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 March 31, 1999
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 14203
(Address of principal executive offices) (Zip Code)
(716) 842-5445
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Number of shares of the registrant's Common Stock, $5 par value, outstanding as
of the close of business on May 5, 1999: 7,742,931 shares.
M&T BANK CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEET -
March 31, 1999 and December 31, 1998 3
CONSOLIDATED STATEMENT OF INCOME -
Three months ended March 31, 1999 and 1998 4
CONSOLIDATED STATEMENT OF CASH FLOWS -
Three months ended March 31, 1999 and 1998 5
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY - Three months ended
March 31, 1999 and 1998 6
CONSOLIDATED SUMMARY OF CHANGES IN
ALLOWANCE FOR POSSIBLE CREDIT LOSSES -
Three months ended March 31, 1999 and 1998 6
NOTES TO FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 30
Part II. OTHER INFORMATION 30
Item 1. Legal Proceedings. 30
Item 2. Changes in Securities and Use of Proceeds. 30
Item 3. Defaults Upon Senior Securities. 30
Item 4. Submission of Matters to a Vote of Security
Holders. 30
Item 5. Other Information. 31
Item 6. Exhibits and Reports on Form 8-K. 31
SIGNATURES 32
EXHIBIT INDEX 33
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET (Unaudited)
March 31, December 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 403,333 493,792
Money-market assets
Interest-bearing deposits at banks 635 674
Federal funds sold and agreements to resell securities 402,926 229,066
Trading account 472,986 173,122
- ---------------------------------------------------------------------------------------------------------------------------
Total money-market assets 876,547 402,862
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities
Available for sale (cost: $1,889,153 at March 31, 1999;
$2,578,940 at December 31, 1998) 1,890,160 2,583,740
Held to maturity (market value: $84,714 at March 31, 1999;
$87,365 at December 31, 1998) 84,813 87,282
Other (market value: $113,292 at March 31, 1999;
$114,542 at December 31, 1998) 113,292 114,542
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,088,265 2,785,564
- ---------------------------------------------------------------------------------------------------------------------------
Loans and leases 16,015,526 16,005,701
Unearned discount (202,642) (214,171)
Allowance for possible credit losses (306,739) (306,347)
- ---------------------------------------------------------------------------------------------------------------------------
Loans and leases, net 15,506,145 15,485,183
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment 159,222 162,842
Goodwill and core deposit intangible 534,482 546,036
Accrued interest and other assets 716,851 707,612
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 20,284,845 20,583,891
===========================================================================================================================
Liabilities Noninterest-bearing $ 1,866,413 2,066,814
NOW accounts 485,102 509,307
Savings deposits 4,819,862 4,830,678
Time deposits 7,045,848 7,027,083
Deposits at foreign office 258,720 303,270
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 14,475,945 14,737,152
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and agreements
to repurchase securities 1,345,971 1,746,078
Other short-term borrowings 373,546 483,898
Accrued interest and other liabilities 705,433 446,854
Long-term borrowings 1,716,704 1,567,543
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 18,617,599 18,981,525
- ---------------------------------------------------------------------------------------------------------------------------
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 40,508 40,508
Common stock issuable, 8,638 shares at March 31, 1999;
8,028 shares at December 31, 1998 4,050 3,752
Additional paid-in capital 470,250 480,014
Retained earnings 1,330,244 1,271,071
Accumulated other comprehensive income, net 620 2,869
Treasury stock - common, at cost - 367,751 shares at
March 31, 1999; 403,769 shares at December 31, 1998 (178,426) (195,848)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,667,246 1,602,366
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 20,284,845 20,583,891
===========================================================================================================================
-3-
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M&T BANK CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three months ended March 31
IN THOUSANDS, EXCEPT PER SHARE 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income Loans and leases, including fees $ 314,973 250,697
Money-market assets
Deposits at banks 7 6
Federal funds sold and agreements
to resell securities 3,823 1,722
Trading account 1,245 138
Investment securities
Fully taxable 34,374 23,630
Exempt from federal taxes 2,123 1,572
-----------------------------------------------------------------------------------------------------------
Total interest income 356,545 277,765
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense NOW accounts 1,280 955
Savings deposits 28,810 22,607
Time deposits 90,892 80,634
Deposits at foreign office 3,429 3,239
Short-term borrowings 25,735 18,597
Long-term borrowings 25,092 8,553
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Total interest expense 175,238 134,585
-----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 181,307 143,180
Provision for possible credit losses 8,500 12,000
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Net interest income after provision
for possible credit losses 172,807 131,180
- -----------------------------------------------------------------------------------------------------------------------------------
Other income Mortgage banking revenues 21,474 13,870
Service charges on deposit accounts 15,868 11,234
Trust income 10,326 9,485
Merchant discount and other credit card fees 1,700 4,238
Trading account and foreign exchange gains 1,169 1,779
Gain on sales of bank investment securities 220 -
Other revenues from operations 21,959 28,287
-----------------------------------------------------------------------------------------------------------
Total other income 72,716 68,893
- -----------------------------------------------------------------------------------------------------------------------------------
Other expense Salaries and employee benefits 68,437 58,333
Equipment and net occupancy 18,024 13,479
Printing, postage and supplies 4,110 3,570
Amortization of goodwill and core deposit intangible 10,852 1,825
Other costs of operations 38,043 56,666
-----------------------------------------------------------------------------------------------------------
Total other expense 139,466 133,873
-----------------------------------------------------------------------------------------------------------
Income before income taxes 106,057 66,200
Income taxes 39,151 17,245
-----------------------------------------------------------------------------------------------------------
NET INCOME $ 66,906 48,955
===================================================================================================================================
Net income per common share
Basic $8.65 $7.34
Diluted 8.34 7.01
Cash dividends per common share 1.00 .80
Average common shares outstanding
Basic 7,731 6,666
Diluted 8,023 6,981
-4-
- ---------------------------------------------------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three months ended March 31
IN THOUSANDS 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from Net income $ 66,906 48,955
operating activities Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 8,500 12,000
Depreciation and amortization of premises
and equipment 7,028 5,369
Amortization of capitalized servicing rights 4,923 4,264
Amortization of goodwill and core deposit intangible 10,852 1,825
Provision for deferred income taxes (721) (4,050)
Asset write-downs 519 173
Net gain on sales of assets (123) 63
Net change in accrued interest receivable, payable (4,079) 11,079
Net change in other accrued income and expense (75,041) (36,604)
Net change in loans held for sale 121,134 (120,046)
Net change in trading account assets and liabilities 40,175 (5,815)
-------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 180,073 (82,787)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from Proceeds from sales of investment securities
investing activities Available for sale 24,789
Other 1,250
Proceeds from maturities of investment securities
Available for sale 725,457 168,317
Held to maturity 7,360 10,070
Purchases of investment securities
Available for sale (62,819) (44)
Held to maturity (4,990) (4,572)
Net (increase) decrease in interest-bearing
deposits at banks 39 (295)
Additions to capitalized servicing rights (4,707) (3,038)
Net increase in loans and leases (151,217) (423,205)
Capital expenditures, net (3,383) (3,225)
Other, net (2,829) 6,782
-------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 528,950 (249,210)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from Net decrease in deposits (260,947) (78,543)
financing activities Net increase (decrease) in short-term borrowings (510,397) 674,446
Proceeds from long-term borrowings 153,152
Payments on long-term borrowings (3,737) (423)
Purchases of treasury stock (115) (16,585)
Dividends paid - common (7,725) (5,332)
Other, net 4,147 11,318
-------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (625,622) 584,881
-------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents $ 83,401 252,884
Cash and cash equivalents at beginning of period 722,858 386,892
Cash and cash equivalents at end of period $ 806,259 639,776
==========================================================================================================================
Supplemental Interest received during the period $ 354,885 278,879
disclosure of cash Interest paid during the period 177,236 126,508
flow information Income taxes paid during the period 101,663 56,566
==========================================================================================================================
Supplemental schedule of
noncash investing and Real estate acquired in settlement of loans $ 2,647 1,303
financing activities
==========================================================================================================================
-5-
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M&T BANK CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Additional other
Preferred Common stock paid-in Retained comprehensive Treasury
DOLLARS IN THOUSANDS, EXCEPT PER SHARE stock stock issuable capital earnings income, net stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Balance - January 1, 1998 $ - 40,487 - 103,233 1,092,106 12,016 (217,576) $1,030,266
Comprehensive income:
Net income - - - - 48,955 - - 48,955
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of
reclassification adjustment - - - - - (7,189) - (7,189)
----------
41,766
Purchases of treasury stock - - - - - - (16,585) (16,585)
Stock-based compensation plans:
Exercise of stock options - - - 4,033 - - 10,756 14,789
Directors' stock plan - - - 47 - - 22 69
Deferred bonus plan, net, including
dividend equivalents - - 3,876 5 (7) - 2 3,876
Common stock cash dividends -
$.80 per share - - - - (5,332) - - (5,332)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - March 31,1998 $ - 40,487 3,876 107,318 1,135,722 4,827 (223,381) $1,068,849
- ------------------------------------------------------------------------------------------------------------------------------------
1999
Balance - January 1, 1999 $ - 40,508 3,752 480,014 1,271,071 2,869 (195,848) $1,602,366
Comprehensive income:
Net income - - - - 66,906 - - 66,906
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of
reclassification adjustment - - - - - (2,249) - (2,249)
----------
64,657
Purchases of treasury stock - - - - - - (115) (115)
Stock-based compensation plans:
Exercise of stock options - - - (9,757) - - 17,212 7,455
Directors' stock plan - - - 4 - - 61 65
Deferred bonus plan, net, including
dividend equivalents - - 298 (11) (8) - 264 543
Common stock cash dividends -
$1.00 per share - - - - (7,725) - - (7,725)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - March 31,1999 $ - 40,508 4,050 470,250 1,330,244 620 (178,426) $1,667,246
====================================================================================================================================
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES (Unaudited)
- -----------------------------------------------------------------------------------------
Three months ended March 31
DOLLARS IN THOUSANDS 1999 1998
- -----------------------------------------------------------------------------------------
Beginning balance $306,347 274,656
Provision for possible credit losses 8,500 12,000
Net charge-offs
Charge-offs (12,956) (12,286)
Recoveries 4,848 4,357
- -----------------------------------------------------------------------------------------
Total net charge-offs (8,108) (7,929)
- -----------------------------------------------------------------------------------------
Ending balance $306,739 278,727
- -----------------------------------------------------------------------------------------
-6-
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of M&T Bank Corporation ("M&T") and
subsidiaries ("the Company") were compiled in accordance with the accounting
policies set forth in note 1 of Notes to Financial Statements included in the
Company's 1998 Annual Report, 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. Certain reclassifications have been made
to the 1998 financial statements to conform with the current year presentation.
2. EARNINGS PER SHARE
The computations of basic earnings per share follow:
Three months ended
March 31
1999 1998
---- ----
(in thousands, except per share)
Income available to common stockholders:
Net income $66,906 48,955
Weighted-average shares
outstanding (including common
stock issuable) 7,731 6,666
Basic earnings per share $ 8.65 7.34
The computations of diluted earnings per share follow:
Three months ended
March 31
1999 1998
---- ----
(in thousands, except per share)
Income available to common
stockholders $66,906 48,955
Weighted-average shares
outstanding (including common
stock issuable) 7,731 6,666
Plus: incremental shares from
assumed conversions of
stock options 292 315
------- ------
Adjusted weighted-average shares
outstanding 8,023 6,981
Diluted earnings per share $ 8.34 7.01
-7-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. COMPREHENSIVE INCOME
The following table displays the components of other comprehensive income:
Three months ended March 31, 1999
---------------------------------
Before-tax Income
amount taxes Net
------ ----- ---
Unrealized losses
on investment securities:
Unrealized holding
losses during period $(3,573) (1,454) (2,119)
Less: reclassification
adjustment for gains
realized in net income 220 90 130
------- ------ ------
Net unrealized losses $(3,793) (1,544) (2,249)
======= ====== ======
Three months ended March 31, 1998
---------------------------------
Before-tax Income
amount taxes Net
------ ----- ---
Unrealized losses
on investment securities:
Unrealized holding
losses during period(a) $(12,063) (4,874) (7,189)
Less: reclassification
adjustment for gains
realized in net income -- -- --
-------- ------ ------
Net unrealized losses $(12,063) (4,874) (7,189)
======== ====== ======
(a) Including the effect of the contribution of appreciated investment
securities described in note 4.
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. ACQUISITIONS
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. ACQUISITIONS, 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 was 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 $21.3 million ($14.0 million net of applicable
income taxes) during 1998, including approximately $1.6 million ($1.0 million
net of applicable income taxes) during the three month period ended March 31,
1998.
On December 9, 1998, M&T entered into a definitive agreement with FNB Rochester
Corp.("FNB"), a bank holding company headquartered in Rochester, New York,
providing for a merger between the two companies. FNB had total assets of $590
million as of March 31, 1999. The merger, which will be accounted for as a
purchase, has been approved by the boards of directors of each company, as well
as the applicable regulators, and is subject to certain conditions, including
approval of FNB's stockholders. If approved by FNB stockholders, it is
anticipated that the merger will take place on or about June 1, 1999. Under the
terms of the merger agreement, stockholders of FNB may elect to receive .06766
of a share of M&T common stock (and cash in lieu of any fractional share) or
$33.00 in cash for each outstanding share of FNB common stock. Subject to
certain adjustments set forth in the merger agreements, 50% of the 3,625,806
shares of FNB common stock outstanding on December 9, 1998 will be exchanged for
shares of M&T common stock and the remaining shares will be converted for cash.
The elections of FNB's stockholders will be subject to allocation and proration
if either portion of the merger consideration is oversubscribed. At March 31,
1999, FNB had 3,819,522 shares of common stock issued and outstanding.
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 entity
formed by 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. Including the unamortized portion of a purchase
accounting adjustment to reflect estimated fair value at the April 1, 1998
acquisition of ONBANCorp, the preferred capital securities of OnBank Trust I had
a financial statement carrying value of approximately $69 million at March 31,
1999 and December 31, 1998.
-9-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. BORROWINGS, CONTINUED
Other than the following payment terms (and the redemption terms described
below), the preferred capital securities issued by the Trusts ("Capital
Securities") are similar 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
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
-10-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. BORROWINGS, CONTINUED
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 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.
7. SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related
Information." In accordance with the provision of SFAS No. 131, reportable
segments have been determined based upon the Company's internal profitability
reporting system, which is organized by strategic business units. Certain
strategic business units have been combined for segment information reporting
purposes where the nature of the products and services, the type of customer and
the distribution of those products and services are similar. The reportable
segments are Commercial Banking, Commercial Real Estate, Discretionary
Portfolio, Residential Mortgage Banking and Retail Banking.
The financial information of the Company's segments was compiled utilizing the
accounting policies described in note 21 to the Company's consolidated financial
statements as of and for the year ended December 31, 1998. The management
accounting policies and processes utilized in compiling segment financial
information are highly subjective and, unlike financial accounting, are not
based on authoritative guidance similar to generally accepted accounting
principles. As a result, the financial information of the reported segments
is not necessarily comparable with similar information reported by other
financial institutions. Information about the Company's segments is presented
in the following table.
-11-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. SEGMENT INFORMATION, CONTINUED
Three months ended Average
March 31, 1999 total assets
---------------------------------- ------------------------
Inter- Net
Total segment income March 31, December 31,
Revenues(a) revenues (loss) 1999 1998
----------- -------- ------ --------- ------------
(in thousands) (in millions)
Commercial Banking $ 45,454 124 20,736 $ 4,118 3,653
Commercial Real Estate 28,641 268 14,394 3,862 3,527
Discretionary Portfolio 16,703 -- 8,844 6,823 6,025
Residential Mortgage
Banking 37,568 9,569 6,980 659 581
Retail Banking 105,412 1,941 24,544 4,023 3,781
All Other 20,245 (11,902) (8,592) 813 742
-------- ------- ------- ------- ------
Total $254,023 -- 66,906 $20,298 18,309
======== ======= ======= ======= ======
Three months ended Average
March 31, 1998 total assets
---------------------------------- ------------------------
Inter- Net
Total segment income March 31, December 31,
Revenues(a) revenues (loss) 1998 1997
----------- -------- ------ --------- ------------
(in thousands) (in millions)
Commercial Banking $ 31,130 122 13,344 $ 2,735 2,777
Commercial Real Estate 29,932 286 15,801 3,608 3,151
Discretionary Portfolio 11,542 -- 5,369 4,016 3,883
Residential Mortgage
Banking 28,001 8,614 4,146 450 360
Retail Banking 84,820 1,599 19,180 3,014 3,066
All Other 26,648 (10,621) (8,885) 232 72
-------- ------- ------- ------- ------
Total $212,073 -- 48,955 $14,055 13,309
======== ======= ======= ======= ======
(a) Total revenues are comprised of net interest income and other income.
Net interest income is the difference between taxable-equivalent
interest earned on assets and interest paid on liabilities owned by a
segment and a funding charge (credit) based on the Company's internal
funds transfer pricing methodology. Segments are charged a cost to
fund any assets (e.g., loans) and are paid a funding credit for any
funds provided (e.g., deposits). The taxable-equivalent adjustment
aggregated $1,825,000 and $1,541,000 for the three-month periods ended
March 31, 1999 and 1998, respectively, and is eliminated in "All
Other" total revenues. Total revenues in "All Other" for the three
months ended March 31, 1998 include the impact of the contribution of
appreciated investment securities described in note 4. Intersegment
revenues are included in total revenues of the reportable segments.
The elimination of intersegment revenues is included in the
determination of "All Other" total revenues.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
M&T Bank Corporation ("M&T") earned $66.9 million or $8.34 of diluted earnings
per common share in the first quarter of 1999, increases of 37% and 19%,
respectively, from the first quarter of 1998 when net income was $49.0 million
or $7.01 of diluted earnings per common share. Net income was $57.8 million or
$7.14 of diluted earnings per common share in the fourth quarter of 1998. Basic
earnings per common share rose 18% to $8.65 in the recent quarter from $7.34 in
the first quarter of 1998 and 16% from $7.44 earned in 1998's fourth quarter.
The annualized rate of return on average total assets for M&T and its
consolidated subsidiaries ("the Company") in the first quarter of 1999 was
1.34%, compared with 1.41% in the year-earlier quarter and 1.14% in 1998's last
quarter. The annualized return on average common stockholders' equity was 16.56%
in the initial 1999 quarter, compared with 18.86% and 14.20% in the first and
fourth quarters of 1998, respectively.
On April 1, 1998, M&T acquired ONBANCorp, Inc. ("ONBANCorp"), a bank
holding company headquartered in Syracuse, New York. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
operations acquired from ONBANCorp have been included in the Company's financial
results 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. In connection with the
acquisition, the Company acquired approximately $5.5 billion of assets,
including approximately $3 billion of loans, $1.6 billion of investment
securities and $563 million of goodwill and core deposit intangible. Liabilities
assumed in the acquisition totaled approximately $4.6 billion, including
approximately $3.8 billion of deposits.
As previously announced, on December 9, 1998, M&T entered into a
definitive agreement with FNB Rochester Corp.("FNB"), a bank holding company
headquartered in Rochester, New York, providing for a merger between the two
companies. FNB had total assets of $590 million as of March 31, 1999 and is the
parent company of First National Bank of Rochester, which has 18 offices in
western and central New York State. Under the terms of the merger agreement,
stockholders of FNB may elect to receive .06766 of a share of M&T common stock
(and cash in lieu of any fractional share) or $33.00 in cash for each
outstanding share of FNB common stock. Subject to certain adjustments set forth
in the merger agreements, 50% of the 3,625,806 shares of FNB common stock
outstanding on December 9, 1998 will be exchanged for shares of M&T common stock
and the remaining shares will be converted for cash. The elections of FNB's
stockholders will be subject to allocation and proration if either portion of
the merger consideration is oversubscribed. The merger, which will be accounted
for as a purchase, has received the approval of the boards of directors of each
company as well as the applicable regulatory authorities, and is subject to
certain conditions, including approval of FNB's stockholders. Subject to
approval by FNB's stockholders, it is anticipated that the merger will take
place on or about June 1, 1999.
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 March 31, 1999 goodwill and core deposit intangible
totaling $534 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" (or "tangible") basis (which excludes the
after-tax effect of amortization of goodwill and core deposit intangible and the
related asset balances) represents a relevant measure of financial performance.
The supplemental cash basis data presented herein do not exclude the effect of
other non-cash operating expenses such as depreciation, provision for possible
credit losses, or deferred income taxes associated with the results of
operations. Unless noted otherwise, cash
-13-
basis data for the first quarter of 1998 does, however, exclude the after-tax
impact of $1.0 million ($1.6 million pre-tax), or $.14 per share, of
nonrecurring merger-related expenses associated with the acquisition of
ONBANCorp.
Cash net income rose 48% to $76.3 million in the recent quarter from
$51.4 million in the first quarter of 1998. Diluted cash earnings per share for
the first quarter of 1999 were $9.51, up 29% from $7.37 in the year-earlier
quarter. Cash net income and diluted cash earnings per share were $67.3 million
and $8.31, respectively, in the fourth quarter of 1998.
Cash return on average tangible assets was an annualized 1.57% in the
recent quarter, compared with 1.49% in the first quarter of 1998 and 1.36% in
the fourth quarter of 1998. Cash return on average tangible common equity rose
to an annualized 27.66% in the first quarter of 1999, compared with 20.13% in
the year-earlier quarter and 24.57% in the last 1998 quarter. Including the
effect of merger-related expenses, the annualized cash return on average
tangible assets for the three month period ended March 31, 1998 was 1.46% and
the annualized cash return on average tangible common stockholders' equity was
19.76%.
TAXABLE-EQUIVALENT NET INTEREST INCOME
Net interest income expressed on a taxable-equivalent basis was $183.1 million
in the first quarter of 1999, up $38.4 million or 27% from $144.7 million in the
year-earlier quarter and $6.0 million or 3% from $177.1 million earned in the
fourth quarter of 1998. Growth in average loans and leases was the most
significant factor contributing to the improvement in net interest income from
the initial quarter of 1998. Average loans and leases increased $4.2 billion, or
36%, to $15.8 billion in the first quarter of 1999 from $11.6 billion in the
year-earlier quarter. The leading factor for the higher loan balances compared
with 1998 was the $3.0 billion of loans obtained on April 1, 1998 from 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. Partially offsetting the
ONBANCorp-related increases in average loans and leases was the impact of the
July 1998 sale of M&T's retail credit card business. Average credit card
balances for the first quarter of 1998 totaled $246 million. Average loans and
leases in the recent quarter were $372 million, or 2%, higher than the fourth
quarter of 1998. The accompanying table summarizes quarterly changes in the
major components of the loan and lease portfolio.
AVERAGE LOANS AND LEASES
(net of unearned discount)
Dollars in millions
Percent increase
(decrease) from
1st Qtr. 1st Qtr. 4th Qtr.
1999 1998 1998
-------- -------- --------
Commercial, financial, etc. $ 3,179 33% 5%
Real estate - commercial 5,533 23 5
Real estate - consumer 4,158 66 -
Consumer
Automobile 1,458 59 (1)
Home equity 739 13 (1)
Credit cards 11 (96) (1)
Other 683 79 1
------- -- --
Total consumer 2,891 32 -
------- -- --
Total $15,761 36% 2%
======= == ==
Investment securities averaged $2.5 billion in the recent quarter, up
from $1.6 billion in the first quarter of 1998. Holdings of investment
securities averaged $2.6 billion in the fourth quarter of 1998. The
-14-
investment securities portfolio is largely comprised of mortgage-backed
securities, collateralized mortgage obligations, and shorter-term U.S. Treasury
notes. When purchasing investment securities, the Company considers its overall
risk profile as well as the adequacy of expected returns relative to prepayment
and other risks assumed. The Company occasionally sells investment securities as
a result of changes in interest rates and spreads, actual or anticipated
prepayments, or credit risk associated with a particular security.
Money-market assets averaged $406 million in 1999's first quarter,
compared with $141 million in the year-earlier quarter and $395 million in the
fourth 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 above, average earning assets
totaled $18.7 billion in the first quarter of 1999, an increase of $5.3 billion,
or 40%, from $13.4 billion in the comparable 1998 quarter. Average earning
assets in the recent quarter were up 1% from $18.4 billion in the fourth quarter
of 1998.
Core deposits represent the most significant source of funding to the
Company and generally carry lower interest rates than wholesale funds of
comparable maturities. Core deposits consist of noninterest-bearing deposits,
interest-bearing transaction accounts, savings deposits and nonbrokered domestic
time deposits under $100,000. The Company's branch network is the principal
source of core deposits. Core deposits also 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 on April 1, 1998 in conjunction with the acquisition of ONBANCorp
totaled approximately $2.8 billion. Average core deposits increased to $11.4
billion in the first quarter of 1999, from $8.4 billion in the year-earlier
quarter. Core deposits averaged $11.5 billion in the final quarter of 1998. The
accompanying table provides an analysis of quarterly changes in the components
of average core deposits.
AVERAGE CORE DEPOSITS
Dollars in millions
Percent increase
(decrease) from
1st Qtr. 1st Qtr. 4th Qtr.
1999 1998 1998
-------- -------- --------
NOW accounts $ 399 48% 2%
Savings deposits 4,881 42 1
Time deposits less than $100,000 4,295 26 (4)
Noninterest-bearing deposits 1,865 47 1
------- -- --
Total $11,440 36% (1)%
======= == ==
In addition to core deposits, the Company obtains funding through
domestic time deposits of $100,000 or more, deposits originated through the
Company's offshore branch office, and brokered certificates of deposit. Brokered
deposits are used as an alternative to short-term borrowings to lengthen the
average maturity of interest-bearing liabilities. Brokered deposits averaged
$1.3 billion during the recent quarter, equal to both the comparable 1998 period
and the fourth quarter of 1998. At March 31, 1999, brokered deposits totaled
$1.3 billion and had a weighted average remaining term to maturity of 1.7 years.
Certain of the deposits have provisions that allow early redemption. In
connection with the Company's management of interest rate risk, interest rate
swaps have been entered into under which the Company receives a fixed rate of
interest and pays a variable rate and that have notional amounts and terms
substantially similar to the amounts and terms of the brokered deposits.
Additional amounts of brokered deposits may be solicited in the future depending
on market conditions and the cost of
-15-
funds available from alternative sources at the time.
The Company also uses borrowings from banks, securities dealers, the
Federal Home Loan Banks ("FHLB") and others as sources of funding. Short-term
borrowings averaged $2.1 billion in the recent quarter and in the fourth quarter
of 1998, compared with $1.4 billion in the first quarter of 1998. Long-term
borrowings averaged $1.6 billion and $428 million in the first quarter of 1999
and 1998, respectively, and $1.3 billion in the fourth quarter of 1998. Included
in average long-term borrowings during the recent quarter were $1.1 billion of
FHLB borrowings, compared with $2 million in the year-earlier quarter and $832
million in the fourth quarter of 1998. Long-term borrowings also included $319
million of trust preferred securities and $175 million of subordinated capital
notes. Further information regarding the trust preferred securities is provided
in note 6 of Notes to Financial Statements.
Net interest income is impacted by changes in the composition of the
Company's earning assets and interest-bearing liabilities, as well as changes in
interest rates and spreads. The yield on earning assets decreased 69 basis
points (hundredths of one percent) to 7.79% in the first quarter of 1999 from
8.48% in the year-earlier quarter. Lower yielding assets acquired in the
ONBANCorp transaction, the impact of the sale of the Company's retail credit
card business in July 1998 and competitive pressure on interest rates charged
for newly originated loans, particularly commercial loans and commercial real
estate loans, contributed to the decline in yield from the first quarter of
1998. The rate paid on interest-bearing liabilities in the recent quarter was
4.33%, compared with 4.75% in the corresponding 1998 quarter. Lower rates on
deposit products largely contributed to the decline. As a result of the changes
noted above, net interest spread, or the difference between the
taxable-equivalent yield on earning assets and the rate paid on interest-bearing
liabilities, was 3.46% in the first quarter of 1999, compared with 3.73% in the
corresponding 1998 quarter. The net interest spread was 3.27% in the fourth
quarter of 1998 when the yield on earning assets was 7.77% and the rate paid on
interest-bearing liabilities was 4.50%. The improvement in the net interest
spread from the fourth quarter of 1998 was due in part to lower interest rates
on deposit products following actions by the Federal Reserve late in 1998 and a
general steepening of the yield curve, which favorably contributed to the
interest rate spread earned from lending activities.
Net interest-free funds, consisting largely of noninterest-bearing
demand deposits and stockholders' equity, contributed .52% to net interest
margin, or taxable equivalent net interest income expressed as an annualized
percentage of average earning assets, in the first quarter of 1999, compared
with .66% in the corresponding 1998 quarter and .55% in the fourth quarter of
1998. Average interest-free funds totaled $2.2 billion in the first quarter of
1999, up from $1.9 billion a year earlier but equal to the final 1998 quarter.
The decline in the contribution to net interest margin of net interest-free
funds from the first quarter of 1998 was due to a lower proportion of net
interest-free funds as a result of the goodwill and core deposit intangible
assets recorded in conjunction with the ONBANCorp acquisition, which averaged
$531 million during the recent quarter, and the cash surrender value of
bank-owned life insurance, which averaged $372 million and $204 million in the
first quarter of 1999 and 1998, respectively. 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." The increases in 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. Declines in the average rate paid on
interest-bearing liabilities used to impute the value of interest-free funds
were also a factor for the lower contribution of such funds to net interest
margin.
Due largely to the changes described above, the Company's net interest
margin was 3.98% in 1999's initial quarter, down from 4.39% in the comparable
quarter of 1998 but improved from 3.82% in the fourth quarter of 1998.
-16-
The Company, as part of the management of interest rate risk, utilizes
interest rate swap agreements to modify the repricing characteristics of certain
portions of its portfolios of earning assets and interest-bearing liabilities.
Revenue and expense arising from these agreements are reflected in either the
yields earned on assets or, as appropriate, rates paid on interest-bearing
liabilities. The notional amount of interest rate swap agreements used as part
of the Company's management of interest rate risk in effect at March 31, 1999
and 1998 was $2.3 billion and $2.5 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 $82 million of swaps, the Company
pays a fixed rate of interest and receives a variable rate. At March 31, 1999,
the weighted average rates to be received and paid under interest rate swap
agreements currently in effect were 6.23% and 5.17%, respectively. As of March
31, 1999, the Company had also entered into forward-starting swaps with an
aggregate notional amount of $391 million in which the Company will pay a fixed
rate of interest and receive a variable rate. Such forward-starting swaps had no
effect on the Company's net interest income through March 31, 1999. The average
notional amounts of interest rate swaps and the related effect on net interest
income and margin are presented in the accompanying table.
INTEREST RATE SWAPS
Dollars in thousands
Three months ended March 31
-------------------------------------------------
1999 1998
----------------------- --------------------
Amount Rate * Amount Rate *
Increase (decrease) in:
Interest income $ 3,993 .09% 282 .01%
Interest expense (4,346) (.11) (3,205) (.11)
---------- ----------
Net interest
income/margin $ 8,339 .18% $ 3,487 .11%
========== === ========== ====
Average notional
amount ** $2,338,562 $2,596,119
========== ==========
* 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 March 31, 1999 it would have received
approximately $24.6 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 and investment securities, repayments of loans and investment securities,
and cash generated from operations, such as fees collected for services, provide
the Company with sources of liquidity. M&T's banking subsidiaries have access to
additional funding sources through membership in the FHLB, as well as other
available borrowing facilities. M&T has historically utilized dividend payments
from its banking subsidiaries, which are subject to various regulatory
limitations, to pay operating expenses, stockholder dividends and treasury stock
repurchases. In 1997, the proceeds from the issuance of $250 million
-17-
of trust preferred securities provided funds to M&T. M&T also maintains a $25
million line of credit with an unaffiliated commercial bank, all of which was
available for borrowing at March 31, 1999.
The Company expects to have access to sufficient liquid assets to fund
the cash portion of the previously discussed acquisition of FNB and,
accordingly, management does not anticipate engaging in any activities, either
currently or in the long-term, which would cause a significant strain on
liquidity at either 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.
Market risk is the risk of loss from adverse changes in market prices
and/or interest rates of the Company's financial instruments. The primary market
risk the Company is exposed to is interest rate risk. The core banking
activities of lending and deposit-taking expose the Company to interest rate
risk. Interest rate risk occurs when assets and liabilities reprice at different
times as interest rates change. As a result, net interest income earned by the
Company is subject to the effects of changing interest rates. The Company
measures interest rate risk by calculating the variability of net interest
income in future periods under various interest rate scenarios using projected
balances for earning assets, interest-bearing liabilities and off-balance sheet
financial instruments. Management's philosophy toward interest rate risk
management is to attempt to limit the variability of net interest income. The
balances of both on- and off-balance sheet financial instruments used in the
projections are based on expected growth from forecasted business opportunities,
anticipated prepayments of mortgage-related assets and expected maturities of
investment securities, loans and deposits. Management supplements the modeling
technique described above with analyses of market values of the Company's
financial instruments.
The Asset-Liability Committee, which includes members of senior
management, monitors the Company's interest rate sensitivity with the aid of a
computer model that 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 as of March 31, 1999 and December 31, 1998
displays the estimated impact on net interest income from non-trading
financial instruments 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 interest income
Changes in Interest Rates March 31, 1999 December 31, 1998
- ------------------------- --------------- -------------------
+200 basis points $ (5,720) $ (7,668)
+100 basis points (2 188) 335
- -100 basis points 4,943 5,161
- -200 basis points 5,575 4,498
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
-18-
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, mortgage-backed
securities and interest rate contracts, such as swaps. The Company generally
mitigates the foreign currency and interest rate risk associated with trading
activities by entering into offsetting trading positions. The amounts of gross
and net trading positions as well as the type of trading activities conducted by
the Company are subject to a well-defined series of potential loss exposure
limits established by the Asset-Liability Committee.
The notional amounts of interest rate and foreign currency trading
contracts totaled $1.7 billion and $1.6 billion, respectively, at March 31, 1999
and $2.4 billion and $1.8 billion, respectively, at March 31, 1998. The notional
amounts of these trading contracts are not recorded in the consolidated balance
sheet. However, the fair values of all financial instruments used for trading
activities are recorded in the consolidated balance sheet. The fair value of all
trading account assets and liabilities were $473 million and $391 million,
respectively, at March 31, 1999 and $48 million and $43 million, respectively,
at March 31, 1998. Trading account assets and liabilities were $173 million and
$51 million, respectively, at December 31, 1998. Included in trading account
assets at March 31, 1999 were $348 million of mortgage-backed securities that
served as collateral securing certain money-market assets. The obligation to
return such collateral was recorded in noninterest-bearing trading account
liabilities, which are included in accrued interest and other liabilities
in the Company's consolidated balance sheet. Given the Company's policies,
limits and positions, management believes that the potential loss exposure
to the Company resulting from trading activities was not material as of
March 31, 1999 and 1998.
PROVISION FOR POSSIBLE CREDIT LOSSES
The purpose of the provision for possible credit losses is to replenish or
build the Company's allowance for possible credit losses to a level that is
adequate to absorb losses inherent in the loan and lease portfolio. The
provision for possible credit losses in the first quarter of 1999 was $8.5
million, down from $12.0 million in the year-earlier quarter, but higher than
the $7.5 million in 1998's fourth quarter. The decrease from the year earlier
period was due, in part, to the July 1998 sale of the Company's retail credit
card business. Net loan charge-offs totaled $8.1 million in the recent
quarter, compared with $7.9 million and $10.7 million in the first and fourth
quarters of 1998, respectively. Net charge-offs as an annualized percentage
of average loans and leases were .21% in the recent quarter, compared with
.28% in both the first and fourth quarters of 1998. Net charge-offs of
consumer loans in the recent quarter were $5.3 million, compared with $7.8
million in the year-earlier period and $5.9 million in 1998's final quarter.
Net consumer loan charge-offs as an annualized percentage of average consumer
loans and leases were .75% in the first quarter of 1999, compared with 1.45%
in the corresponding quarter of 1998 and .81% in 1998's fourth quarter. Net
charge-offs of credit card balances included in net consumer loan charge-offs
were $263 thousand and $4.5 million in the first quarter of 1999 and 1998,
respectively, and $679 thousand in the last quarter of 1998.
-19-
Nonperforming loans were $115.4 million or .73% of total loans and
leases outstanding at March 31, 1999, compared with $70.0 million or .58% a year
earlier and $117.0 million or .74% at December 31, 1998. The increase from March
31, 1998 was largely the result of nonperforming loans obtained in the
acquisition of ONBANCorp. Nonperforming commercial real estate loans totaled
$21.6 million at March 31, 1999, $10.7 million at March 31, 1998 and $17.8
million at December 31, 1998. Nonperforming consumer loans and leases totaled
$26.1 million at March 31, 1999, compared with $19.5 million at March 31, 1998
and $25.8 million at December 31, 1998. As a percentage of consumer loan
balances outstanding, nonperforming consumer loans and leases were .89% at March
31, 1999 and December 31, 1998 compared with .90% at March 31, 1998. The
remaining nonperforming loans consisted largely of residential mortgage loans
totaling $49 million and $29 million at March 31, 1999 and 1998, respectively,
and $48 million at December 31, 1998. Assets acquired in settlement of defaulted
loans were $11.1 million at March 31, 1999 and December 31, 1998, 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.
NONPERFORMING ASSETS
Dollars in thousands
1999 1998 Quarters
First Quarter Fourth Third Second First
------------- ------ ----- ------ -----
Nonaccrual loans $ 69,393 70,999 73,778 78,527 40,737
Loans past due
90 days or more 37,988 37,784 37,746 41,686 24,449
Renegotiated loans 8,014 8,262 7,656 7,025 4,819
-------- ------- ------- ------- ------
Total nonperforming loans 115,395 117,045 119,180 127,238 70,005
Real estate and other
assets owned 11,052 11,129 11,106 12,211 7,828
-------- ------- ------- ------- ------
Total nonperforming assets $126,447 128,174 130,286 139,449 77,833
======== ======= ======= ======= ======
Government guaranteed
nonperforming loans* $ 13,368 14,316 13,776 16,062 14,787
======== ======= ======= ======= ======
Nonperforming loans
to total loans and leases,
net of unearned discount .73% .74% .79% .83% .58%
Nonperforming assets
to total net loans and
leases and real estate
and other assets owned .80% .81% .86% .91% .65%
======== ======= ======= ======= ======
* INCLUDED IN TOTAL NONPERFORMING LOANS.
The allowance for possible credit losses was $306.7 million, or 1.94% of
total loans and leases at March 31, 1999, compared with $278.7 million or 2.32%
a year earlier and $306.3 million or 1.94% at December 31, 1998. The ratio of
the allowance for possible credit losses to nonperforming loans was 266% at the
most recent quarter-end, compared with 398% a year earlier and 262% at December
31, 1998. The decline in the allowance as a percentage of total loans at March
31, 1999 as compared with a year earlier reflects management's evaluation of the
loan and lease portfolio, the July 1998 sale of the retail credit card business,
the relatively favorable economic environment for many commercial borrowers, and
other factors. 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. Given the concentration of
commercial real estate loans in the Company's loan portfolio, particularly the
large concentration of loans secured by properties in New York State, in
general, and in the New York City metropolitan area, in particular, coupled
-20-
with the amount of commercial and industrial loans to businesses in New York
State outside of the New York City metropolitan area and significant growth in
recent years in loans to individual consumers, management cautiously evaluated
the impact of interest rates and overall economic conditions on the ability of
borrowers to meet repayment obligations when assessing the adequacy of the
Company's allowance for possible credit losses as of March 31, 1999. Based upon
the results of such review, management believes that the allowance for possible
credit losses at March 31, 1999 was adequate to absorb credit losses from
existing loans and leases.
OTHER INCOME
Other income totaled $72.7 million in the first quarter of 1999, up 36% from
$53.6 million in the year-earlier quarter, excluding $15.3 million of tax-exempt
other income the Company recognized in 1998's first quarter 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.
Approximately one-half of the increase from the first quarter of 1998 was
attributable to revenues related to operations and/or market areas associated
with the former ONBANCorp. Other income was $65.0 million in the fourth quarter
of 1998.
Mortgage banking revenues totaled $21.5 million in the recent quarter,
compared with $13.9 million in the year-earlier quarter and $16.9 million in the
fourth quarter of 1998. Residential mortgage loan servicing fees were $7.0
million in the initial 1999 quarter, compared with $7.2 million a year earlier
and $7.1 million in the final quarter of 1998. Gains from sales of residential
mortgage loans and loan servicing rights were $13.0 million in the recently
completed quarter, compared with $5.9 million in the corresponding 1998 quarter
and $8.4 million in 1998's fourth quarter. During the first quarter of 1999
residential mortgage loans originated for sale to other investors totaled $652
million, up from $572 million in 1998's first quarter, but down from
$819 million in the fourth 1998 quarter. Mortgage banking revenues in the first
quarter of 1999 and the final 1998 quarter reflected a generally favorable
interest rate environment for borrowers. Higher interest rates in 1999 would
likely have the effect of dampening future mortgage loan origination volume.
Residential mortgage loans held for sale totaled $324 million and $309 million
at March 31, 1999 and 1998, respectively, and $445 million at December 31, 1998.
Residential mortgage loans serviced for others totaled $7.1 billion at March 31,
1999 and $7.3 billion at March 31 and December 31, 1998. Capitalized servicing
assets were $62 million at March 31, 1999 and December 31, 1998 and $59 million
at March 31, 1998. 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 were $15.9 million in the first
quarter of 1999, up from $11.2 million in the corresponding quarter of the
previous year and little changed from $16.0 million in the fourth quarter of
1998. Fees for services provided to customers in the areas formerly served by
ONBANCorp contributed approximately three-fourths of the increase from the first
quarter of 1998. Trust income was $10.3 million in the first quarter of 1999,
compared with $9.5 million in last year's initial quarter and $9.4 million in
the fourth quarter of 1998. Merchant discount and credit card fees were $1.7
million in the recent quarter, compared with $4.2 million in the year-earlier
period and $1.5 million in the fourth 1998 quarter. The decrease from the first
quarter of 1998 was predominately the result of the July 1998 sale of the
Company's retail credit card business. Trading account and foreign exchange
activity resulted in gains of $1.2 million in the first quarter of 1999,
compared with gains of $1.8 million in the first and fourth quarters of 1998.
Other revenue from operations totaled $22.0 million in the recent quarter,
compared with $13.0 million in the corresponding quarter of 1998 (after
excluding the $15.3 million of tax-exempt income related to the first quarter
1998 transfer of securities to the affiliated charitable foundation) and $18.2
million in the final quarter of 1998. The increase from the year-earlier period
was due largely to higher revenues of $2.1
-21-
million from tax-exempt income earned from the Company's ownership of bank-owned
life insurance, $1.5 million from the sale of mutual funds and annuities, and
$1.5 million from letter of credit and other credit-related fees, plus a
nonrecurring $2.9 million award received in recognition of the Company's
community reinvestment activities. The community reinvestment award and higher
revenues from the sale of mutual funds and annuities were the leading factors
contributing to the increase from the fourth quarter of 1998.
OTHER EXPENSE
Other expense totaled $128.6 million in the initial quarter of 1999, 22% higher
than $105.8 million in the year-earlier quarter, but little changed from $127.8
million in the fourth quarter of 1998, after excluding the $24.6 million
non-cash charitable contribution expense previously noted and $1.6 million of
nonrecurring ONBANCorp merger-related expenses from 1998's first quarter and
amortization of goodwill and core deposit intangible from each of the quarters.
Such amortization was $10.9 million in the first quarter of 1999, up from $1.8
million in the year-earlier quarter, but equal to 1998's fourth quarter.
Expenses related to the acquired operations of ONBANCorp significantly
contributed to the higher level of expenses since the first quarter of 1998.
However, since all operating systems and support operations of ONBANCorp have
been converted to or combined with those of the Company, the Company's operating
expenses cannot be precisely divided between or attributed directly to
operations acquired from ONBANCorp or the Company as it existed prior to the
merger.
Salaries and employee benefits expense was $68.4 million in the recent
quarter, 17% higher than the $58.3 million in the year-earlier quarter and
slightly higher than the $67.7 million in the fourth quarter of 1998. Salaries
and employee benefits relating to the operations acquired from ONBANCorp largely
contributed to the increased expense level in the first 1999 quarter over 1998's
first quarter. Other factors contributing to the higher expenses were merit
salary increases and higher costs associated with commissions, other
incentive-based compensation arrangements and employee benefits. Partially
offsetting the impact of these higher expenses were declines in expense
associated with stock appreciation rights.
Excluding the same items noted two paragraphs above, nonpersonnel
expense totaled $60.2 million in the recent quarter, compared with $47.5 million
in the first quarter of 1998 and $60.1 million in 1998's fourth quarter. The
increase from the first quarter of 1998 was largely the result of expenses
related to the acquired operations of ONBANCorp. Partially offsetting the
ONBANCorp-related increases were declines in credit card-related operating
expenses following the July 1998 sale of the retail credit card business.
Co-branded credit card rebate and other operating expenses based on card usage
were $1.7 million in the first quarter of 1998.
CAPITAL
Stockholders' equity at March 31, 1999 was $1.7 billion or 8.22% of total
assets, compared with $1.1 billion or 7.34% of total assets a year earlier and
$1.6 billion or 7.78% at December 31, 1998. Stockholders' equity per share was
$215.34 at March 31, 1999, up from $160.06 and $207.94 at March 31 and December
31, 1998, respectively. Excluding goodwill and core deposit intangible, net of
applicable tax effect, tangible equity per share was $148.95 at March 31, 1999,
compared with $157.75 a year earlier and $139.89 at December 31, 1998. 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 March 31, 1999 reflected a gain of $620
thousand, or $.08 per share, for the net after-tax impact of unrealized gains
-22-
on investment securities classified as available for sale, compared with
unrealized gains of $4.8 million or $.72 per share at March 31, 1998 and $2.9
million or $.37 per share at December 31, 1998. Such unrealized gains 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. As of March 31, 1999, core capital
included the $319 million carrying value of trust preferred securities. Total
capital also included $145 million of subordinated notes issued by M&T Bank in
prior years. The capital ratios of the Company and its banking subsidiaries,
Manufacturers and Traders Trust Company ("M&T Bank") and M&T Bank, N.A., as of
March 31, 1999 are presented in the accompanying table.
REGULATORY CAPITAL RATIOS
March 31, 1999
M&T M&T M&T
(Consolidated) Bank Bank, N.A.
-------------- ---- ----------
Core capital 8.95% 8.65% 14.87%
Total capital 11.12% 10.83% 16.47%
Leverage 7.34% 7.14% 7.38%
The rate of internal capital generation, or net income less dividends
paid expressed as an annualized percentage of average total stockholders'
equity, was 14.65% during the first quarter of 1999, compared with 16.80% and
12.31% in the first and fourth quarters of 1998, respectively.
During January 1999, M&T acquired 1,581 shares of its common stock for
$115 thousand pursuant to, and thereby completing, the repurchase program
announced in October 1998. In February 1999, M&T's board of directors authorized
another plan to repurchase up to 134,342 additional shares for reissuance upon
the possible future exercise of outstanding stock options. As of March 31, 1999,
no shares had been repurchased under the latest plan.
YEAR 2000 INITIATIVES
The "Year 2000" problem relates to the ability of computer systems, including
those in non-information technology equipment and systems ("Computer Systems"),
to distinguish date data between the twentieth and twenty-first centuries. The
Company's efforts to resolve the potential impact of the Year 2000 problem are
continuing. The risk for the Company is that all of the corrections and testing
will not be adequately completed in time for its own Computer Systems and/or for
those of other parties doing business with or providing services to the Company.
Addressing the Year 2000 problem requires that the Company identify,
remediate and test its Computer Systems that have date sensitive functions. As
part of this process, the Company has identified those of its Computer Systems
which, if uncorrected, would have a material adverse impact on the Company's
customers, the Company's compliance with applicable regulations, or the
Company's financial statements ("Mission Critical Systems"). Management
-23-
believes that all but two of the Company's Mission Critical Systems are Year
2000 compliant. These two remaining Mission Critical Systems are out-sourced
systems. Based on information supplied by the vendors, remediation efforts
related to the two systems are largely complete. Management expects the systems
to be certified Year 2000 compliant following completion of industry-wide
testing during the second quarter of 1999. The Company also expects that its
remaining Computer Systems will be Year 2000 compliant before the new
millennium.
The Company could also be adversely affected if its vendors, customers
and other parties that supply or rely on data processing systems are not Year
2000 compliant prior to the end of 1999. The Company, therefore, is working with
its data processing vendors and providing information to its commercial
customers regarding Year 2000 issues. Specifically, lending officers have been
trained to address Year 2000 issues with customers, including assessing customer
needs for Year 2000 compliance. The Company is also addressing the Year 2000
risks posed by other parties such as its funds providers and capital
market/asset management counterparties. 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. Notwithstanding the Company's efforts, a risk remains due to the
uncertainty that such parties will be Year 2000 compliant before the new
millennium. As a result, it is possible that if all aspects of Year 2000 issues
are not adequately resolved by each of the parties referred to above, the
Company's future business operations, financial position and results of
operations could be adversely impacted. 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. The Company
has, however, completed a second survey of its commercial customers and has
identified customers considered to have a potentially high Year 2000 business
risk. The Company will monitor the Year 2000 status of such customers
throughout 1999. The Company continues to evaluate information regarding Year
2000 activities received from significant vendors. Based on information
provided to date by these vendors, management believes that such parties are
taking steps to address Year 2000 issues on a timely basis.
Management is closely monitoring the Company's progress regarding Year
2000 issues. The Company has established a Year 2000 Steering Committee
consisting of senior members of management to oversee all Year 2000 activities.
In conjunction with its assessment of the Company's Year 2000 remediation plans,
and the remediation efforts of other parties such as those described in the
preceding paragraph, management is in the process of developing appropriate
contingency plans to mitigate risks associated with critical Year 2000 issues
that could arise during the period leading up to and after January 1, 2000.
These contingency plans, which are expected to be complete by the end of the
second quarter of 1999, will include business resumption contingency plans.
Through March 31, 1999, the Company has spent approximately $6.5
million (including approximately $1.2 million during the first three months of
1999) in addressing its potential Year 2000 problems. Management believes that
the Company is continuing to devote appropriate financial and human resources to
resolve its Year 2000 issues in a timely manner, and currently estimates that it
will expend an additional $2.5 to $4.5 million in order to address Year 2000
issues. A majority of the Company's past and future Year 2000 costs relate to
internal costs and constitute resources that would otherwise have been
reallocated within the Company. Such reallocation has not had a material adverse
impact on the Company's financial condition or results of operations, nor is it
expected to have a material adverse impact in future periods. Costs associated
with Year 2000 issues are recognized in expense as 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.
-24-
SEGMENT INFORMATION
The Company's reportable segments have been determined based upon its
internal profitability reporting system, which is organized by strategic
business unit. Certain strategic business units have been combined for
segment information reporting purposes where the nature of the products and
services, the type of customer and the distribution of those products are
similar. The reportable segments are Commercial Banking, Commercial Real
Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail
Banking.
The financial information of the Company's segments was compiled
utilizing the accounting policies described in note 21 to the Company's
consolidated financial statements as of and for the year ended December 31,
1998. The management accounting policies and processes utilized in compiling
segment financial information are highly subjective and, unlike financial
accounting, are not based on authoritative guidance similar to generally
accepted accounting principles. As a result, reported segments are not
necessarily comparable with similar information reported by other financial
institutions.
The Commercial Banking segment's earnings rose 55% to $20.7 million in
the first quarter of 1999 from $13.3 million in the comparable 1998 quarter.
Commercial loans obtained from ONBANCorp and loan growth in most of the markets
already served by the Company were the leading factors contributing to the
increase. In the initial quarter of 1999, the Commercial Real Estate segment
contributed net income of $14.4 million, compared with $15.8 million in the
year-earlier period. The decrease in net income was due in part to a higher
provision for loan losses of $1.2 million in 1999's first quarter over the
corresponding 1998 quarter. Net income contributed by the Discretionary
Portfolio segment in the first quarter of 1999 totaled $8.8 million, compared
with $5.4 million in the first quarter of 1998. Noninterest income in this
segment increased $2.3 million largely due to tax-exempt income earned from
increases in the cash surrender value of bank-owned life insurance. In addition,
an increase in earning assets, including residential mortgage loans and
investment securities obtained in the ONBANCorp acquisition, contributed to an
increase in net interest income of $2.9 million. The Residential Mortgage
Banking segment had net income of $7.0 million in the initial 1999 quarter, an
increase of 68% from $4.1 million in the corresponding 1998 quarter, largely the
result of a $7.3 million increase in gains from sales of loans and loan
servicing rights. A favorable interest rate environment was the primary factor
leading to an increase in loan origination volume and the related increase in
net income for this segment. As of March 31, 1999, loans serviced by the
Residential Mortgage Banking segment totaled $10.7 billion, including $3.5
billion of loans serviced for the Company, compared with $9.6 billion a year
earlier. Retail Banking earned $24.5 million in 1999's first quarter, up 28%
from $19.2 million in the year-earlier period. The acquisition of ONBANCorp on
April 1, 1998 was the leading factor contributing to the increase.
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 (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.
-25-
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
began after issuance of the statement. SFAS No. 133 should not be applied
retroactively to financial statements of prior periods.
The Company anticipates that adoption of SFAS No. 133 as of January 1,
2000 could increase the volatility of reported earnings and stockholders' equity
and could also result in the modification of certain data processing systems and
hedging practices.
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.
-26-
- -------------------------------------------------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
QUARTERLY TRENDS
1999 1998 Quarters
- -------------------------------------------------------------------------------------------------------------------------
First quarter Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS AND DIVIDENDS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
Interest income (taxable-equivalent basis) $358,370 360,571 361,921 364,838 279,306
Interest expense 175,238 183,424 184,850 184,644 134,585
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 183,132 177,147 177,071 180,194 144,721
Less: provision for possible credit losses 8,500 7,500 10,500 13,200 12,000
Other income 72,716 64,985 63,986 65,075 68,893
Less: other expense 139,466 138,756 138,490 155,004 133,873
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 107,882 95,876 92,067 77,065 67,741
Applicable income taxes 39,151 36,064 33,693 30,587 17,245
Taxable-equivalent adjustment 1,825 1,969 1,897 1,779 1,541
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 66,906 57,843 56,477 44,699 48,955
- -------------------------------------------------------------------------------------------------------------------------
Per common share data
Net income
Basic $ 8.65 7.44 7.09 5.55 7.34
Diluted 8.34 7.14 6.81 5.32 7.01
Cash dividends $ 1.00 1.00 1.00 1.00 .80
Average common shares outstanding
Basic 7,731 7,778 7,966 8,051 6,666
Diluted 8,023 8,105 8,288 8,409 6,981
========================================================================================================================
PERFORMANCE RATIOS, ANNUALIZED
Return on
Average assets 1.34% 1.14% 1.15% .92% 1.41%
Average common stockholders' equity 16.56% 14.20% 13.48% 10.77% 18.86%
Net interest margin on average earning assets
(taxable-equivalent basis) 3.98% 3.82% 3.93% 4.02% 4.39%
Nonperforming assets to total assets,
at end of quarter .62% .62% .67% .69% .53%
========================================================================================================================
CASH (TANGIBLE)OPERATING RESULTS (A)
Net income (in thousands) $ 76,333 67,326 67,703 65,445 51,448
Diluted net income per common share 9.51 8.31 8.17 7.78 7.37
Annualized return on
Average tangible assets 1.57% 1.36% 1.42% 1.38% 1.49%
Average tangible common stockholders' equity 27.66% 24.57% 23.90% 23.50% 20.13%
========================================================================================================================
BALANCE SHEET DATA
DOLLARS IN MILLIONS, EXCEPT PER SHARE
Average balances
Total assets $ 20,298 20,101 19,455 19,547 14,055
Earning assets 18,664 18,401 17,881 17,992 13,357
Investment securities 2,497 2,617 2,533 2,858 1,614
Loans and leases, net of unearned discount 15,761 15,389 15,124 14,978 11,602
Deposits 14,497 14,617 14,552 14,726 10,988
Stockholders' equity 1,638 1,616 1,662 1,664 1,053
- -------------------------------------------------------------------------------------------------------------------------
At end of quarter
Total assets $ 20,285 20,584 19,478 20,138 14,570
Earning assets 18,730 18,926 17,905 18,419 13,778
Investment securities 2,088 2,786 2,446 2,707 1,530
Loans and leases, net of unearned discount 15,813 15,792 15,163 15,245 12,033
Deposits 14,476 14,737 14,394 14,813 11,085
Stockholders' equity 1,667 1,602 1,649 1,659 1,069
Equity per common share 215.34 207.94 209.03 207.18 160.06
Tangible equity per common share 148.95 139.89 141.43 139.37 157.75
========================================================================================================================
MARKET PRICE PER COMMON SHARE
High $ 518 3/4 539 1/2 582 554 504
Low 464 400 410 480 429
Closing 479 518 15/16 461 554 499 7/8
========================================================================================================================
(a) Excludes amortization and balances related to goodwill and core deposit
intangible and the 1998 nonrecurring ONBANCorp merger-related expenses,
net of applicable income tax effects.
-27-
- ------------------------------------------------------------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
1999 First quarter 1998 Fourth quarter 1998 Third quarter
AVERAGE BALANCE IN MILLIONS; Average Average Average Average Average Average
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 $ 3,179 $ 64,028 8.17% 3,034 61,936 8.10% 2,935 61,711 8.34%
Real estate 9,691 191,482 7.90 9,458 189,222 8.00 9,273 191,102 8.24
Consumer 2,891 60,003 8.42 2,897 63,154 8.65 2,916 65,389 8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 15,761 315,513 8.12 15,389 314,312 8.10 15,124 318,202 8.35
- ------------------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 1 6 2.68 2 14 3.80 2 16 3.07
Federal funds sold and agreements
to resell securities 331 3,823 4.68 276 3,690 5.30 119 1,634 5.44
Trading account 74 1,257 6.91 117 2,066 6.99 103 1,797 6.93
- ------------------------------------------------------------------------------------------------------------------------------------
Total money-market assets 406 5,086 5.08 395 5,770 5.80 224 3,447 6.11
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,112 15,832 5.77 1,398 20,905 5.93 1,561 23,644 6.01
Obligations of states and
political subdivisions 72 1,116 6.30 78 1,217 6.19 85 1,321 6.18
Other 1,313 20,823 6.43 1,141 18,367 6.39 887 15,307 6.84
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,497 37,771 6.13 2,617 40,489 6.14 2,533 40,272 6.31
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 18,664 358,370 7.79 18,401 360,571 7.77 17,881 361,921 8.03
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (308) (310) (311)
Cash and due from banks 442 425 413
Other assets 1,500 1,585 1,472
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 20,298 20,101 19,455
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 399 1,280 1.30 390 1,379 1.40 344 1,328 1.53
Savings deposits 4,881 28,810 2.39 4,828 30,707 2.52 4,709 31,395 2.65
Time deposits 7,049 90,892 5.23 7,216 98,526 5.42 7,414 103,525 5.54
Deposits at foreign office 303 3,429 4.59 341 4,208 4.89 293 3,964 5.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 12,632 124,411 3.99 12,775 134,820 4.19 12,760 140,212 4.36
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,138 25,735 4.88 2,055 26,640 5.14 2,069 29,376 5.63
Long-term borrowings 1,647 25,092 6.18 1,344 21,964 6.48 861 15,262 7.03
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 16,417 175,238 4.33 16,174 183,424 4.50 15,690 184,850 4.67
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,865 1,842 1,792
Other liabilities 378 469 311
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 18,660 18,485 17,793
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 1,638 1,616 1,662
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 20,298 20,101 19,455
====================================================================================================================================
Net interest spread 3.46 3.27 3.36
Contribution of interest-free funds 0.52 0.55 0.57
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $183,132 3.98% 177,147 3.82% 177,071 3.93%
====================================================================================================================================
*INCLUDES NONACCRUAL LOANS.
**INCLUDES AVAILABLE FOR SALE SECURITIES AT AMORTIZED COST.
-28-
- ------------------------------------------------------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
1998 Second quarter 1998 First quarter
AVERAGE BALANCE IN MILLIONS; Average Average Average Average
INTEREST IN THOUSANDS balance Interest rate balance Interest rate
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc $ 2,954 $ 62,185 8.44% 2,393 $ 49,797 8.44%
Real estate 8,951 185,138 8.27 7,012 150,205 8.57
Consumer 3,073 69,830 9.11 2,197 51,194 9.45
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 14,978 317,153 8.49 11,602 251,196 8.78
- ------------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 37 364 3.93 1 6 2.91
Federal funds sold and agreements
to resell securities 88 1,247 5.70 127 1,722 5.51
Trading account 31 494 6.31 13 169 5.13
- ------------------------------------------------------------------------------------------------------------------------------
Total money-market assets 156 2,105 5.40 141 1,897 5.45
- ------------------------------------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,816 27,620 6.10 1,013 15,861 6.35
Obligations of states and
political subdivisions 90 1,396 6.25 37 628 6.83
Other 952 16,564 6.98 564 9,724 7.00
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,858 45,580 6.40 1,614 26,213 6.59
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 17,992 364,838 8.13 13,357 279,306 8.48
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (310) (279)
Cash and due from banks 417 321
Other assets 1,448 656
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 19,547 14,055
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 304 1,189 1.57 270 955 1.44
Savings deposits 4,718 30,636 2.60 3,446 22,607 2.66
Time deposits 7,686 105,500 5.51 5,753 80,634 5.68
Deposits at foreign office 267 3,562 5.34 247 3,239 5.31
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 12,975 140,887 4.36 9,716 107,435 4.48
- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,207 30,969 5.63 1,353 18,597 5.57
Long-term borrowings 695 12,788 7.38 428 8,553 8.11
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 15,877 184,644 4.66 11,497 134,585 4.75
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,751 1,272
Other liabilities 255 233
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 17,883 13,002
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 1,664 1,053
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 19,547 14,055
==============================================================================================================================
Net interest spread 3.47 3.73
Contribution of interest-free funds 0.55 0.66
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $ 180,194 4.02% $144,721 4.39%
==============================================================================================================================
*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 1999 Annual Meeting of Stockholders of M&T was held on April 20,
1999. At the 1999 Annual Meeting, stockholders elected twenty-two (22)
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 1999 Annual Meeting.
NUMBER OF VOTES
NOMINEE FOR WITHHELD
- -------------- --------- --------
William F. Allyn 6,964,656 25,690
Brent D. Baird 6,968,659 21,687
John H. Benisch 6,966,728 23,618
Robert J. Bennett 6,918,550 71,796
C. Angela Bontempo 6,964,433 25,913
Robert T. Brady 6,547,995 442,351
Patrick J. Callan 6,968,521 21,825
Richard E. Garman 6,552,482 437,864
James V. Glynn 6,964,609 25,737
Roy M. Goodman 6,956,308 34,038
Patrick W.E. Hodgson 6,968,182 22,164
Samuel T. Hubbard, Jr. 6,548,032 442,314
Russell A. King 6,963,622 26,724
Lambros J. Lambros 6,552,045 438,301
Reginald B. Newman, II 6,964,428 25,918
Peter J. O'Donnell, Jr. 6,964,257 26,089
Jorge G. Pereira 6,968,298 22,048
Robert E. Sadler, Jr. 6,968,352 21,994
John L. Vensel 6,846,725 143,621
Herbert L. Washington 6,529,702 460,644
John L. Wehle, Jr. 6,963,984 26,362
Robert G. Wilmers 6,967,972 22,374
At the Annual Meeting, stockholders also approved an amendment to the M&T Bank
Corporation 1983 Stock Option Plan ("Stock Option Plan") permitting any
employee of the Company to be eligible to receive grants under the Stock
Option Plan. The following table presents the tabulation of the votes with
respect to the amendment to the Stock Option Plan.
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Number of Votes
------------------------------------------------------
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
6,519,007 420,606 50,733 0
Item 5. Other Information.
(None.)
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report:
Exhibit
NO.
10.3 M&T Bank Corporation 1983 Stock Option Plan as last amended
April 20, 1999. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K. M&T did not file any Current Reports on Form
8-K during the fiscal quarter ended March 31, 1999.
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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: May 14, 1999 By: /s/ Michael P. Pinto
-------------------------------
Michael P. Pinto
Executive Vice President
and Chief Financial Officer
-32-
EXHIBIT INDEX
Exhibit
No.
- -------
10.3 M&T Bank Corporation 1983 Stock Option Plan as last amended April 20,
1999. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
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