second quarter of 1997. Average earning assets were $13.4 billion in the
first quarter of 1998 and aggregated $15.7 billion and $12.6 billion for the six
months ended June 30, 1998 and 1997, respectively. The impact of
ONBANCorp-related earning assets on average earning assets in the second quarter
and first six months of 1998 was $4.5 billion and $2.3 billion, respectively.
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 of funding
to the Company and generally carry lower interest rates than wholesale funds of
comparable maturities. The Company's branch network is the principal source of
core deposits. Core deposits include certificates of deposit under $100,000
generated on a nationwide basis by M&T Bank, National Association ("M&T Bank,
N.A."), a wholly owned bank subsidiary of M&T. Core deposits obtained in the
acquisition of ONBANCorp were approximately $2.8 billion on the April 1, 1998
acquisition date. Average core deposits increased to $11.5
-14-
billion in the second quarter of 1998, up from $8.3 billion in the year-earlier
quarter and $8.4 billion in the first quarter of 1998. Average core deposits of
M&T Bank, N.A., were $406 million in the recently completed quarter, compared
with $440 million in the second quarter of 1997 and $433 million in the first
quarter of 1998. The accompanying table provides an analysis of quarterly
changes in the components of average core deposits. For the six months ended
June 30, 1998 and 1997, core deposits averaged $10.0 billion and $8.2 billion,
respectively.
AVERAGE CORE DEPOSITS
Dollars in millions
Percent increase from
2nd Qtr. 2nd Qtr. 1st Qtr.
1998 1997 1998
-------- -------- ------
NOW accounts $ 304 18 % 13 %
Savings deposits 4,718 39 37
Time deposits less than $100,000 4,741 37 39
Noninterest-bearing deposits 1,751 48 38
------ -- --
Total $11,514 39 % 37 %
====== == ==
In addition to core deposits, the Company obtains funding through
domestic time deposits of $100,000 or more, deposits originated through M&T
Bank's offshore branch office, and brokered certificates of deposit. Brokered
deposits are used as an alternative to short-term borrowings to lengthen the
average maturity of interest-bearing liabilities. Brokered deposits averaged
$1.5 billion during the recent quarter and totaled $1.5 billion at June 30,
1998, compared with an average balance of $1.3 billion during the comparable
1997 period and a total balance of $1.5 billion at June 30, 1997. Brokered
deposits also averaged $1.3 billion in the initial quarter of 1998. The weighted
average remaining term to maturity of brokered deposits at June 30, 1998 was
2.08 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 borrowings from banks,
securities dealers, Federal Home Loan Banks ("FHLB") and others as sources of
funding. Short-term borrowings averaged $2.2 billion in the recent quarter
(including $476 million of borrowings assumed as a result of the ONBANCorp
acquisition), compared with $749 million in the second 1997 quarter and $1.4
billion in the first quarter of 1998. Long-term borrowings averaged $695 million
and $355 million in the second quarter of 1998 and 1997, respectively, and $428
million in the first quarter of 1998. During the second 1998 quarter, average
long-term borrowings included $268 million of borrowings obtained in the
ONBANCorp transaction. Long-term borrowings include $250 million of trust
preferred securities issued by two special-purpose subsidiaries of M&T during
the first and second quarters of 1997 and similar securities with a carrying
value of $69 million that were issued in the first quarter of 1997 by a
special-purpose subsidiary of ONBANCorp, as well as $175 million of subordinated
capital notes issued in prior years by M&T Bank.
Changes in the composition of the Company's earning assets and
interest-bearing liabilities, as well as changes in interest rates and spreads,
can impact net interest income. Net interest spread, or the difference between
the taxable-equivalent yield on earning assets and the rate paid on
interest-bearing liabilities, was 3.44% in the second quarter of 1998, compared
with 3.73% in the year-earlier quarter. The yield on earning assets decreased 28
basis points (hundredths of one percent) to 8.10% in the second quarter of 1998
from 8.38% in the second quarter of 1997. The decrease in the recent quarter's
yield was primarily due to lower yielding residential real estate loans,
consumer loans and investment securities acquired in the ONBANCorp transaction.
The adverse impact of the ONBANCorp-related earning assets on M&T's yield on
earning assets for the second quarter of 1998 was approximately 24 basis points.
The rate paid on interest-bearing liabilities in the second quarter of 1998 was
4.66%,
-15-
compared with 4.65% in the corresponding 1997 quarter. The net interest spread
was 3.68% in the first quarter of 1998 when the yield on earning assets was
8.43% and the rate paid on interest-bearing liabilities was 4.75%.
The contribution to net interest margin, or taxable equivalent net
interest income expressed as an annualized percentage of average earning assets,
of interest-free funds was .55% in the second quarter of 1998, down from .68% in
the corresponding 1997 quarter and .67% in the first quarter of 1998. Average
interest-free funds, which include noninterest-bearing demand deposits and
stockholders' equity, totaled $2.1 billion in the second quarter of 1998, up
from $1.9 billion a year earlier and in the initial 1998 quarter. The decline in
the contribution to net interest margin of interest-free funds was due, in part,
to the goodwill and core deposit intangible assets recorded in conjunction with
the ONBANCorp acquisition, which averaged $557 million during the recent
quarter, and the Company's ownership of bank-owned life insurance which averaged
$322 million. Although there was no similar investment during the second quarter
of 1997, bank-owned life insurance averaged $204 million during the first
quarter of 1998. Increases in the cash surrender value of bank-owned life
insurance are not included in interest income, but rather are recorded in "other
revenue from operations." These two noninterest-earning assets mitigated much of
the benefit derived from increases in noninterest-bearing deposits and
stockholders' equity resulting from the ONBANCorp transaction.
Due to the changes described above, the Company's net interest margin
was 3.99% in 1998's second quarter, compared with 4.41% in the comparable
quarter of 1997 and 4.35% in the initial 1998 quarter. During the first six
months of 1998 and 1997, the net interest margin was 4.14% and 4.45%,
respectively.
The Company utilizes interest rate swap agreements as part of the
management of interest rate risk to modify the repricing characteristics of
certain portions of the loan and deposit portfolios. Revenue and expense arising
from these agreements are reflected in either the yields earned on loans or, as
appropriate, rates paid on interest-bearing deposits and borrowings. The
notional amount of interest rate swap agreements used as part of the Company's
management of interest rate risk in effect at June 30, 1998 and 1997 was $2.5
billion and $2.9 billion, respectively. 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 the terms of a $33 million swap, the Company pays a fixed rate of
interest and receives a variable rate. At June 30, 1998, the weighted average
rates to be received and paid under interest rate swap agreements were 6.32% and
5.67%, respectively. As of June 30, 1998, the Company had also entered into
forward-starting swaps with an aggregate notional amount of $205 million in
which the Company will pay a fixed rate of interest and receive a variable rate,
and $20 million in which the Company will pay a variable rate of interest and
receive a fixed rate. Such forward-starting swaps had no effect on the Company's
net interest income through June 30, 1998. The average notional amounts of
interest rate swaps and the related effect on net interest income and margin are
presented in the accompanying table.
-16-
INTEREST RATE SWAPS
Dollars in thousands
Three months ended June 30
-----------------------------------------------
1998 1997
---------------------- --------------------
Amount Rate * Amount Rate *
---------- ------ ---------- ------
Increase (decrease) in:
Interest income $ 408 .01 % $ (129) -- %
Interest expense (3,129) (.08) (3,417) (.13)
---------- ----------
Net interest
income/margin $ 3,537 .08 % $ 3,288 .10 %
---------- ------ ---------- ------
---------- ------ ---------- ------
Average notional
amount ** $2,457,962 $2,620,422
---------- ----------
---------- ----------
Six months ended June 30
-----------------------------------------------
1998 1997
---------------------- --------------------
Amount Rate * Amount Rate *
---------- ------ --------- ------
Increase (decrease) in:
Interest income $ 690 - % $ 48 -- %
Interest expense (6,334) (.09) (6,625) (.12)
---------- ---------
Net interest
income/margin $ 7,024 .09 % $ 6,673 .11 %
---------- ------ --------- ------
---------- ------ --------- ------
Average notional
amount ** $2,526,659 $2,454,677
---------- ---------
---------- ---------
* Computed as an annualized percentage of average earning assets or
interest-bearing liabilities.
** Excludes forward-starting interest rate swaps.
The Company estimates that as of June 30, 1998 it would have received
approximately $18 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 recorded in the consolidated financial statements.
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. Deposits and borrowings, maturities of money-market
assets, repayments of loans and investment securities, and cash generated from
operations, such as net interest income and fees collected for services, provide
the Company with other sources of liquidity. Through membership in the FHLB, as
well as other available borrowing facilities, M&T's banking subsidiaries have
access to additional funding sources. M&T utilizes dividend payments from its
banking subsidiaries, which are subject to various regulatory limitations, to
pay dividends, repurchase treasury stock, and fund debt service and other
operating expenses. The proceeds from $250 million of junior subordinated debt
issued to two special-purpose subsidiaries provided additional funds to M&T in
1997. M&T also maintains a $25 million line of credit with an unaffiliated
commercial bank, all of which was available for borrowing at June 30, 1998.
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
M&T 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.
-17-
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. 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 the Company's sensitivity to changes in the market values
of financial instruments resulting from changing interest rates.
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 actions, 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 displays the estimated impact on net interest
income from financial instruments held for non-trading purposes resulting from
changes in interest rates during the first modeling year.
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
(dollars in thousands) Calculated
increase (decrease)
in projected net
Changes in Interest Rates interest income
- ------------------------- -------------------
+200 basis points $ 1,207
+100 basis points 2,435
- -100 basis points (2,207)
- -200 basis points (3,571)
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 interest
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.
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
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 trading activities. However, the Company
generally mitigates exposure arising from trading
-18-
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 June 30, 1998 was not considered material.
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 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
June 30, 1998 was adequate to absorb credit losses from existing loans and
leases.
The provision for possible credit losses in the second quarter of 1998
was $13.2 million, up from $11.0 million in the second quarter of 1997 and $12.0
million in 1998's first quarter. Net loan charge-offs totaled $9.0 million in
the second quarter of 1998, compared with $12.6 million in the year-earlier
quarter and $7.9 million in 1998's initial quarter. Net charge-offs as an
annualized percentage of average loans and leases were .24% in the recent
quarter, compared with .47% in the corresponding 1997 quarter and .28% in the
first quarter of 1998. Net charge-offs of consumer loans in the recent quarter
were $9.3 million, compared with $9.7 million in the second quarter of 1997 and
$7.8 million in 1998's initial quarter. Net consumer loan charge-offs as an
annualized percentage of average consumer loans and leases were 1.21% in the
recent quarter, compared with 1.68% in the second quarter of 1997 and 1.45% in
1998's first quarter. Net charge-offs of credit card balances included in net
consumer loan charge-offs were $4.6 million and $5.1 million in the second
quarter of 1998 and 1997, respectively, and $4.5 million in the first quarter of
1998. For the six months ended June 30, 1998 and 1997, the provision for
possible credit losses was $25.2 million and $22.0 million, respectively.
Through June 30, net charge-offs were $17.0 million in 1998 and $20.5 million in
1997, representing .26% and .38%, respectively, of average loans and leases.
Consumer loan net charge-offs totaled $17.1 million and $18.5 million during the
six months ended June 30, 1998 and 1997, respectively. Net credit card
charge-offs were $9.2 million during the first half of 1998 and $9.9 million
during the corresponding 1997 period.
Including $38.4 million of loans obtained in the acquisition of
ONBANCorp, nonperforming loans were $127.2 million or .83% of total loans and
leases outstanding at June 30, 1998, compared with $97.1 million or .88% at June
30, 1997 and $70.0 million or .58% at March 31, 1998. Nonperforming commercial
real estate loans totaled $24.8 million at June 30, 1998, $29.2 million at June
30, 1997 and $10.7 million at March 31, 1998. Nonperforming commercial real
estate loans include loans secured by properties located in the New York City
metropolitan area of $3.6 million at June 30, 1998, $11.9 million at June 30,
1997 and $206 thousand at March 31, 1998. Nonperforming consumer loans and
leases totaled $30.0 million at June 30, 1998, compared with $16.4 million at
June 30, 1997 and $19.5 million at March 31, 1998. As a percentage of consumer
loan balances outstanding, nonperforming consumer loans and leases were .99% at
June 30, 1998 compared with .71% at June 30, 1997 and .90% at March 31, 1998.
Assets acquired in settlement of defaulted loans were $12.2 million at June 30,
1998, $9.7 million at June 30, 1997 and $7.8 million at March 31, 1998.
A comparative summary of nonperforming assets and certain credit
quality ratios is presented in the accompanying table.
-19-
NONPERFORMING ASSETS
Dollars in thousands
1998 Quarters 1997 Quarters
Second First Fourth Third Second
Nonaccrual loans $78,527 40,737 38,588 50,369 62,525
Loans past due
90 days or more 41,686 24,449 30,402 29,979 31,810
Renegotiated loans 7,025 4,819 11,660 5,413 2,741
------- ------ ------ ------ ------
Total nonperforming loans 127,238 70,005 80,650 85,761 97,076
Real estate and other assets 12,211 7,828 8,413 8,239 9,698
------- ------ ------ ------ ------
Total nonperforming assets $139,449 77,833 89,063 94,000 106,774
======= ====== ====== ====== =======
Government guaranteed
nonperforming loans* $ 16,062 14,787 17,712 17,853 20,656
======= ====== ====== ====== ======
Nonperforming loans
to total loans and leases,
net of unearned discount .83% .58% .70% .76% .88%
Nonperforming assets
to total net loans and
other real estate owned .91% .65% .77% .83% .97%
=== === === === ===
* Included in total nonperforming loans.
The allowance for possible credit losses was $310.8 million, or 2.04%
of total loans and leases at June 30, 1998, compared with $271.9 million or
2.48% a year earlier, $274.7 million or 2.39% at December 31, 1997 and $278.7
million or 2.32% at March 31, 1998. The ratio of the allowance for possible
credit losses to nonperforming loans was 244% at the most recent quarter-end,
compared with 280% a year earlier, 341% at December 31, 1997 and 398% at March
31, 1998.
Other Income
Reflecting strong growth in mortgage banking revenues, fees for trust and
investment services, and approximately $7.6 million of revenues associated with
operations obtained in the ONBANCorp acquisition, other income totaled $66.4
million in the second quarter of 1998, up 51% from $44.0 million in the
year-earlier quarter. Other income was $55.1 million in the first quarter of
1998 excluding $15.3 million of tax-exempt other income the Company recognized
in connection with the contribution of appreciated investment securities with a
fair value of $24.6 million to an affiliated, tax-exempt private charitable
foundation. As a result of the transfer, the Company also incurred $24.6 million
of charitable contributions expense and realized income tax benefits of $10.0
million. Also excluding the effect of the transfer, other income was $121.5
million in the first half of 1998, up 35% from $89.9 million in the comparable
1997 period.
Including $2.1 million of revenues associated with acquired ONBANCorp
operations, mortgage banking revenues totaled $18.5 million in the recent
quarter, compared with $12.2 million in the year-earlier quarter and $13.9
million in the first quarter of 1998. Residential mortgage loan servicing fees
were $7.8 million in the second quarter of 1998, up from $6.2 million in the
second quarter of 1997 and $7.2 million in the initial 1998 quarter. Gains from
sales of residential mortgage loans and loan servicing rights were $9.9 million
in the recently completed quarter, compared with $5.4 million in the
year-earlier quarter and $5.9 million in 1998's first quarter. During the recent
quarter, the Company completed bulk sales of servicing rights related to
approximately $400 million of loans sold to investors in prior periods resulting
in a gain of $1.2 million. Due, in part, to generally favorable interest rates
for borrowers, during the second quarter of 1998 residential mortgage loans
originated for sale to other investors totaled $953 million, up from $505
million in 1997's second quarter and $775 million in the initial 1998 quarter.
Residential mortgage loans serviced for others
-20-
totaled $8.1 billion and $6.5 billion at June 30, 1998 and 1997, respectively.
Capitalized servicing assets were $67 million and $49 million at June 30, 1998
and 1997, respectively. Loans serviced for others and the related capitalized
servicing assets obtained in the ONBANCorp acquisition were $988 million and $16
million, respectively, at April 1, 1998.
Service charges on deposit accounts increased to $14.2 million in the
second quarter of 1998, up from $10.7 million in the corresponding quarter of
the previous year and $11.2 million in the first quarter of 1998. Fees for
services provided to customers in the areas formerly served by ONBANCorp were
$2.6 million in the recent quarter. Largely due to higher revenues for
management, custody and securities clearing services, trust income was $9.9
million in the second quarter of 1998, compared with $7.2 million in last year's
second quarter. Trust income was $9.5 million during the first three months of
1998. Merchant discount and credit card fees were $4.3 million in the recent
quarter, compared with $4.2 million in both the year-earlier period and in the
initial 1998 quarter. Trading account and foreign exchange activity resulted in
gains of $506 thousand in the second quarter of 1998, compared with gains of
$596 thousand and $1.8 million in the second quarter of 1997 and the first
quarter of 1998, respectively. Other revenue from operations totaled $18.7
million in the recent quarter, compared with $9.2 million in the corresponding
quarter of 1997 and $14.5 million in the first quarter of 1998 (excluding the
$15.3 million of tax-exempt income related to the transfer of securities to the
Company's affiliated foundation). Included in other revenue from operations in
1998's second quarter was $1.5 million relating to ONBANCorp-related activities.
The remaining increase from the year-earlier period was due largely to $4.5
million of tax-exempt income earned from the Company's ownership of bank-owned
life insurance, higher fees earned from the sales of mutual funds and annuities
of $1.2 million, $1.1 million in fees for providing automated teller machine
services and higher miscellaneous loan fees of $1.0 million.
For the six-month period ended June 30, 1998, mortgage banking revenues
totaled $32.3 million, up 33% from $24.2 million in the corresponding 1997
period. Compared with the first half of 1997, mortgage servicing fees and gains
from sales of loans and loan servicing rights in 1998 were up by $2.9 million
and $4.9 million, respectively. Compared with the same period in 1997, service
charges on deposit accounts increased 20% to $25.4 million during the first six
months of 1998, while trust income increased 37% to $19.4 million. As a result
of the factors discussed in the next paragraph, merchant discount and credit
card fees decreased 9% to $8.6 million from $9.5 million in the similar period
of 1997. Trading account and foreign exchange activity resulted in gains of $2.3
million for the initial half of 1998, compared with gains of $1.9 million during
the first six months of 1997. Excluding the effect of the transfer of securities
to the affiliated charitable foundation, other revenues from operations
increased 73% to $33.2 million in the first six months of 1998 from $19.2
million in the comparable 1997 period. The increase resulted largely from $7.4
million of tax-exempt income earned from bank-owned life insurance, $2.3 million
of increased loan fees, $1.6 million in automated teller machine service fees
and a $1.5 million increase in fees earned from the sales of mutual funds and
annuities. These latter fees totaled $8.9 million during the first half of 1998.
Due to poorer than expected results, during 1997 and 1998 the
Company terminated all of its co-branded credit card programs. In addition,
during the recently completed quarter, M&T agreed to sell its retail credit
card business. The sale occurred on July 31, 1998 and resulted in a third
quarter pre-tax gain of approximately $3 million. Following the sale, M&T
continues to offer credit cards to customers in the name of M&T Bank, but the
cardholder accounts are owned and serviced by the purchaser of that business.
Credit card balances outstanding were $205.5 million, or 1.35% of total loans
and leases, at June 30, 1998. Total credit card fees included in merchant
discount and credit card fees in the first half of 1998 were $6.9 million,
compared with $7.9 million in the corresponding 1997 period. Including
internal allocations of the provision for possible credit losses, interest
expense and other operating expenses, net income from credit card operations
was less than 1.5% of the Company's net income during the first six months of
1998.
-21-
Other Expense
Excluding the impact of the $24.6 million of contributions expense already
discussed, amortization of goodwill and core deposit intangible, and
nonrecurring merger-related expenses, other expense totaled $127.4 million in
the second quarter of 1998, up 27% from $100.2 million in the second quarter of
1997 and 20% from $105.8 million in the first quarter of 1998. On the same
basis, through the first half of 1998, other expense totaled $233.2 million, an
increase of 15% from $202.7 million in the comparable 1997 period. Nonrecurring
merger-related expenses were $16.7 million and $1.6 million during the second
and first quarters of 1998, respectively. Increases in operating expense levels
compared with prior periods is predominately the effect of combining ONBANCorp
with the Company. Since nearly all operating systems and support operations of
ONBANCorp were converted to or combined with those of the Company during the
recent quarter, the Company's operating expenses cannot be precisely divided
between or attributed directly to ONBANCorp or the Company as it existed prior
to the merger.
Salaries and employee benefits expense was $69.9 million in the recent
quarter, 31% higher than the $53.6 million in the corresponding 1997 quarter,
and 20% higher than the $58.3 million in the first quarter of 1998. For the
first six months of 1998, salaries and employee benefits expense increased 18%
to $128.3 million from $109.1 million in the corresponding 1997 period. Salaries
and employee benefits relating to the operations acquired from ONBANCorp were
the predominant factor for the increased expense level. Other factors
contributing to the higher expenses were merit salary increases and higher costs
associated with incentive-based compensation arrangements, stock appreciation
rights and employee benefits.
Excluding the previously mentioned $24.6 million of contributions
expense recognized in the first quarter of 1998, one-time merger-related
expenses and amortization of goodwill and core deposit intangible, nonpersonnel
expense totaled $58.8 million in the second quarter of 1998, up from $46.7
million in the second quarter of 1997 and $47.5 million in the first quarter of
1998. On the same basis, such expenses were $106.3 million during the first six
months of 1998, an increase of 14% from $93.6 million during the corresponding
1997 period. The increases were the result of expenses related to the acquired
operations of ONBANCorp. Partially offsetting these increases were decreases in
co-branded credit card rebate and other operating expenses based on card usage
of $1.5 million and $1.7 million compared with the second quarter of 1997 and
the first quarter of 1998, respectively. Such expenses for the first half of
1998 were $2.6 million, compared with $6.1 million in the corresponding 1997
period.
Capital
Stockholders' equity at June 30, 1998 was $1.7 billion or 8.24% of total assets,
compared with $951 million or 7.08% of total assets a year earlier and $1.0
billion or 7.36% at December 31, 1997. On a per share basis, stockholders'
equity was $207.18 at June 30, 1998, up from $143.64 and $155.86 at June 30 and
December 31, 1997, respectively. Excluding goodwill and core deposit intangible,
net of applicable tax effect, tangible equity per share was $139.37 at June 30,
1998, compared with $140.43 at June 30, 1997 and $153.24 at December 31, 1997.
To complete the acquisition of ONBANCorp on April 1, 1998, M&T issued 1,429,998
shares of common stock to former holders of ONBANCorp common stock and assumed
employee stock options for 61,772 shares of M&T common stock resulting in
additions to stockholders' equity of $587.8 million and $19.4 million,
respectively.
Stockholders' equity at June 30, 1998 reflected a gain of $6.6 million,
or $.83 per share, for the net after-tax impact of unrealized gains on
investment securities classified as available for sale, compared with unrealized
gains of $3.4 million or $.52 per share at June 30, 1997 and $12.0 million or
$1.82 per share at December 31, 1997. Such unrealized gains
-22-
represent the difference, net of applicable income tax effect, between the
estimated fair value and amortized cost of investment securities classified
as available for sale. 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.
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 capital. Core capital includes
the $250 million of trust preferred securities issued by two special-purpose
subsidiaries of M&T in the first and second quarters of 1997 and similar
securities having a carrying value of $69 million issued in February 1997 by a
special-purpose subsidiary of ONBANCorp. As of June 30, 1998, total capital also
included $160 million of subordinated notes issued by M&T Bank in prior years.
Unrealized gains or losses on investment securities are not recognized in
determining regulatory capital. The capital ratios of the Company and its
banking subsidiaries, M&T Bank and M&T Bank, N.A., as of June 30, 1998 are
presented in the accompanying table.
REGULATORY CAPITAL RATIOS
June 30, 1998
M&T Bank Corp. M&T M&T
(Consolidated) Bank Bank, N.A.
------------- ------ ----------
Core capital 9.08% 8.33% 17.73%
Total capital 11.37% 10.65% 18.98%
Leverage 7.40% 6.86% 8.47%
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 less
dividends paid expressed as an annualized percentage of average total
stockholders' equity, was 8.84% during the second quarter of 1998, compared with
16.25% in the second quarter of 1997 and 16.80% in the initial 1998 quarter.
During the second quarter of 1998, M&T acquired 88,438 shares of its
common stock pursuant to, and thereby completing, the repurchase program
announced in February 1997. A total of 303,317 shares were repurchased at an
average cost of $398.27 per share. In May 1998, M&T announced another plan to
repurchase up to 155,133 additional shares for reissuance upon the possible
future exercise of outstanding stock options. As of June 30, 1998, M&T had
repurchased 25,155 common shares pursuant to the latest plan at an average cost
of $515.56 per share. M&T repurchased 150,461 common shares during the first six
months of 1998 at a total cost of $74.7 million.
Year 2000 Initiatives
The "Year 2000" problem relates to the ability of computer and
computer-dependent systems to distinguish date data between the twentieth and
twenty-first centuries. The Company is currently working to resolve the
potential impact of the Year 2000 problem. The risk for the Company is that
all of the corrections and testing will not be made in time for its own
computer, data processing or other computer-dependent systems, and for those
third parties doing business with or providing services to the Company.
Addressing the Year 2000 problem requires that the Company identify,
remediate and test its centalized and distributed computer, data processing
-23-
and other computer-dependent systems that have date sensitive functions.
Management anticipates that the Company's "mission critical" computer
systems, i.e., those which if uncorrected would have a material adverse
impact on the Company, will be Year 2000 compliant by the end of 1998 and has
a planned program to test for such compliance. As a result of completed
testing, management presently believes that approximately one-third of its
centralized computer systems are Year 2000 compliant. The Company is also
engaged in an ongoing process of assessing, correcting and testing its
distributed computer and other computer-dependent systems which may be
affected by the Year 2000 problem. The Company currently expects to make
mission critical distributed computer and other computer-dependent systems
Year 2000 compliant or to replace such non-compliant systems before the new
millenium.
The Company could be adversely affected if its vendors and customers
that supply or rely on data processing systems 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. Specifically, lending
officers have been trained to address Year 2000 issues with customers,
including providing help with assessing customer needs for Year 2000
compliance. Notwithstanding the Company's efforts, a risk remains due to the
uncertainty that such third parties will not be Year 2000 compliant before
the new millennium. For example, the credit quality of commercial and other
loans may be adversely affected by the failure of customers' operating
systems resulting from Year 2000 issues.
Lack of corrective measures by government agencies or service providers
which the Company either receives data from or provides data to could also
have a negative impact on the Company's operations. Additionally, there is
risk to the extent that other third parties that engage in business with the
Company are relying on systems that are not Year 2000 compliant. As a result,
it is possible that if all aspects of Year 2000 issues are not adequately
resolved by each of the entities referred to above, the Company's future
business operations, financial position and results of operations could be
adversely impacted.
The Company's management is monitoring the Company's progress regarding
Year 2000 issues. Management will assess the Company's current Year 2000
remediation plans and develop appropriate contingency plans should any
critical issues not be resolved prior to January 1, 2000.
To date, the Company has spent approximately $2 million in addressing
its potential Year 2000 problems. The Company is continuing to devote
appropriate financial and human resources to resolve its Year 2000 issues in
a timely manner. The Company currently estimates that it will expend an
additional $3 to $5 million in order to address Year 2000 issues. A majority
of the Company's past and future Year 2000 expenses relate to internal costs
and constitute resources that would otherwise have been reallocated within
the Company. Costs associated with Year 2000 issues are recognized as
expenses are incurred.
The preceding discussion of Year 2000 initiatives contains
forward-looking statements as to Year 2000 issues. See also the discussion of
Future Factors under the caption "Forward-Looking Statements," which are
incorporated by reference into the preceding discussion.
Recently issued accounting standards not yet adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as
-24-
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,
an unrecognized firm commitment, an available for sale security, or a foreign
currency denominated forecasted transaction.
The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. An entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. Those methods must be consistent with the entity's approach to
managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of SFAS No. 133 should be as
of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of the statement. Early application of all of the provisions of SFAS No. 133 is
encouraged, but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of the statement. SFAS No. 133 should not be applied
retroactively to financial statements of prior periods.
The Company is currently in the process of analyzing the provisions of
SFAS No. 133. The method of adoption expected to be utilized by the Company
and the impact that adopting the provisions of SFAS No. 133 is expected to
have on the Company's financial statements has yet to be determined.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this quarterly 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. 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. The Company 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; technological,
implementation and financial risks associated with Year 2000 issues; 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.
-25-
- --------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
QUARTERLY TRENDS
1998 Quarters 1997 Quarters
- --------------------------------------------------------------------------------------------------------------------------
Taxable-equivalent basis Second First Fourth Third Second First
- --------------------------------------------------------------------------------------------------------------------------
Earnings and dividends
Amounts in thousands, except per share
Interest income $363,503 277,803 277,166 271,305 265,301 257,029
Interest expense 184,644 134,585 133,270 129,768 125,734 119,321
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 178,859 143,218 143,896 141,537 139,567 137,708
Less: provision for possible credit losses 13,200 12,000 12,000 12,000 11,000 11,000
Other income 66,410 70,396 52,979 50,182 43,983 45,923
Less: other expense 155,004 133,873 110,716 104,706 102,070 104,284
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 77,065 67,741 74,159 75,013 70,480 68,347
Applicable income taxes 30,587 17,245 26,246 27,518 26,329 25,825
Taxable-equivalent adjustment 1,779 1,541 1,613 1,604 1,360 1,263
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 44,699 48,955 46,300 45,891 42,791 41,259
- --------------------------------------------------------------------------------------------------------------------------
Per common share data
Net income
Basic $ 5.55 7.34 7.01 6.96 6.46 6.17
Diluted 5.32 7.01 6.66 6.62 6.17 5.81
Cash dividends $ 1.00 .80 .80 .80 .80 .80
Average common shares outstanding
Basic 8,051 6,666 6,599 6,592 6,627 6,685
Diluted 8,409 6,981 6,955 6,927 6,928 7,100
- --------------------------------------------------------------------------------------------------------------------------
Performance ratios, annualized
Return on
Average assets .92% 1.41% 1.33% 1.36% 1.31% 1.30%
Average common stockholders' equity 10.77% 18.86% 18.25% 18.92% 18.55% 18.24%
Net interest margin on average earning assets 3.99% 4.35% 4.34% 4.35% 4.41% 4.50%
Nonperforming assets to total assets,
at end of quarter .69% .53% .64% .69% .79% .81%
- ---------------------------------------------------------------------------------------------------------------------------
Cash (tangible) operating results (1)
Net income (in thousands) $ 65,445 51,448 47,837 47,428 44,350 42,773
Diluted net income per common share 7.78 7.37 6.88 6.85 6.40 6.02
Annualized return on
Average tangible assets 1.38% 1.49% 1.38% 1.40% 1.36% 1.35%
Average tangible common stockholders' equity 23.50% 20.13% 19.20% 19.98% 19.70% 19.39%
- ---------------------------------------------------------------------------------------------------------------------------
Balance sheet data
Dollars in millions, except per share
Average balances
Total assets $ 19,547 14,055 13,785 13,424 13,148 12,866
Earning assets 17,992 13,357 13,148 12,905 12,700 12,420
Investment securities 2,858 1,614 1,721 1,747 1,715 1,611
Loans and leases, net of unearned discount 14,978 11,602 11,327 11,002 10,842 10,715
Deposits 14,726 10,988 11,262 11,170 10,914 10,454
Stockholders' equity 1,664 1,053 1,007 962 925 917
- --------------------------------------------------------------------------------------------------------------------------
At end of quarter
Total assets $ 20,138 14,570 14,003 13,675 13,441 13,122
Earning assets 18,419 13,778 13,333 13,100 12,903 12,621
Investment securities 2,707 1,530 1,725 1,752 1,708 1,693
Loans and leases, net of unearned discount 15,245 12,033 11,497 11,271 10,980 10,803
Deposits 14,813 11,085 11,163 11,205 11,186 10,533
Stockholders' equity 1,659 1,069 1,030 982 951 912
Equity per common share 207.18 160.06 155.86 149.31 143.64 137.33
Tangible equity per common share 139.37 157.75 153.24 146.40 140.43 133.84
- --------------------------------------------------------------------------------------------------------------------------
Market price per common share
High $ 554 504 468 415 343 1/2 336
Low 480 429 401 335 303 281
Closing 554 499 7/8 465 415 337 320
- --------------------------------------------------------------------------------------------------------------------------
(1)Excludes amortization and balances related to goodwill and core deposit
intangible and nonrecurring merger-related expenses, net of applicable
income tax effects.
-26-
- --------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
1998 Second quarter 1998 First quarter 1997 Fourth quarter
Average Average Average Average Average Average
Average balance in millions; interest in thousands balance Interest rate balance Interest rate balance Interest rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc. $ 2,954 $ 62,026 8.42% 2,393 49,755 8.43% 2,353 49,625 8.37%
Real estate 8,951 184,120 8.23 7,012 148,744 8.49 6,752 145,960 8.65
Consumer 3,073 69,672 9.09 2,197 51,194 9.45 2,222 52,259 9.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 14,978 315,818 8.46 11,602 249,693 8.73 11,327 247,844 8.68
- ------------------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 37 364 3.93 1 6 2.91 1 6 2.80
Federal funds sold and agreements
to resell securities 88 1,247 5.70 127 1,722 5.51 56 772 5.50
Trading account 31 494 6.31 13 169 5.13 43 825 7.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total money-market assets 156 2,105 5.40 141 1,897 5.45 100 1,603 6.36
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,816 27,620 6.10 1,013 15,861 6.35 1,098 17,328 6.26
Obligations of states and political subdivisions 90 1,396 6.25 37 628 6.83 40 672 6.60
Other 952 16,564 6.98 564 9,724 7.00 583 9,719 6.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,858 45,580 6.40 1,614 26,213 6.59 1,721 27,719 6.39
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 17,992 363,503 8.10 13,357 277,803 8.43 13,148 277,166 8.36
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (310) (279) (273)
Cash and due from banks 417 321 322
Other assets 1,448 656 588
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 19,547 14,055 13,785
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 304 1,189 1.57 270 955 1.44 257 897 1.39
Savings deposits 4,718 30,636 2.60 3,446 22,607 2.66 3,483 23,418 2.67
Time deposits 7,686 105,500 5.51 5,753 80,634 5.68 5,978 85,711 5.69
Deposits at foreign office 267 3,562 5.34 247 3,239 5.31 227 3,079 5.37
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 12,975 140,887 4.36 9,716 107,435 4.48 9,945 113,105 4.51
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,207 30,969 5.63 1,353 18,597 5.57 829 11,610 5.56
Long-term borrowings 695 12,788 7.38 428 8,553 8.11 428 8,555 7.93
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 15,877 184,644 4.66 11,497 134,585 4.75 11,202 133,270 4.72
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,751 1,272 1,316
Other liabilities 255 233 260
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 17,883 13,002 12,778
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 1,664 1,053 1,007
Total liabilities and stockholders' equity $ 19,547 14,055 13,785
Net interest spread 3.44 3.68 3.64
Contribution of interest-free funds 0.55 .67 .70
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $ 178,859 3.99% 143,218 4.35% 143,896 4.34%
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes nonaccrual loans.
**Includes available for sale securities at amortized cost. (continued)
-27-
M&T BANK CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
1997 Third quarter 1997 Second quarter
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. $ 2,226 $ 47,527 8.47% 2,260 47,680 8.46%
Real estate 6,468 139,184 8.61 6,265 134,710 8.60
Consumer 2,308 54,025 9.28 2,317 53,347 9.23
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 11,002 240,736 8.68 10,842 235,737 8.72
- ------------------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 63 944 5.91 54 816 6.01
Federal funds sold and agreements
to resell securities 69 952 5.47 64 860 5.40
Trading account 24 414 6.96 25 443 7.10
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Total money-market assets 156 2,310 5.88 143 2,119 5.93
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Investment securities**
U.S. Treasury and federal agencies 1,132 17,959 6.29 1,192 19,002 6.39
Obligations of states and political subdivisions 45 755 6.61 44 728 6.59
Other 570 9,545 6.64 479 7,715 6.46
Total investment securities 1,747 28,259 6.42 1,715 27,445 6.42
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 12,905 271,305 8.34 12,700 265,301 8.38
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (273) (272)
Cash and due from banks 303 307
Other assets 489 413
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 13,424 13,148
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Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 234 803 1.36 259 835 1.30
Savings deposits 3,443 22,746 2.62 3,406 22,495 2.65
Time deposits 6,021 85,889 5.66 5,852 82,254 5.64
Deposits at foreign office 221 2,969 5.32 216 2,873 5.33
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Total interest-bearing deposits 9,919 112,407 4.50 9,733 108,457 4.47
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 641 8,801 5.45 749 10,230 5.48
Long-term borrowings 428 8,560 7.94 355 7,047 7.93
Total interest-bearing liabilities 10,988 129,768 4.69 10,837 125,734 4.65
Noninterest-bearing deposits 1,251 1,181
Other liabilities 223 205
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Total liabilities 12,462 12,223
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Stockholders' equity 962 925
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 13,424 13,148
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Net interest spread 3.65 3.73
Contribution of interest-free funds .70 .68
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Net interest income/margin on earning assets $ 141,537 4.35% 139,567 4.41%
- ------------------------------------------------------------------------------------------------------------------------------------
*Includes nonaccrual loans.
**Includes available for sale securities at amortized cost.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Incorporated by reference to the discussion contained under the caption
"Taxable-equivalent Net Interest Income" in Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
M&T and its subsidiaries are subject in the normal course of business
to various pending and threatened legal proceedings in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate that the aggregate ultimate liability, if any, arising out of
litigation pending against M&T or its subsidiaries will be material to M&T'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 M&T's
consolidated results of operations in any future reporting period.
Item 2. Changes in Securities and Use of Proceeds.
(Not applicable.)
Item 3. Defaults Upon Senior Securities.
(Not applicable.)
Item 4. Submission of Matters to a Vote of Security Holders.
The 1998 Annual Meeting of Stockholders of M&T was held on May 19,
1998. At the 1998 Annual Meeting, stockholders elected twenty-one (21)
directors, all of whom were then serving as directors of M&T, for terms of one
(1) year and until their successors are elected and qualified. The following
table reflects the tabulation of the votes with respect to each director who was
elected at the 1998 Annual Meeting.
Number of Votes
---------------------------------
Nominee For Withheld
- ---------------- --------- --------
William F. Allyn 7,120,854 51,129
Brent D. Baird 7,123,727 48,256
John H. Benisch 7,121,782 50,201
Robert J. Bennett 7,124,425 47,558
C. Angela Bontempo 7,114,112 57,871
Robert T. Brady 7,095,974 76,009
Patrick J. Callan 7,104,088 67,895
Richard E. Garman 7,124,466 47,517
James V. Glynn 7,120,644 51,339
Roy M. Goodman 7,092,296 79,687
Patrick W.E. Hodgson 7,123,487 48,496
Samuel T. Hubbard, Jr. 7,096,089 75,894
Russell A. King 7,116,322 55,661
Lambros J. Lambros 7,124,722 47,261
Wilfred J. Larson 7,120,508 51,475
Peter J. O'Donnell, Jr. 7,120,820 51,163
Jorge G. Pereira 7,124,702 47,281
John L. Vensel 7,120,863 51,120
Herbert L. Washington 7,114,898 57,085
John L. Wehle, Jr. 7,116,592 55,391
Robert G. Wilmers 7,124,623 47,360
At the Annual Meeting, stockholders also approved an amendment to the First
Empire State Corporation Certificate of Incorporation (the "Certificate of
Incorporation") changing the name of First Empire State Corporation to "M&T Bank
Corporation." In addition, stockholders approved an amendment to the M&T Bank
Corporation 1983 Stock Option Plan (the "Stock Option Plan") increasing from
2,000,000 to 2,500,000 the number of shares of M&T Bank Corporation common stock
subject to the Stock Option Plan. The following table presents the tabulation
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of the votes with respect to the amendments to the Certificate of Incorporation
and the Stock Option Plan.
Number of Votes
----------------------------------------------------------------
Broker
For Against Abstain Non-Votes
--- ------- ------- ----------
Certificate
of Incorporation 7,096,666 40,145 35,172 -
Stock Option Plan 5,123,830 1,111,320 42,530 894,303
Item 5. Other Information.
Subsequent Event. On July 31, 1998, M&T completed the sale of its
retail credit card business that is discussed under Item 2 of Part I,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Following the sale, M&T will continue to offer credit cards to
consumers in the name of M&T Bank, but the cardholder accounts will be owned and
serviced by the purchaser of that business.
Stockholder Proposals. If M&T does not receive notice at its principal
executive offices on or before December 10, 1998 of a stockholder proposal for
consideration at the 1999 Annual Meeting of Stockholders, the proxies named by
the M&T Board of Directors with respect to such meeting shall have discretionary
voting authority with respect to such proposal.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report:
Exhibit
No.
3.1 Restated Certificate of Incorporation of M&T Bank Corporation
dated May 29, 1998 (File No. 1-9861). Filed herewith.
3.2 By-Laws of M&T Bank Corporation as last amended on May 19, 1998
(File No. 1-9861). Filed herewith.
10.2 M&T Bank Corporation 1983 Stock Option Plan, as amended and
restated (File No. 1-9861). Filed herewith.
10.3 M&T Bank Corporation Annual Executive Incentive Plan, as amended
and restated (File No. 1-9861). Filed herewith.
10.7 M&T Bank Corporation Supplemental Pension Plan, as amended and
restated (File No. 1-9861). Filed herewith.
10.8 M&T Bank Corporation Supplemental Retirement Savings Plan, as
amended and restated (File No. 1-9861). Filed herewith.
10.9 M&T Bank Corporation Deferred Bonus Plan, as amended and restated
(File No. 1-9861). Filed herewith.
10.10 M&T Bank Corporation Directors' Stock Plan, as amended and
restated (File No. 1-9861). Filed herewith.
10.11 Restated 1987 Stock Option and Appreciation Rights Plan of
ONBANCorp, Inc. (File No. 1-9861). Filed herewith.
10.12 1992 ONBANCorp Directors' Stock Option Plan (File No. 1-9861).
Filed herewith.
10.13 Amended Franklin First Financial Corp. 1988 Stock Incentive Plan
(File No. 1-9861). Filed herewith.
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10.14 Employment Agreement, dated as of April 1, 1998, between M&T
Bank Corporation, (formerly First Empire State Corporation)
and Robert J. Bennett (File No. 1-9861). Filed herewith.
10.15 SERP Assumption Agreement, dated as of January 15, 1993,
between Robert J. Bennett and ONBANCorp, Inc.
(File No. 1-9861). Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K. M&T filed a Current Report on Form 8-K dated
April 1, 1998, disclosing under Item 2 that it had consummated the merger of
ONBANCorp with and into Olympia Financial Corp., a wholly owned subsidiary of
M&T, on April 1, 1998. Certain financial statements and other exhibits were
filed with, or incorporated by reference into, such Current Report in Item 7
thereof. Such Current Report on Form 8-K was filed on April 10, 1998, and an
amendment of Item 7 thereto on Form 8-K/A was filed on May 14, 1998 in order to
disclose the pro forma financial information required to be filed by Item 7(b)
of Form 8-K.
M&T also filed a Current Report on Form 8-K dated May 29, 1998 reporting under
Item 5 that at the 1998 Annual Meeting of Stockholders held on May 19, 1998,
stockholders approved a proposal to amend the First Empire State Corporation
Certificate of Incorporation to change the name of the company to "M&T Bank
Corporation." Such Current Report also reported that on June 1, 1998, the common
stock of the Company was listed and began trading on the New York State Stock
Exchange under the name M&T Bank Corporation (NYSE: MTB).
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SIGNATURES
Pursuant to the requirements 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.
M&T BANK CORPORATION
Date: August 13, 1998 By: /s/ Michael P. Pinto
---------------------
Michael P. Pinto
Executive Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No.
- -------
3.1 Restated Certificate of Incorporation of M&T Bank Corporation dated
May 29, 1998 (File No. 1-9861). Filed herewith.
3.2 By-Laws of M&T Bank Corporation as last amended on May 19, 1998
(File No. 1-9861). Filed herewith.
10.2 M&T Bank Corporation 1983 Stock Option Plan as amended and restated
(File No. 1-9861). Filed herewith.
10.3 M&T Bank Corporation Annual Executive Incentive Plan, as amended and
restated (File No. 1-9861). Filed herewith.
10.7 M&T Bank Corporation Supplemental Pension Plan, as amended and
restated (File No. 1-9861). Filed herewith.
10.8 M&T Bank Corporation Supplemental Retirement Savings Plan, as amended
and restated (File No. 1-9861). Filed herewith.
10.9 M&T Bank Corporation Deferred Bonus Plan, as amended and restated
(File No. 1-9861). Filed herewith.
10.10 M&T Bank Corporation Directors' Stock Plan, as amended and restated
(File No. 1-9861). Filed herewith.
10.11 Restated 1987 Stock Option and Appreciation Rights Plan of
ONBANCorp, Inc. (File No. 1-9861). Filed herewith.
10.12 1992 ONBANCorp Directors' Stock Option Plan (File No. 1-9861). Filed
herewith.
10.13 Amended Franklin First Financial Corp. 1988 Stock Incentive Plan
(File No. 1-9861). Filed herewith.
10.14 Employment Agreement, dated April 1, 1998, between M&T Bank
Corporation and Robert J. Bennett (File No. 1-9861). Filed herewith.
10.15 SERP Assumption Agreement, dated as of January 15, 1993, between
Robert J. Bennett and ONBANCorp, Inc. (File No. 1-9861). Filed
herewith.
27.1 Financial Data Schedule. Filed herewith.
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