UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 of incorporation) (I.R.S. Employer Identification No.) One M&T Plaza, Buffalo, New York 14203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (716)842-5445 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $5 par value New York Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: 8.234% Capital Securities of M&T Capital Trust I (and the Guarantee of M&T Bank Corporation with respect thereto) (Title of class) 8.234% Junior Subordinated Debentures of M&T Bank Corporation (Title of class) 8.277% Capital Securities of M&T Capital Trust II (and the Guarantee of M&T Bank Corporation with respect thereto) (Title of class) 8.277% Junior Subordinated Debentures of M&T Bank Corporation (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the Common Stock, $5 par value, held by non-affiliates of the registrant, computed by reference to the closing price as of the close of business on February 18, 2000: $2,279,047,672. Number of shares of the Common Stock, $5 par value, outstanding as of the close of business on February 18, 2000: 7,687,175 shares. Documents Incorporated By Reference: (1) Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders of M&T Bank Corporation in Part III. -1-
M&T BANK CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 <TABLE> <CAPTION> CROSS-REFERENCE SHEET Form 10-K PART I PAGE <S> <C> Item 1. Business. 5 Statistical disclosure pursuant to Guide 3 I. Distribution of assets, liabilities, and stockholders' equity; interest rates and interest differential A. Average balance sheets 50-51 B. Interest income/expense and resulting yield or rate on average interest-earning assets (including non- accrual loans) and interest-bearing liabilities 50-51 C. Rate/volume variances 19 II. Investment portfolio A. Year-end balances 16 B. Maturity schedule and weighted average yield 62 C. Aggregate carrying value of securities that exceed ten percent of stockholders' equity 77 III. Loan portfolio A. Year-end balances 16,79 B. Maturities and sensitivities to changes in interest rates 59 C. Risk elements Nonaccrual, past-due and renegotiated loans 57 Actual and pro forma interest on certain loans 79 Nonaccrual policy 70 Loan concentrations 34 IV. Summary of loan loss experience A. Analysis of the allowance for loan losses 55 Factors influencing management's judgment concerning the adequacy of the allowance and provision 32-34,71 B. Allocation of the allowance for loan losses 56 V. Deposits A. Average balances and rates 50-51 B. Maturity schedule of domestic time deposits with balances of $100,000 or more 58 VI. Return on equity and assets 18,25-26,39 VII. Short-term borrowings 83-84 </TABLE> -2-
M&T BANK CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 <TABLE> <CAPTION> CROSS-REFERENCE SHEET--CONTINUED Form 10-K PAGE PART I, continued <S> <C> Item 2. Properties. 20,81 Item 3. Legal Proceedings. 20 Item 4. Submission of Matters to a Vote of Security Holders. 20 Executive Officers of the Registrant. 20-22 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 23 A. Principal market 23 Market prices 47 B. Approximate number of holders at year-end 16 C. Frequency and amount of dividends declared 17-18,46-47 D. Restrictions on dividends 11,112 Item 6. Selected Financial Data. A. Selected consolidated year-end balances 16 B. Consolidated earnings, etc. 17-18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 23-62 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 36-39,60,63 Item 8. Financial Statements and Supplementary Data. A. Report of Independent Accountants 64 B. Consolidated Balance Sheet - December 31, 1999 and 1998 65 C. Consolidated Statement of Income - Years ended December 31, 1999, 1998 and 1997 66 D. Consolidated Statement of Cash Flows - Years ended December 31, 1999, 1998 and 1997 67 E. Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997 68 </TABLE> -3-
M&T BANK CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 <TABLE> <CAPTION> CROSS-REFERENCE SHEET--CONTINUED Form 10-K PAGE PART II, continued Item 8. Financial Statements and Supplementary Data, continued <S> <C> F. Notes to Financial Statements 69-115 G. Quarterly Trends 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 116 PART III Item 10. Directors and Executive Officers of the Registrant. 116 Item 11. Executive Compensation. 116 Item 12. Security Ownership of Certain Beneficial Owners and Management. 116 Item 13. Certain Relationships and Related Transactions. 116 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 117 Signatures 118-120 Exhibit Index 121-124 </TABLE> -4-
PART I Item 1. BUSINESS. M&T Bank Corporation ("Registrant" or "M&T") is a New York business corporation which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA") and under Article III-A of the New York Banking Law ("Banking Law"). The principal executive offices of the Registrant are located at One M&T Plaza, Buffalo, New York 14203. The Registrant was incorporated in November 1969. The Registrant and its direct and indirect subsidiaries are collectively referred to herein as the "Company". As of December 31, 1999 the Company had consolidated total assets of $22.4 billion, deposits of $15.4 billion and stockholders' equity of $1.8 billion. The Company had 5,604 full-time and 965 part-time employees as of December 31, 1999. At December 31, 1999, the Registrant had two wholly owned bank subsidiaries: Manufacturers and Traders Trust Company ("M&T Bank") and M&T Bank, National Association ("M&T Bank, N.A."). The banks collectively offer a wide range of commercial banking, trust and investment services to their customers. At December 31, 1999, M&T Bank represented 96% of consolidated assets of the Company. On June 1, 1999, M&T completed the acquisition of FNB Rochester Corp. ("FNB"), a bank holding company headquartered in Rochester, New York. Immediately after the acquisition, FNB's banking subsidiary, First National Bank of Rochester, which had 17 banking offices in western and central New York State, was merged with and into M&T Bank. The acquisition was accounted for using the purchase method of accounting and, accordingly, the operations of FNB have been included in the financial results of the Company since the acquisition date. FNB's stockholders received $76 million in cash and 122,516 shares of M&T common stock in exchange for FNB shares outstanding at the time of acquisition. Assets acquired totaled approximately $676 million and included loans and leases of $393 million and investment securities of $148 million. Liabilities assumed on June 1 were approximately $541 million and included $511 million of deposits. On September 24, 1999, M&T Bank completed the acquisition of 29 upstate New York branch offices from The Chase Manhattan Bank ("Chase"). The branch offices had approximately $634 million of deposits and approximately $44 million of retail installment and commercial loans at the closing. In addition, on September 30, 1999 M&T Bank received investment management and custody accounts having assets of approximately $286 million. Chase also agreed to transfer up to approximately $195 million of other trust and fiduciary account assets to M&T Bank following the receipt of required court approvals. Subject to the receipt of court approval, it is expected that this portion of the transaction will be completed during the first quarter of 2000. In connection with the transactions described in the two preceding paragraphs, the Company recorded approximately $153 million of goodwill and core deposit intangible. Nonrecurring expenses related to systems conversions and other costs of integrating and conforming the acquired operations with and into the operations of M&T Bank totaled $4.7 million ($3.0 million after-tax) during the year ended December 31, 1999. The Company from time to time considers acquiring banks, thrift institutions, branch offices or other businesses within markets currently served or in other nearby markets. The Company has pursued acquisition opportunities in the past, continues to review different opportunities, including the possibility of major acquisitions, and intends to continue this practice. -5-
SUBSIDIARIES Olympia Financial Corp. ("Olympia"), a wholly owned subsidiary of M&T, is a Delaware corporation that holds the stock of M&T Bank and is registered as a bank holding company under the Bank Holding Company Act. Its registered office is located at 1209 Orange Street, Wilmington, Delaware 19801. M&T Bank is a banking corporation which is incorporated under the laws of the State of New York. M&T Bank is a member of the Federal Reserve System and the Federal Home Loan Bank System, and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. M&T acquired all of the issued and outstanding shares of the capital stock of M&T Bank in December 1969. Olympia acquired all of the issued and outstanding shares of the capital stock of M&T Bank in connection with M&T's April 1, 1998 acquisition of ONBANCorp, Inc. ("ONBANCorp"). The stock of Olympia and M&T Bank represents a major asset of M&T. M&T Bank operates under a charter granted by the State of New York in 1892, and the continuity of its banking business is traced to the organization of the Manufacturers and Traders Bank in 1856. The principal executive offices of M&T Bank are located at One M&T Plaza, Buffalo, New York 14203. As of December 31, 1999, M&T Bank had 261 banking offices located throughout New York State, 19 offices in northeastern Pennsylvania, plus a branch in Nassau, The Bahamas. As of December 31, 1999, M&T Bank had consolidated total assets of $21.6 billion, deposits of $14.7 billion and stockholder's equity of $2.1 billion. The deposit liabilities of M&T Bank are insured by the FDIC through either its Bank Insurance Fund ("BIF") or its Savings Association Insurance Fund ("SAIF"). Of M&T Bank's $14.7 billion in assessable deposits at December 31, 1999, 85% were assessed as BIF-insured and the remainder as SAIF-insured deposits. As a commercial bank, M&T Bank offers a broad range of financial services to a diverse base of consumers, businesses, professional clients, governmental entities and financial institutions located in its markets. Lending is largely focused on consumers residing in New York State and northeastern Pennsylvania, and on small and medium-size businesses based in those areas. In addition, the Company conducts lending activities in other states through various subsidiaries. M&T Bank and certain of its subsidiaries also offer commercial mortgage loans secured by income producing properties or properties used by borrowers in a trade or business. Other financial services are also provided through operating subsidiaries. M&T Bank, N.A., a national banking association and a member of the Federal Reserve System and the FDIC, commenced operations on October 2, 1995. The deposit liabilities of M&T Bank, N.A. are insured by the FDIC through the BIF. The main office of M&T Bank, N.A. is located at 48 Main Street, Oakfield, New York 14125. M&T Bank, N.A. offers selected deposit and loan products on a nationwide basis, primarily through direct mail and telephone marketing techniques. M&T Bank, N.A. is also a licensed insurance agency, and offers insurance products primarily through the banking offices of M&T Bank. As of December 31, 1999, M&T Bank, N.A. had total assets of $852 million, deposits of $693 million and stockholder's equity of $50 million. M&T Credit Corporation ("M&T Credit"), a wholly owned subsidiary of M&T Bank, was incorporated as a New York business corporation in April 1994. M&T Credit is a credit and leasing company offering consumer loans and commercial loans and leases. Its headquarters are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203, with offices in Massachusetts and Pennsylvania. As of December 31, 1999, M&T Credit had assets of $699 million and stockholder's equity of $25 million. M&T Credit recorded $42 million of revenue during 1999. M&T Financial Corporation ("M&T Financial"), a New York business corporation, is a wholly owned subsidiary of M&T Bank which specializes in capital-equipment leasing. M&T Financial was formed in October 1985, had assets of $79 million and stockholder's equity of $19 million as of December 31, 1999, and recorded approximately $4 million of revenue in 1999. The headquarters -6-
of M&T Financial are located at One M&T Plaza, Buffalo, New York 14203. M&T Investment Company, Inc. ("M&T Investment Company"), a wholly owned subsidiary of M&T Bank, was incorporated as a New Jersey business corporation in December 1999. Operated as a New Jersey Investment Company, M&T Investment Company owns all of the outstanding common stock and 87.5% of the preferred stock of M&T Real Estate, Inc. As of December 31, 1999, M&T Investment Company had assets of approximately $6.1 billion and stockholder's equity of approximately $6.0 billion. Excluding dividends from M&T Real Estate, Inc., M&T Investment Company recorded $534 thousand of revenue in 1999. The headquarters of M&T Investment Company are located at One Maynard Drive, Park Ridge, New Jersey 07656. M&T Mortgage Corporation ("M&T Mortgage"), the wholly owned mortgage banking subsidiary of M&T Bank, was incorporated as a New York business corporation in November 1991. M&T Mortgage's principal activities are comprised of the origination of residential mortgage loans and providing residential mortgage loan servicing to M&T Bank, M&T Bank, N.A. and others. M&T Mortgage operates throughout New York State, and also maintains branch offices in Arizona, Colorado, Idaho, Massachusetts, Ohio, Oregon, Pennsylvania, Utah and Washington. M&T Mortgage had assets of $519 million and stockholder's equity of $144 million as of December 31, 1999, and recorded approximately $122 million of revenue during 1999. Residential mortgage loans serviced by M&T Mortgage for non-affiliates totaled $7.2 billion at December 31, 1999. The headquarters of M&T Mortgage are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203. M&T Mortgage Reinsurance Company, Inc. ("M&T Reinsurance"), a wholly owned subsidiary of M&T Bank, was incorporated as a Vermont business corporation in July 1999. M&T Reinsurance enters into reinsurance contracts with insurance companies who insure mortgage lenders against the risk of a mortgage borrower's payment default. M&T Reinsurance receives a share of the premium for those policies in exchange for accepting a portion of the insurer's risk of borrower default. M&T Reinsurance had assets of approximately $720 thousand and stockholder's equity of approximately $673 thousand as of December 31, 1999, and recorded approximately $178 thousand of revenue during 1999. M&T Reinsurance's principal and registered office is at 148 College Street, Burlington, Vermont 05401. M&T Real Estate, Inc.("M&T Real Estate"), a subsidiary of M&T Investment Company, was incorporated as a New York business corporation in August 1995. All of the outstanding common stock and 87.5% of the preferred stock of M&T Real Estate is owned by M&T Investment Company. The remaining 12.5% of M&T Real Estate's preferred stock is owned by officers or former officers of the Company. M&T Real Estate engages in commercial real estate lending and provides loan servicing to M&T Bank and others. As of December 31, 1999, M&T Real Estate had assets of $5.8 billion and stockholders' equity of $5.7 billion. M&T Real Estate recorded $441 million of revenue in 1999. Commercial mortgage loans serviced for non-affiliates totaled $21 million at December 31, 1999. The headquarters of M&T Real Estate are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203. M&T Securities, Inc. ("M&T Securities") is a wholly owned subsidiary of M&T Bank that was incorporated as a New York business corporation in November 1985. M&T Securities is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended, as an investment advisor under the Investment Advisors Act of 1940, as amended, and is licensed as an insurance agent. It provides securities brokerage, investment advisory, and insurance services. As of December 31, 1999, M&T Securities had assets of $13 million and stockholder's equity of $6 million. M&T Securities recorded $30 million of revenue during 1999. The headquarters of M&T Securities are located at One M&T Plaza, Buffalo, New York 14203. -7-
Highland Lease Corporation ("Highland Lease"), a wholly owned subsidiary of M&T Bank, was incorporated as a New York business corporation in October 1994. Highland Lease is a consumer leasing company with headquarters at One M&T Plaza, Buffalo, New York 14203. As of December 31, 1999, Highland Lease had assets of $395 million and stockholder's equity of $37 million. Highland Lease recorded $25 million of revenue during 1999. In December 1999, the names of First Empire Capital Trust I, First Empire Capital Trust II, and OnBank Capital Trust I were changed to M&T Capital Trust I, M&T Capital Trust II, and M&T Capital Trust III, respectively. During 1997, the Company formed two Delaware business trusts and ONBANCorp formed one Delaware business trust to issue preferred capital securities ("Capital Securities"). M&T Capital Trust I ("Trust I") issued $150 million of 8.234% Capital Securities on January 17, 1997, and M&T Capital Trust II ("Trust II") issued $100 million of 8.277% Capital Securities on May 30, 1997. On February 4, 1997, M&T Capital Trust III ("Trust III" and, together with Trust I and Trust II, the "Trusts") issued $60 million of 9.25% preferred capital securities. The common securities ("Common Securities") of Trust I and Trust II are wholly owned by M&T and the common securities of Trust III are wholly owned by Olympia. The Common Securities of each Trust 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 M&T's Tier 1 capital. The proceeds from the issuances of the Capital Securities and the Common Securities were used by the Trusts to purchase junior subordinated deferrable interest debentures issued by M&T in the case of Trust I and Trust II and Olympia in the case of Trust III. The junior subordinated debentures represent the sole assets of each Trust and payments under the junior subordinated debentures are the sole source of cash flow for each Trust. As of December 31, 1999, Trust I had assets of $160 million and stockholders' equity of $155 million, and during 1999 Trust I recorded $13 million of revenue. Trust II had assets of $104 million and stockholders' equity of $103 million at December 31, 1999, and during 1999 Trust II recorded $9 million of revenue. Trust III had assets of $73 million and stockholders' equity of $62 million at December 31, 1999, and during 1999 Trust III recorded $5 million of revenue. The Registrant and its banking subsidiaries have a number of other special-purpose or inactive subsidiaries. These other subsidiaries represented, individually and collectively, an insignificant portion of the Company's consolidated assets, net income and stockholders' equity at December 31, 1999. SEGMENT INFORMATION, PRINCIPAL PRODUCTS/SERVICES AND FOREIGN OPERATIONS Information about the Registrant's business segments is included in note 19 of Notes to Financial Statements filed herewith in Part II, Item 8, "Financial Statements and Supplementary Data" and is further discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company's international activities are discussed in note 15 of Notes to Financial Statements filed herewith in Part II, Item 8, "Financial Statements and Supplementary Data". The Registrant's reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Commercial Banking, -8-
Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking. The only activities that, as a class, contributed 10% or more of the sum of consolidated interest income and other income in each of the last three years were lending and investment securities transactions. The amount of income from such sources during those years is set forth on the Company's Consolidated Statement of Income filed herewith in Part II, Item 8, "Financial Statements and Supplementary Data". SUPERVISION AND REGULATION OF THE COMPANY The banking industry is subject to extensive state and federal regulation and continues to undergo significant change. The following discussion summarizes certain aspects of the banking laws and regulations that affect the Company. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company are impossible to determine with any certainty. A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations and earnings of the Company. To the extent that the following information describes statutory or regulatory provisions, it is qualified entirely by reference to the particular statutory or regulatory provision. FINANCIAL SERVICES MODERNIZATION The Gramm-Leach-Bliley Act ("Gramm-Leach") was signed into law on November 12, 1999 and enables combinations among banks, securities firms and insurance companies beginning March 11, 2000 by repealing depression-era laws which restricted such affiliations. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking. In order to engage in these new financial activities, a bank holding company must qualify and register with the Board of Governors of the Federal Reserve System ("Federal Reserve Board") as a "financial holding company" by demonstrating that each of its bank subsidiaries is "well capitalized," "well managed," and has at least a "satisfactory" rating under the Community Reinvestment Act of 1977 ("CRA"). These new financial activities authorized by Gramm-Leach may also be engaged in by a "financial subsidiary" of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and its sister-bank affiliates) to be well capitalized and well managed; the aggregate consolidated assets of all of that bank's financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements. Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the U.S. Securities and Exchange Commission will regulate their securities activities and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. The foregoing discussion is qualified in its entirety by reference to the -9-
statutory provisions of Gramm-Leach and the implementing regulations which are adopted by various government agencies pursuant to Gramm-Leach. BANK HOLDING COMPANY REGULATION As a registered bank holding company, the Registrant and its nonbank subsidiaries are subject to supervision and regulation under the BHCA by the Federal Reserve Board and the New York State Banking Superintendent ("Banking Superintendent"). The Federal Reserve Board requires regular reports from the Registrant and is authorized by the BHCA to make regular examinations of the Registrant and its subsidiaries. Although it meets the qualifications for electing to become a financial holding company, the Registrant has elected to retain its pre-Gramm-Leach status for the present time under the BHCA. The Registrant may not acquire direct or indirect ownership or control of more than 5% of the voting shares of any company, including a bank, without the prior approval of the Federal Reserve Board, except as specifically authorized under the BHCA. The Registrant is also subject to regulation under the Banking Law with respect to certain acquisitions of domestic banks. Under the BHCA, the Registrant, subject to the approval of the Federal Reserve Board, may acquire shares of non-banking corporations the activities of which are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board has enforcement powers over bank holding companies and their non-banking subsidiaries, among other things, to interdict activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative orders or written agreements with a federal bank regulator. These powers may be exercised through the issuance of cease-and-desist orders, civil money penalties or other actions. Under the Federal Reserve Board's statement of policy with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit all available resources to support such institutions in circumstances where it might not do so absent such policy. Although this "source of strength" policy has been challenged in litigation, the Federal Reserve Board continues to take the position that it has authority to enforce it. For a discussion of circumstances under which a bank holding company may be required to guarantee the capital levels or performance of its subsidiary banks, SEE CAPITAL ADEQUACY, below. The Federal Reserve also has the authority to terminate any activity of a bank holding company that constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution or to terminate its control of any bank or nonbank subsidiaries. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the "Interstate Banking Act") generally permits bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; permits a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition; and permits banks to establish and operate DE NOVO interstate branches whenever the host state opts-in to DE NOVO branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed. The Banking Law authorizes interstate branching by merger or acquisition on a reciprocal basis, and permits the acquisition of a single branch without -10-
restriction, but does not provide for DE NOVO interstate branching. Bank holding companies and their subsidiary banks are also subject to the provisions of the CRA. Under the terms of the CRA, the Federal Reserve Board (or other appropriate bank regulatory agency) is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the communities served by that bank, including low- and moderate- income neighborhoods. Furthermore, such assessment is also required of any bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of a federally-regulated financial institution, or to open or relocate a branch office. In the case of a bank holding company applying for approval to acquire a bank or bank holding company, the Federal Reserve Board will assess the record of each subsidiary bank of the applicant bank holding company in considering the application. The Banking Law contains provisions similar to the CRA which are applicable to New York-chartered banks. SUPERVISION AND REGULATION OF BANK SUBSIDIARIES The Registrant's banking subsidiaries are subject to supervision and regulation, and are examined regularly, by various bank regulatory agencies: M&T Bank by the Federal Reserve Board and the Banking Superintendent; and M&T Bank, N.A. by the Comptroller of the Currency (the "OCC"). The Registrant and its direct non-banking subsidiaries are affiliates, within the meaning of the Federal Reserve Act, of the Registrant's subsidiary banks and their subsidiaries. As a result, the Registrant's subsidiary banks and their subsidiaries are subject to restrictions on loans or extensions of credit to, purchases of assets from, investments in, and transactions with the Registrant and its direct non-banking subsidiaries and on certain other transactions with them or involving their securities. Gramm-Leach places similar restrictions on the Registrant's subsidiary banks making loans or extending credit to, purchasing assets from, investing in, or entering into transactions with, their financial subsidiaries, although the Registrant's subsidiary banks have not yet commenced any activities through financial subsidiaries. Under the "cross-guarantee" provisions of the FDI Act, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by either the BIF or SAIF of the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. Thus, any insured depository institution subsidiary of M&T could incur liability to the FDIC in the event of a default of another insured depository institution owned or controlled by M&T. The FDIC's claim under the cross-guarantee provisions is superior to claims of stockholders of the insured depository institution or its holding company and to most claims arising out of obligations or liabilities owed to affiliates of the institution, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the BIF or SAIF or both. DIVIDENDS FROM BANK SUBSIDIARIES M&T Bank and M&T Bank, N.A. are subject, under one or more of the banking laws, to restrictions on the amount and frequency (no more often than quarterly) of dividend declarations. Future dividend payments to the Registrant by its subsidiary banks will be dependent on a number of factors, including the earnings and financial condition of each such bank, and are subject to the limitations referred to in note 20 of Notes to Financial Statements filed herewith in Part II, Item 8, "Financial Statements and Supplementary Data," and to other statutory powers of bank regulatory agencies. -11-
An insured depository institution is prohibited from making any capital distribution to its owner, including any dividend, if, after making such distribution, the depository institution fails to meet the required minimum level for any relevant capital measure, including the risk-based capital adequacy and leverage standards discussed below. CAPITAL ADEQUACY The Federal Reserve Board, the FDIC and the OCC have adopted risk-based capital adequacy guidelines for bank holding companies and banks under their supervision. Under these guidelines, the so-called "Tier 1 capital" and "Total capital" as a percentage of risk-weighted assets and certain off-balance sheet instruments must be at least 4% and 8%, respectively. The Federal Reserve Board, the FDIC and the OCC have also imposed a leverage standard to supplement their risk-based ratios. This leverage standard focuses on a banking institution's ratio of Tier 1 capital to average total assets, adjusted for goodwill and certain other items. Under these guidelines, banking institutions that meet certain criteria, including excellent asset quality, high liquidity, low interest rate exposure and good earnings, and that have received the highest regulatory rating must maintain a ratio of Tier 1 capital to total adjusted average assets of at least 3%. Institutions not meeting these criteria, as well as institutions with supervisory, financial or operational weaknesses, along with those experiencing or anticipating significant growth are expected to maintain a Tier 1 capital to total adjusted average assets ratio equal to at least 4% to 5%. As reflected in the following table, the risk-based capital ratios and leverage ratios of the Registrant, M&T Bank and M&T Bank, N.A. as of December 31, 1999 exceeded the required capital ratios for classification as "well capitalized," the highest classification under the regulatory capital guidelines. Capital Components and Ratios at December 31, 1999 (dollars in millions) <TABLE> <CAPTION> Registrant M&T Bank, (Consolidated) M&T Bank N.A. -------------- -------- --------- <S> <C> <C> <C> Capital Components Tier 1 capital $ 1,490 $ 1,436 $ 50 Total capital 1,846 1,787 55 Risk-weighted assets and off-balance sheet instruments $ 18,008 $ 17,534 $ 468 Risk-based Capital Ratio Tier 1 capital 8.27% 8.19% 10.74% Total capital 10.25% 10.19% 11.76% Leverage Ratio 6.92% 6.92% 6.18% </TABLE> The federal banking agencies, including the Federal Reserve Board and the OCC, maintain risk-based capital standards in order to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risk of nontraditional activities, as well as reflect the actual performance and expected risk of loss on certain multifamily housing loans. Bank regulators periodically propose amendments to the risk-based capital guidelines and related regulatory framework. While the Company's management studies such proposals, the timing of adoption, ultimate form and effect of any such proposed amendments on the Company's capital requirements and operations cannot be predicted. -12-
The federal banking agencies are required to take "prompt corrective action" in respect of depository institutions and their bank holding companies that do not meet minimum capital requirements. FDICIA established five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". A depository institution's capital tier, or that of its bank holding company, depends upon where its capital levels are in relation to various relevant capital measures, including a risk-based capital measure and a leverage ratio capital measure, and certain other factors. Under the implementing regulations adopted by the federal banking agencies, a bank holding company or bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" bank holding company or bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMELS rating of 1). A bank holding company or bank is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMELS rating of 1); (B) "significantly undercapitalized" if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)"critically undercapitalized" if the bank has a ratio of tangible equity to total assets equal to or less than 2%. The Federal Reserve Board may reclassify a "well capitalized" bank holding company or bank as "adequately capitalized" or subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower capital category if it determines that the bank holding company or bank is in an unsafe or unsound condition or deems the bank holding company or bank to be engaged in an unsafe or unsound practice and not to have corrected the deficiency. M&T, Olympia, M&T Bank and M&T Bank, N.A. currently meet the definition of "well capitalized" institutions. "Undercapitalized" depository institutions, among other things, are subject to growth limitations, are prohibited, with certain exceptions, from making capital distributions, are limited in their ability to obtain funding from a Federal Reserve Bank and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan and provide appropriate assurances of performance. If a depository institution fails to submit an acceptable plan, including if the holding company refuses or is unable to make the guarantee described in the previous sentence, it is treated as if it is "significantly undercapitalized". Failure to submit or implement an acceptable capital plan also is grounds for the appointment of a conservator or a receiver. "Significantly undercapitalized" depository institutions may be subject to a number of additional requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Moreover, the parent holding company of a significantly undercapitalized depository institution may be ordered to divest itself of the institution or of nonbank subsidiaries of the holding company. "Critically undercapitalized" institutions, among other things, are prohibited from making any payments of principal and interest on subordinated debt, and are subject to the appointment of a receiver or conservator. -13-
Each federal banking agency prescribes standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares and other standards as they deem appropriate. The Federal Reserve Board and OCC have adopted such standards. Depository institutions that are not "well capitalized" or "adequately capitalized" and have not received a waiver from the FDIC are prohibited from accepting or renewing brokered deposits. As of December 31, 1999, M&T Bank and M&T Bank, N.A. had approximately $998 million and $4 million in brokered deposits, respectively. Although M&T has issued shares of common stock in connection with acquisitions or at other times, the Company has generally maintained capital ratios in excess of minimum regulatory guidelines largely through internal capital generation (i.e. net income less dividends paid). Historically, M&T's dividend payout ratio and dividend yield, when compared with other bank holding companies, has been relatively low, thereby allowing for capital retention to support growth or to facilitate purchases of M&T's common stock to be held as treasury stock. Management's policy of reinvestment of earnings and repurchase of shares of common stock is intended to enhance M&T's earnings per share prospects and thereby reward stockholders over time with capital gains in the form of increased stock price rather than high dividend income. FDIC DEPOSIT INSURANCE ASSESSMENTS As institutions with deposits insured by the BIF and the SAIF, M&T Bank and M&T Bank, N.A. are subject to FDIC deposit insurance assessments. Under current law the regular insurance assessments to be paid by BIF-insured and SAIF-insured institutions are specified in schedules issued by the FDIC that specify, at semiannual intervals, target reserve ratios designed to maintain the reserve ratios of each of those insurance funds at 1.25% of their estimated insured deposits. The FDIC is also authorized to impose one or more special assessments. The FDIC has implemented a risk-based deposit premium assessment system under which each depository institution is placed in one of nine assessment categories based on the institution's capital classification under the prompt corrective action provisions described above, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The adjusted assessment rates for both BIF-insured and SAIF-insured institutions under the current system range from .00% to .27% depending upon the assessment category into which the insured institution is placed. Neither of the Company's banking subsidiaries paid regular insurance assessments to the FDIC in 1999. However, the FDIC retains the ability to increase regular BIF and SAIF assessments and to levy special additional assessments. In addition to deposit insurance fund assessments, beginning in 1997 the FDIC assessed BIF-assessable and SAIF-assessable deposits to fund the repayment of debt obligations of the Financing Corporation ("FICO"). FICO is a government agency-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. The current annualized rates established by the FDIC for both BIF-assessable and SAIF-assessable deposits are 2.12 basis points (hundredths of one percent). Any significant increases in assessment rates or additional special assessments by the FDIC could have an adverse impact on the results of operations and capital of M&T Bank or M&T Bank, N.A. -14-
GOVERNMENTAL POLICIES The earnings of the Company are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and Federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on the Company's business and earnings. COMPETITION The Company competes in offering commercial and personal financial services with other banking institutions and with firms in a number of other industries, such as thrift institutions, credit unions, personal loan companies, sales finance companies, leasing companies, securities firms and insurance companies. Furthermore, diversified financial services companies are able to offer a combination of these services to their customers on a nationwide basis. The Company's operations are significantly impacted by state and federal regulations applicable to the banking industry. Moreover, the provisions of Gramm-Leach may increase competition among diversified financial services providers, and the Interstate Banking Act and the Banking Law may further ease entry into New York State by out-of-state banking institutions. As a result, the number of financial services providers and banking institutions with which the Company competes may grow in the future. OTHER LEGISLATIVE INITIATIVES Proposals may be introduced in the United States Congress and in the New York State Legislature and before various bank regulatory authorities which would alter the powers of, and restrictions on, different types of banking organizations and which would restructure part or all of the existing regulatory framework for banks, bank holding companies and other providers of financial services. Moreover, other bills may be introduced in Congress which would further regulate, deregulate or restructure the financial services industry. It is not possible to predict whether these or any other proposals will be enacted into law or, even if enacted, the effect which they may have on the Company's business and earnings. STATISTICAL DISCLOSURE PURSUANT TO GUIDE 3 SEE cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K. Additional information is included in the following tables. -15-
<TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------------- Item 1, Table 1 SELECTED CONSOLIDATED YEAR-END BALANCES In thousands 1999 1998 1997 - ------------------------------------------------------------ --------------- --------------- --------------- <S> <C> <C> <C> Money-market assets Interest-bearing deposits at banks $ 1,092 674 668 Federal funds sold and resell agreements 643,555 229,066 53,087 Trading account 641,114 173,122 57,291 - ------------------------------------------------------------ --------------- --------------- --------------- Total money-market assets 1,285,761 402,862 111,046 Investment securities U.S. Treasury and federal agencies 737,586 1,321,000 1,081,247 Obligations of states and political subdivisions 79,189 73,789 38,018 Other 1,083,747 1,390,775 605,953 - ------------------------------------------------------------ --------------- --------------- --------------- Total investment securities 1,900,522 2,785,564 1,725,218 Loans and leases Commercial, financial, leasing, etc. 3,697,058 3,211,427 2,406,640 Real estate - construction 525,241 489,112 254,434 Real estate - mortgage 10,152,905 9,289,521 6,765,408 Consumer 3,197,657 3,015,641 2,339,051 - ------------------------------------------------------------ --------------- --------------- --------------- Total loans and leases 17,572,861 16,005,701 11,765,533 Unearned discount (166,090) (214,171) (268,965) Allowance for credit losses (316,165) (306,347) (274,656) - ------------------------------------------------------------ --------------- --------------- --------------- Loans and leases, net 17,090,606 15,485,183 11,221,912 Goodwill and core deposit intangible 648,040 546,036 17,288 Real estate and other assets owned 10,000 11,129 8,413 Total assets 22,409,115 20,583,891 14,002,935 - ------------------------------------------------------------ --------------- --------------- --------------- Noninterest-bearing deposits 2,260,432 2,066,814 1,458,241 NOW accounts 583,471 509,307 346,795 Savings deposits 5,198,681 4,830,678 3,344,697 Time deposits 7,088,345 7,027,083 5,762,497 Deposits at foreign office 242,691 303,270 250,928 - ------------------------------------------------------------ --------------- --------------- --------------- Total deposits 15,373,620 14,737,152 11,163,158 Short-term borrowings 2,554,159 2,229,976 1,050,918 Long-term borrowings 1,775,133 1,567,543 427,819 Total liabilities 20,612,069 18,981,525 12,972,669 - ------------------------------------------------------------ --------------- --------------- --------------- Stockholders' equity 1,797,046 1,602,366 1,030,266 - ------------------------------------------------------------ --------------- --------------- --------------- In thousands 1996 1995 - ------------------------------------------------------------ ------------ ------------ <S> <C> <C> Money-market assets Interest-bearing deposits at banks 47,325 125,500 Federal funds sold and resell agreements 125,326 1,000 Trading account 37,317 9,709 - ------------------------------------------------------------ ------------- ------------ Total money-market assets 209,968 136,209 Investment securities U.S. Treasury and federal agencies 1,023,038 1,087,005 Obligations of states and political subdivisions 41,445 35,250 Other 507,215 647,040 - ------------------------------------------------------------ ------------- ------------ Total investment securities 1,571,698 1,769,295 Loans and leases Commercial, financial, leasing, etc. 2,206,282 2,013,937 Real estate - construction 90,563 77,604 Real estate - mortgage 6,199,931 5,648,590 Consumer 2,623,445 2,133,592 - ------------------------------------------------------------ ------------- ------------ Total loans and leases 11,120,221 9,873,723 Unearned discount (398,098) (317,874) Allowance for credit losses (270,466) (262,344) - ------------------------------------------------------------ ------------- ------------ Loans and leases, net 10,451,657 9,293,505 Goodwill and core deposit intangible 18,923 28,234 Real estate and other assets owned 8,523 7,295 Total assets 12,943,915 11,955,902 - ------------------------------------------------------------ ------------- ------------ Noninterest-bearing deposits 1,352,929 1,184,359 NOW accounts 334,787 768,559 Savings deposits 3,280,788 2,765,301 Time deposits 5,352,749 4,596,053 Deposits at foreign office 193,236 155,303 - ------------------------------------------------------------ ------------- ------------ Total deposits 10,514,489 9,469,575 Short-term borrowings 1,127,900 1,270,022 Long-term borrowings 178,002 192,791 Total liabilities 12,038,256 11,109,649 - ------------------------------------------------------------ ------------- ------------ Stockholders' equity 905,659 846,253 - ------------------------------------------------------------ ------------- ------------ </TABLE> <TABLE> <CAPTION> STOCKHOLDERS, EMPLOYEES AND OFFICES Number at year-end 1999 1998 1997 1996 1995 - -------------------------------------- ------------- ------------ ------------ ----------- ----------- <S> <C> <C> <C> <C> <C> Stockholders 4,991 5,207 3,449 3,654 3,787 Employees 6,569 6,467 5,083 5,180 4,889 Offices 310 283 210 202 181 - -------------------------------------- ------------- ------------ ------------ ----------- ----------- </TABLE> -16-
<TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ----------------------------------------------------------------------------------------------------------------------------------- Item 1, Table 2 CONSOLIDATED EARNINGS IN THOUSANDS 1999 1998 1997 - ------------------------------------------------- -------------- -------------- ------------- INTEREST INCOME <S> <C> <C> <C> Loans and leases, including fees $ 1,323,262 1,198,639 954,974 Money-market assets Deposits at banks 87 400 2,475 Federal funds sold and resell agreements 24,491 8,293 2,989 Trading account 3,153 4,403 1,781 Investment securities Fully taxable 118,741 139,731 99,640 Exempt from federal taxes 8,897 7,984 5,640 - ---------------------------------------------------- ----------- -------------- ------------- Total interest income 1,478,631 1,359,450 1,067,499 - ---------------------------------------------------- ----------- -------------- ------------- INTEREST EXPENSE NOW accounts 4,683 4,851 3,455 Savings deposits 121,888 115,345 90,907 Time deposits 367,889 388,185 327,611 Deposits at foreign office 12,016 14,973 12,160 Short-term borrowings 104,911 105,582 44,341 Long-term borrowings 107,847 58,567 29,619 - ---------------------------------------------------- ----------- -------------- ------------- Total interest expense 719,234 687,503 508,093 - ---------------------------------------------------- ----------- -------------- ------------- NET INTEREST INCOME 759,397 671,947 559,406 Provision for credit losses 44,500 43,200 46,000 - ---------------------------------------------------- ----------- -------------- ------------- Net interest income after provision for credit losses 714,897 628,747 513,406 - ---------------------------------------------------- ----------- -------------- ------------- OTHER INCOME Mortgage banking revenues 71,819 65,646 51,547 Service charges on deposit accounts 73,612 57,357 43,377 Trust income 40,751 38,211 30,688 Merchant discount and other credit card fees 7,515 12,436 19,395 Trading account and foreign exchange gains 315 3,963 3,690 Gain (loss) on sales of bank investment securities 1,575 1,761 (280) Gain on sales of venture capital investments 80 - 2,677 Other revenues from operations 86,708 83,565 39,435 - ---------------------------------------------------- ----------- -------------- ------------- Total other income 282,375 262,939 190,529 - ---------------------------------------------------- ----------- -------------- ------------- OTHER EXPENSE Salaries and employee benefits 284,822 259,487 220,017 Equipment and net occupancy 73,131 66,553 53,299 Printing, postage and supplies 17,510 17,603 13,747 Amortization of goodwill and core deposit intangible 49,715 34,487 7,291 Deposit insurance 2,798 2,710 1,935 Other costs of operations 150,982 185,283 125,487 - ---------------------------------------------------- ----------- -------------- ------------- Total other expense 578,958 566,123 421,776 - ---------------------------------------------------- ----------- -------------- ------------- Income before income taxes 418,314 325,563 282,159 Income taxes 152,688 117,589 105,918 - ---------------------------------------------------- ----------- -------------- ------------- NET INCOME $ 265,626 207,974 176,241 - ---------------------------------------------------- ----------- -------------- ------------- DIVIDENDS DECLARED Common $ 35,128 28,977 21,207 Preferred - - - - ---------------------------------------------------- ----------- -------------- ------------- IN THOUSANDS 1996 1995 - ------------------------------------------------- -------------- --------------- INTEREST INCOME <S> <C> <C> Loans and leases, including fees 883,500 796,501 Money-market assets Deposits at banks 2,413 8,181 Federal funds sold and resell agreements 2,985 3,007 Trading account 980 1,234 Investment securities Fully taxable 107,415 118,791 Exempt from federal taxes 2,637 2,760 - ---------------------------------------------------- -------------- --------------- Total interest income 999,930 930,474 - ---------------------------------------------------- -------------- --------------- INTEREST EXPENSE NOW accounts 9,430 11,902 Savings deposits 84,822 87,612 Time deposits 286,088 239,882 Deposits at foreign office 12,399 6,952 Short-term borrowings 59,442 84,225 Long-term borrowings 14,227 11,157 - ---------------------------------------------------- -------------- --------------- Total interest expense 466,408 441,730 - ---------------------------------------------------- -------------- --------------- NET INTEREST INCOME 533,522 488,744 Provision for credit losses 43,325 40,350 - ---------------------------------------------------- -------------- --------------- Net interest income after provision for credit losses 490,197 448,394 - ---------------------------------------------------- -------------- --------------- OTHER INCOME Mortgage banking revenues 44,484 37,142 Service charges on deposit accounts 40,659 38,290 Trust income 27,672 25,477 Merchant discount and other credit card fees 18,266 10,675 Trading account and foreign exchange gains 2,421 2,783 Gain (loss) on sales of bank investment securities (37) 4,479 Gain on sales of venture capital investments 3,175 2,619 Other revenues from operations 31,110 25,753 - ---------------------------------------------------- -------------- --------------- Total other income 167,750 147,218 - ---------------------------------------------------- -------------- --------------- OTHER EXPENSE Salaries and employee benefits 208,342 188,222 Equipment and net occupancy 51,346 50,526 Printing, postage and supplies 15,167 14,442 Amortization of goodwill and core deposit intangible 6,292 6,293 Deposit insurance 9,337 14,675 Other costs of operations 118,494 100,281 - ---------------------------------------------------- -------------- --------------- Total other expense 408,978 374,439 - ---------------------------------------------------- -------------- --------------- Income before income taxes 248,969 221,173 Income taxes 97,866 90,137 - ---------------------------------------------------- -------------- --------------- NET INCOME 151,103 131,036 - ---------------------------------------------------- -------------- --------------- DIVIDENDS DECLARED Common 18,617 16,224 Preferred 900 3,600 - ---------------------------------------------------- -------------- --------------- </TABLE> -17-
<TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------------------------------- Item 1, Table 3 COMMON SHAREHOLDER DATA 1999 1998 1997 1996 1995 - ---------------------------------------------------- ----- ----- ----- ----- ----- <S> <C> <C> <C> <C> <C> Per Share Net income Basic $ 34.05 27.30 26.60 22.54 19.61 Diluted 32.83 26.16 25.26 21.08 17.98 Cash dividends declared 4.50 3.80 3.20 2.80 2.50 Stockholders' equity at year-end 232.41 207.94 155.86 135.45 125.33 Tangible stockholders' equity at year-end 151.40 139.89 153.24 132.62 120.94 Dividend payout ratio 13.22 % 13.93 % 12.03 % 12.39 % 12.73 % - ---------------------------------------------------- ------- ------ ------ ------ ------ </TABLE> -18-
<TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------------------- Item 1, Table 4 CHANGES IN INTEREST INCOME AND EXPENSE* 1999 compared with 1998 ---------------------------------------- Resulting from Total changes in: --------------------------- Increase (decrease) in thousands change Volume Rate - ----------------------------------------------------------------- ------------ ------------- ------------ Interest income <S> <C> <C> <C> Loans and leases, including fees $ 124,849 173,474 (48,625) Money-market assets Deposits at banks (313) (305) (8) Federal funds sold and agreements to resell securities 16,198 16,499 (301) Trading account (1,303) (1,250) (53) Investment securities U.S. Treasury and federal agencies (34,922) (30,636) (4,286) Obligations of states and political subdivisions 94 101 (7) Other 15,102 17,203 (2,101) - ----------------------------------------------------------------- ---------- Total interest income $ 119,705 - ----------------------------------------------------------------- ---------- Interest expense Interest-bearing deposits NOW accounts $ (168) 810 (978) Savings deposits 6,543 17,854 (11,311) Time deposits (20,296) 2,885 (23,181) Deposits at foreign office (2,957) (1,667) (1,290) Short-term borrowings (671) 7,074 (7,745) Long-term borrowings 49,280 57,149 (7,869) - ----------------------------------------------------------------- ---------- Total interest expense $ 31,731 - ----------------------------------------------------------------- ---------- 1998 compared with 1997 -------------------------------------------- Resulting from Total changes in: ---------------------------- Increase (decrease) in thousands change Volume Rate - ----------------------------------------------------------------- -------------- -------------- ------------ Interest income <S> <C> <C> <C> Loans and leases, including fees 243,937 279,155 (35,218) Money-market assets Deposits at banks (2,075) (1,414) (661) Federal funds sold and agreements to resell securities 5,304 5,298 6 Trading account 2,587 2,723 (136) Investment securities U.S. Treasury and federal agencies 17,062 19,964 (2,902) Obligations of states and political subdivisions 1,734 1,878 (144) Other 24,748 23,816 932 - ----------------------------------------------------------------- -------------- Total interest income 293,297 - ----------------------------------------------------------------- -------------- Interest expense Interest-bearing deposits NOW accounts 1,396 1,008 388 Savings deposits 24,438 26,516 (2,078) Time deposits 60,574 66,505 (5,931) Deposits at foreign office 2,813 3,023 (210) Short-term borrowings 61,241 60,997 244 Long-term borrowings 28,948 32,764 (3,816) - ----------------------------------------------------------------- -------------- Total interest expense 179,410 - ----------------------------------------------------------------- -------------- </TABLE> * Interest income data are on a taxable-equivalent basis. The apportionment of changes resulting from the combined effect of both volume and rate was based on the separately determined volume and rate changes. -19-
Item 2. PROPERTIES. Both M&T and M&T Bank maintain their executive offices at One M&T Plaza in Buffalo, New York. This twenty-one story headquarters building, containing approximately 276,000 rentable square feet of space, is owned in fee by M&T Bank, and was completed in 1967. M&T, M&T Bank and their subsidiaries occupy approximately 84% of the building and the remainder is leased to non-affiliated tenants. At December 31, 1999, the cost of this property (including improvements subsequent to the initial construction), net of accumulated depreciation, was $8.9 million. In September 1992, M&T Bank acquired an additional facility in Buffalo, New York with approximately 365,000 rentable square feet of space at a cost of approximately $12 million. Approximately 77% of this facility, known as M&T Center, is occupied by M&T Bank and its subsidiaries, with the remainder leased to non-affiliated tenants. At December 31, 1999, the cost of this building (including improvements subsequent to acquisition), net of accumulated depreciation, was $15.1 million. M&T Bank also owns and occupies two separate facilities in the Buffalo area which support certain back-office and operations functions of the Company. The total square footage of these facilities approximates 223,000 square feet and their combined cost (including improvements subsequent to acquisition), net of accumulated depreciation, was $13.1 million at December 31, 1999. As a result of the April 1, 1998 ONBANCorp merger, M&T Bank acquired a facility in Syracuse, New York with approximately 136,000 rentable square feet of space. Approximately 48% of this facility is occupied by M&T Bank, with the remainder leased to non-affiliated tenants. At December 31, 1999, the cost of this building, net of accumulated depreciation, was $7.9 million. The cost, net of accumulated depreciation and amortization, of the Company's premises and equipment is detailed in note 6 of Notes to Financial Statements filed herewith in Part II, Item 8, "Financial Statements and Supplementary Data". Of the 281 domestic banking offices of the Registrant's subsidiary banks, 98 are owned in fee and 183 are leased. Item 3. LEGAL PROCEEDINGS. M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the Registrant's executive officers is presented below as of February 25, 2000. The year the officer was first appointed to the indicated position with the Registrant or its subsidiaries is shown parenthetically. In the case of each corporation noted below, officers' terms run until the first meeting of the board of directors after such corporation's annual meeting, and until their successors are elected and qualified. -20-
Robert J. Bennett, age 58, is chairman of the board and a director (1998) of the Registrant. He is a vice chairman of the board and a director (1998) of M&T Bank and serves as chairman of the Directors Advisory Council of M&T Bank's Syracuse Division. Mr. Bennett is also a director (1998) of M&T Bank, N.A. He served as chairman of the board, president, chief executive officer and a director of ONBANCorp from May 1989 until its merger with M&T on April 1, 1998. Robert G. Wilmers, age 65, is president (1988), chief executive officer (1983) and a director (1982) of the Registrant. Prior to the acquisition of ONBANCorp, Mr. Wilmers held the additional position of chairman of the board of the Registrant from April 1994 through March 1998. He is chairman of the board, chief executive officer (1983) and a director (1982) of M&T Bank, and served as president of M&T Bank from March 1984 to June 1996. Mr. Wilmers is chairman of the board and a director of M&T Bank, N.A.(1995). He is a director of M&T Financial (1983). Emerson L. Brumback, age 48, is an executive vice president (1997) of the Registrant and M&T Bank, and is in charge of the Company's Retail Banking Division. Mr. Brumback is chairman of the board (1999) and a director (1997) of Highland Lease and executive vice president (1998) and a director of M&T Bank, N.A.(1997). He is chairman of the board (1999) and a director (1997) of M&T Credit and a director of M&T Mortgage (1997), M&T Reinsurance (1999) and M&T Securities (1997). Mr. Brumback was executive vice president, national retail distribution, at BancOne Corporation prior to joining the Company. Atwood Collins, III, age 53, is an executive vice president of the Registrant (1997) and M&T Bank (1996) and is chairman of the Directors Advisory Council (1998) of M&T Bank's New York City Division. Previously, Mr. Collins served as president and chief executive officer of the New York City Division of M&T Bank (1997), and as president, chief executive officer and a director (1995) of The East New York Saving Bank, which had been a wholly owned subsidiary of the Registrant prior to its merger with and into M&T Bank on May 24, 1997. He is a director of M&T Real Estate (1995). Mr. Collins has responsibility for managing the Company's middle market, commercial real estate and business banking activities in Westchester, Putnam and Rockland counties of New York State and Connecticut, business banking in New York City and Investment banking, Institutional and Correspondent banking activities. He also manages the Company's Facilities Management and Services group. Mark J. Czarnecki, age 44, is an executive vice president of the Registrant (1999) and M&T Bank (1997) and is in charge of the M&T Investment Group, which is comprised of M&T Securities, the Insurance Services Division of M&T Bank, N.A. and the Trust and Investment Services Division of M&T Bank. Mr. Czarnecki is a director of M&T Securities (1999) and an executive vice president of M&T Bank, N.A. (1997). Mr. Czarnecki has held a number of management positions with M&T Bank since 1977, most recently as senior vice president of the private client services group of the Trust and Investment Services Division (1994), and prior thereto as an administrative vice president and regional manager for the Retail Banking Division. -21-
Brian E. Hickey, age 47, is an executive vice president of the Registrant (1997) and M&T Bank (1996) and is president and a member of the Directors Advisory Council (1994) of the Rochester Division of M&T Bank. Mr. Hickey is a director of M&T Financial (1996). In addition to managing all of M&T Bank's business segments in the Rochester market, Mr. Hickey has responsibility for managing the Company's Western New York Commercial Banking Division. James L. Hoffman, age 60, is an executive vice president of the Registrant (1997) and M&T Bank (1996) and is president (1992) of the Hudson Valley Division of M&T Bank. Mr. Hoffman is a director of M&T Investment Company (1999). Mr. Hoffman served as chairman of the board, president, chief executive officer and a director (1983) of The First National Bank of Highland, which had been a wholly owned subsidiary of the Registrant prior to its merger with and into M&T Bank on February 29, 1992. Adam C. Kugler, age 42, is an executive vice president and treasurer (1997) of the Registrant and M&T Bank, and is in charge of the Company's Treasury Division. Mr. Kugler is chairman of the board and a director of M&T Investment Company (1999), a director of M&T Financial (1997), M&T Securities (1997) and is an executive vice president, Treasurer and a director of M&T Bank, N.A. (1997). Mr Kugler was previously a senior vice president in the Treasury Division of M&T Bank. Ray E. Logan, age 62, is an executive vice president of M&T Bank (1999) and is in charge of the Company's Human Resources Division. Mr. Logan served as senior vice president of M&T Bank from 1986 to 1999. John L. Pett, age 51, is an executive vice president (1997) and chief credit officer (1995) of the Registrant and is an executive vice president and chief credit officer of M&T Bank (1996). Mr. Pett is a director of Highland Lease (1997) and M&T Credit (1997). He is an executive vice president (1998) and a director (1996) of M&T Bank, N.A. Mr. Pett served as senior vice president of the Registrant from 1991 to 1997. Michael P. Pinto, age 44, is an executive vice president and chief financial officer of the Registrant (1997) and M&T Bank (1996), and is in charge of the Company's Finance Division and its Technology and Banking Operations Division. Mr. Pinto is chairman of the board, president and a director of Olympia Financial Corp. (1997), and a director of M&T Financial (1996), M&T Mortgage (1996), M&T Real Estate (1996) and M&T Investment Company (1999). He is an executive vice president and chief financial officer (1996) and a director (1998) of M&T Bank, N.A. Mr. Pinto served as senior vice president and controller of the Registrant from 1993 to 1997. Robert E. Sadler, Jr., age 54, is an executive vice president (1990) and a director (1999) of the Registrant, president and a director of M&T Bank (1996), and is in charge of the Company's Commercial Banking Division. Mr. Sadler is president, chief executive officer and a director of M&T Bank, N.A.(1995); chairman of the board (1989) and a director of M&T Financial (1985); chairman of the board and a director of M&T Mortgage (1991); chairman of the board and a director of M&T Securities (1994); and chairman of the board, president and a director of M&T Real Estate (1995). -22-
PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Registrant's common stock is traded under the symbol MTB on the New York Stock Exchange. SEE cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K for market prices of the Registrant's common stock, approximate number of common stockholders at year-end, frequency and amounts of dividends on common stock and restrictions on the payment of dividends. Item 6. SELECTED FINANCIAL DATA. SEE cross-reference sheet for disclosures incorporated elsewhere in this Annual Report on Form 10-K. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CORPORATE PROFILE AND SIGNIFICANT DEVELOPMENTS M&T Bank Corporation ("M&T") is a bank holding company headquartered in Buffalo, New York with consolidated assets of $22.4 billion at December 31, 1999. M&T and its consolidated subsidiaries are hereinafter referred to collectively as "the Company." M&T's wholly owned banking subsidiaries are Manufacturers and Traders Trust Company ("M&T Bank") and M&T Bank, National Association ("M&T Bank, N.A."). M&T Bank, with total assets of $21.6 billion at December 31, 1999, is a New York-chartered commercial bank with 261 banking offices throughout New York State, 19 banking offices in northeastern Pennsylvania and an office in Nassau, The Bahamas. M&T Bank and its subsidiaries offer a broad range of financial services to a diverse base of consumers, businesses, professional clients, governmental entities and financial institutions located in its markets. Lending is largely focused on consumers residing in New York State and northeastern Pennsylvania, and on small and medium size businesses based in those areas. Certain lending activities are also conducted in other states through various subsidiaries. M&T Bank's subsidiaries include Highland Lease Corporation, a consumer leasing company; M&T Credit Corporation, a consumer lending and commercial leasing and lending company; M&T Financial Corporation, a commercial leasing company; M&T Mortgage Corporation, a residential mortgage banking company; M&T Real Estate, Inc., a commercial mortgage lender; and M&T Securities, Inc., a broker/dealer. M&T Bank, N.A., with total assets of $852 million at December 31, 1999, is a national bank with an office in Oakfield, New York. M&T Bank, N.A. offers selected deposit, loan and insurance products on a nationwide basis, primarily through telephone and direct mail marketing techniques. Insurance products are also offered by M&T Bank, N.A. through banking offices of M&T Bank. On September 24, 1999, M&T Bank completed the acquisition of 29 upstate New York branches from The Chase Manhattan Bank ("Chase"). The branches had approximately $634 million of deposits and approximately $44 million of retail installment and commercial loans at the closing. In addition, on September 30, 1999 M&T Bank received from Chase investment management and custody accounts having assets of approximately $286 million. Chase also agreed to transfer up to approximately $195 million of other trust and fiduciary account assets to M&T Bank following the receipt of required court approvals. It is expected that this portion of the transaction will be completed in the first quarter of 2000. -23-
On June 1, 1999, M&T completed the acquisition of FNB Rochester Corp. ("FNB"), a bank holding company headquartered in Rochester, New York. Immediately after the acquisition, FNB's banking subsidiary, First National Bank of Rochester, which had 17 banking offices in western and central New York State, was merged with and into M&T Bank. The acquisition was accounted for using the purchase method of accounting, and, accordingly, the operations of FNB have been included in the financial results of the Company since the acquisition date. FNB's stockholders received $76 million in cash and 122,516 shares of M&T common stock in exchange for FNB shares outstanding at the time of acquisition. Assets acquired totaled approximately $676 million and included loans and leases of $393 million and investment securities of $148 million. Liabilities assumed on June 1 were approximately $541 million and included $511 million of deposits. In connection with the transactions described in the two preceding paragraphs the Company recorded approximately $153 million of goodwill and core deposit intangible. Nonrecurring expenses related to systems conversions and other costs of integrating and conforming the acquired operations with and into M&T Bank totaled $4.7 million ($3.0 million after-tax) during the year ended December 31, 1999 and consisted largely of expenses for professional services and other temporary help fees associated with the conversion of systems and/or integration of operations; initial marketing and promotion expenses designed to introduce M&T Bank to Chase and FNB customers; and printing, supplies and other costs. Since the systems conversions and integration of operations are complete, the Company does not expect to incur a material amount of additional integration costs. In accordance with generally accepted accounting principles, included in the determination of goodwill were charges totaling $4.1 million, net of applicable income taxes, for severance of former Chase and FNB employees; legal and other professional fees; and termination of contracts for data processing and other services. As of December 31, 1999, the remaining unpaid portion of merger-related expenses and charges included in the determination of goodwill were $130 thousand and $960 thousand, respectively. The resolution of any preacquisition contingencies is not expected to have a material impact on the allocation of the purchase price or the amount of goodwill recorded as part of the acquisitions. On April 1, 1998, M&T completed the acquisition of ONBANCorp, Inc. ("ONBANCorp"), a bank holding company headquartered in Syracuse, New York. Immediately after the acquisition, ONBANCorp's two banking subsidiaries, OnBank & Trust Co. in Syracuse, which operated 59 offices in upstate New York, and Franklin First Savings Bank in Wilkes-Barre, Pennsylvania, which operated 19 offices in northeastern Pennsylvania, were merged with and into M&T Bank. The acquisition was accounted for using the purchase method of accounting and, accordingly, the operations acquired from ONBANCorp have been included in the financial results of the Company since the acquisition date. ONBANCorp's stockholders received $266 million in cash and 1,429,998 shares of M&T common stock in exchange for ONBANCorp shares outstanding at the time of acquisition. The accompanying table provides a summary of assets acquired -24-
and liabilities assumed on April 1, 1998 in connection with the ONBANCorp transaction: <TABLE> <CAPTION> Assets (in thousands) <S> <C> Investment securities $1,576,604 Loans and leases, net of unearned discount 2,970,306 Allowance for possible credit losses (27,905) --------- Loans and leases, net 2,942,401 Goodwill and core deposit intangible 562,533 Other assets 411,727 --------- Total assets $5,493,265 ========== Liabilities Deposits $3,767,729 Short-term borrowings 541,689 Long-term borrowings 268,617 Other liabilities 41,680 --------- Total liabilities $4,619,715 ========== </TABLE> In connection with the ONBANCorp acquisition, the Company recorded approximately $563 million of goodwill and core deposit intangible, and incurred nonrecurring expenses related to systems conversions and other costs of integrating and conforming the acquired operations with and into the operations of M&T Bank of approximately $21.3 million ($14.0 million after-tax) during the year ended December 31, 1998. Included in the determination of goodwill were charges totaling $16.8 million, net of applicable income taxes, for severance of former ONBANCorp employees; investment banking, legal and other professional fees; and termination of ONBANCorp contracts for data processing and other services. As of December 31, 1998, the remaining unpaid portion of merger-related expenses and charges included in the determination of goodwill were $2.1 million and $1.1 million, respectively. Substantially all of these balances were paid during 1999. In December 1999, M&T Bank entered into a definitive agreement to acquire Matthews, Bartlett & Dedecker, Inc. ("MBD"), an insurance agency located in Buffalo, New York. MBD provides insurance services principally to the commercial market and will operate as a subsidiary of M&T Bank. It is expected that the acquisition will be completed in the first quarter of 2000 and that it will not have a material impact on the Company's financial position or results of operations. OVERVIEW M&T reported net income in 1999 of $265.6 million or $32.83 of diluted earnings per common share, increases of 28% and 25%, respectively, from $208.0 million or $26.16 per diluted share in 1998. Basic earnings per common share rose to $34.05 in 1999, an increase of 25% from $27.30 in 1998. Net income totaled $176.2 million in 1997, while diluted and basic earnings per share were $25.26 and $26.60, respectively. The after-tax impact of nonrecurring expenses associated with the merger and acquisition activity previously described was $3.0 million ($4.7 million pre-tax) or $.37 of diluted earnings per share and $.38 of basic earnings per share in 1999, compared with $14.0 million ($21.3 million pre-tax) or $1.76 of diluted earnings per share and $1.84 of basic earnings per share in 1998. The impact on 1999's net income resulting from the FNB and Chase branch acquisitions was not material. Net income represented a return on average assets in 1999 of 1.26%, -25-
compared with 1.14% in 1998 and 1.32% in 1997. The return on average common stockholders' equity was 15.30% in 1999, 13.86% in 1998 and 18.49% in 1997. Excluding the impact of merger-related expenses, the rates of return on average assets and average common equity in 1999 were 1.28% and 15.47%, respectively, compared with 1.21% and 14.79%, respectively, in 1998. Growth in average loans and leases was the most significant factor contributing to a 13% increase in taxable-equivalent net interest income to $767 million in 1999 from $679 million in 1998. Average loans and leases rose to $16.4 billion in 1999, an increase of 15% from $14.3 billion in 1998. Similarly, average earning assets totaled $19.1 billion in 1999, up 13% from $16.9 billion in 1998. A 30% increase in average loans outstanding in 1998, including the impact of the $3.0 billion of loans obtained on April 1, 1998 in the ONBANCorp acquisition, was the most significant factor for the rise in that year's net interest income from $565 million in 1997. Average loans and average earning assets in 1997 were $11.0 billion and $12.8 billion, respectively. Improvement in 1998's net interest income resulting from asset growth was partially offset by a reduction of the Company's net interest margin, or taxable-equivalent net interest income expressed as a percentage of average earning assets. Net interest margin in 1999 was 4.02%, compared with 4.01% in 1998 and 4.42% in 1997. The provision for credit losses in 1999 was $44.5 million, compared with $43.2 million in 1998 and $46.0 million in 1997. Net charge-offs totaled $40.3 million in 1999, compared with $39.4 million in 1998 and $41.8 million in 1997. Net charge-offs as a percentage of average loans outstanding declined to .25% in 1999, from .28% in 1998 and .38% in 1997. 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 the contribution, in 1998 the Company recognized charitable contributions expense of $24.6 million and recognized tax-exempt other income of $15.3 million. The contribution provided an income tax benefit of approximately $10.0 million and, accordingly, resulted in an after-tax increase in 1998's net income of $700 thousand, or $.09 per diluted share. Excluding the effect of this contribution, noninterest income of $282 million in 1999 increased 14% from $248 million in 1998 and was 48% above the $191 million earned in 1997. Growth in mortgage banking revenues, fees earned from deposit services, and a full year of revenues associated with operations obtained in the ONBANCorp acquisition were factors contributing to the increase from 1998 to 1999. Revenues related to operations and/or market areas associated with the ONBANCorp acquisition, along with higher revenues from mortgage banking, trust activities and bank owned life insurance contributed to the increase from 1997 to 1998. Approximately 40% of the increase from 1997 to 1998 was attributable to revenues related to operations and/or market areas associated with the ONBANCorp acquisition. Noninterest expenses associated with operations, which exclude amortization of goodwill and core deposit intangible and certain nonrecurring expenses, were $525 million in 1999, an increase of 8% from $486 million in 1998. The excluded items consist of nonrecurring merger-related expenses of $4.7 million and $21.3 million in 1999 and 1998, respectively, amortization of goodwill and core deposit intangible of $49.7 million in 1999 and $34.5 million in 1998, and $24.6 million of expense related to the previously mentioned contribution to the affiliated charitable foundation in 1998. Higher expenses related to salaries, employee benefits and occupancy contributed to the higher expense level in 1999 compared with 1998. After excluding $7.3 million of amortization of goodwill and core deposit intangible, noninterest expenses associated with operations in 1997 totaled $414 million. Operating expenses related to the acquired operations of ONBANCorp significantly contributed to the increase from 1997 to 1998. -26-
The efficiency ratio, or noninterest expense divided by the sum of taxable-equivalent net interest income and noninterest income, measures how much of a company's revenue is consumed by operating expenses. Reflecting the smooth integration of the 1998 and 1999 acquisitions, M&T's efficiency ratio, calculated using the adjusted income and expense totals noted above and excluding gains from sales of bank investment securities from noninterest income, improved significantly to 50.06% in 1999 from 52.51% in 1998 and 54.82% in 1997. CASH OPERATING RESULTS As a result of the acquisitions of ONBANCorp, FNB and the Chase branches and, to a significantly lesser extent, acquisitions of other entities in prior years, the Company had recorded as assets goodwill and core deposit intangible totaling $648 million and $546 million at December 31, 1999 and 1998, respectively. Since the amortization of goodwill and core deposit intangible does not result in a cash expense, M&T believes that supplemental reporting of 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 credit losses, or deferred income taxes associated with the results of operations. Unless noted otherwise, cash basis data does, however, exclude the after-tax impact of nonrecurring merger-related expenses associated with the acquisitions of ONBANCorp, FNB and the Chase branches. Cash net income rose 23% to $311.0 million in 1999 from $251.9 million in 1998. Diluted and basic cash earnings per share in 1999 were each up 21% to $38.44 and $39.87, respectively, from $31.69 and $33.06 in 1998. In 1997, cash net income was $182.4 million while diluted and basic cash earnings per share were $26.14 and $27.53, respectively. The impact of the FNB and Chase branch acquisitions on 1999 cash net income was not material. Cash return on average tangible assets was 1.52% in 1999, compared with 1.41% in 1998 and 1.37% in 1997. Cash return on average tangible common equity was 26.71% in 1999, compared with 23.08% and 19.56% in 1998 and 1997, respectively. Including the effect of merger-related expenses, the cash return on average tangible assets for 1999 and 1998 was 1.50% and 1.33%, respectively, and the cash return on average tangible common equity was 26.45% and 21.80%, respectively. NET INTEREST INCOME/LENDING AND FUNDING ACTIVITIES Taxable-equivalent net interest income rose 13% to $767 million in 1999 from $679 million in 1998, largely the result of growth in average earning assets, which increased $2.2 billion or 13% to $19.1 billion in 1999 from $16.9 billion in 1998. Taxable-equivalent net interest income and average earning assets in 1997 were $565 million and $12.8 billion, respectively. The growth in average earning assets in 1999 and 1998 was largely attributable to higher average loans and leases outstanding. Average loans and leases totaled $16.4 billion in 1999, up 15% from $14.3 billion in 1998 and 50% higher than $11.0 billion in 1997. The impact of the $393 million of loans obtained in the FNB transaction in June 1999 and the full-year impact of loans acquired in the April 1998 ONBANCorp transaction contributed to the higher average loan balances in 1999 compared with 1998. The primary reason for the higher loan balances in 1998 as compared to 1997 was the $3.0 billion of loans obtained in the ONBANCorp acquisition, including approximately $450 million of commercial loans, $380 million of commercial real estate loans, $1.2 billion -27-
of residential mortgage loans and $930 million of consumer loans. Partially offsetting these increases in average loans and leases in 1998 was the impact of the July 1998 sale of M&T's retail credit card business, including approximately $186 million of outstanding credit card balances as of the sale date. Average credit card balances, including cards issued to small businesses, were $10 million in 1999, compared with $136 million in 1998 and $268 million in 1997. The accompanying table 4 summarizes average loans and leases outstanding in 1999 and percentage changes in the major components of the portfolio over the past two years. Loans secured by real estate, including home equity loans and outstanding home equity lines of credit which the Company classifies as consumer loans, represented approximately 66% of the loan and lease portfolio during 1999 and 1998, up from 64% in 1997. At December 31, 1999, the Company held approximately $6.5 billion of commercial real estate loans, $4.1 billion of consumer real estate mortgage loans secured by one-to-four family residential properties and $885 million of outstanding home equity loans and lines of credit, compared with $5.5 billion, $4.3 billion and $739 million, respectively, at December 31, 1998. Commercial real estate loans originated by the Company are predominately secured by properties in the New York City metropolitan area, including areas in neighboring states generally considered to be within commuting distance of New York City, and Western New York, which includes Buffalo, Niagara Falls, Rochester and surrounding areas. Commercial real estate loans are also originated in the Syracuse, Albany, Hudson Valley and Southern Tier regions of New York State, as well as in northeastern Pennsylvania. Historically, commercial real estate loans originated by the Company are fixed-rate instruments with monthly payments and a balloon payment of the remaining unpaid principal at maturity, in many cases five years after origination. For borrowers in good standing, the terms of such loans may be extended by the customer for an additional five years at the then-current market rate of interest. In response to customer needs, in recent years the Company has also originated fixed-rate commercial real estate loans with maturities of greater than five years. In general, these loans have original maturity terms of approximately ten years. The Company also originates adjustable-rate commercial real estate loans. As of December 31, 1999, approximately 27% of the commercial real estate loan portfolio consisted of adjustable-rate loans. The accompanying table 6 presents commercial real estate loans by geographic area, type of collateral and size of the loans outstanding at December 31, 1999. Of the $3.2 billion of commercial real estate loans in the New York City metropolitan area, approximately 50% were secured by multi-family residential properties, 20% by retail space and 12% by office space. The Company's experience has been that office space and retail properties tend to demonstrate more volatile fluctuations in value through economic cycles and changing economic conditions than do multi-family residential properties. Approximately 54% of the aggregate dollar amount of New York City area loans were for $5 million or less, while loans of more than $10 million made up approximately 28% of the total. Commercial real estate loans secured by properties elsewhere in New York State tend to have a greater diversity of collateral types and include a significant amount of lending to customers who use the mortgaged property in their trade or business. Approximately 77% of the aggregate dollar amount of these New York State loans were for $5 million or less. Commercial real estate loans secured by properties located outside of New York State and outside of areas of neighboring states considered to be part of the New York City metropolitan area comprised 10% of total commercial real estate loans as of December 31, 1999. Of the $395 million of commercial construction loans presented in the accompanying table 6, $226 million represent loans for which the Company has -28-
also committed to provide permanent financing. At December 31, 1999, commercial construction loans represented 2% of total loans and leases. Real estate loans secured by one-to-four family residential properties totaled $4.1 billion at December 31, 1999, including approximately 67% secured by properties located in New York State. At December 31, 1999, $239 million of residential real estate loans were held for sale by M&T Mortgage Corporation, the Company's mortgage banking subsidiary. Consumer loans and leases represented approximately 18% of the average loan portfolio during 1999, compared with 19% and 21% in 1998 and 1997, respectively. Automobile loans and leases and home equity loans and lines of credit represent the largest components of the consumer loan portfolio. Approximately 96% of home equity loans and lines of credit outstanding at December 31, 1999 were secured by properties in New York State. At December 31, 1999, 40% of the automobile loan and lease portfolio was to customers residing in New York State, while the remainder was largely to customers in Pennsylvania. Automobile loans and leases are generally originated through dealers, however, all applications submitted by dealers are subject to the Company's normal underwriting and loan approval procedures. Automobile loans and leases represented approximately 9% of the Company's average loan portfolio during 1999, while no other consumer loan product represented more than 5%. The average outstanding balance of automobile leases outstanding was approximately $375 million in 1999, $315 million in 1998 and $147 million in 1997. Due to poorer than expected results, during 1998 and 1997 the Company terminated all of its co-branded credit card programs and sold its retail credit card business on July 31, 1998, including outstanding balances of approximately $186 million. The Company's portfolio of investment securities averaged $2.1 billion in 1999, $2.4 billion in 1998 and $1.7 billion in 1997. The investment securities portfolio is largely comprised of residential mortgage-backed securities and collateralized mortgage obligations, commercial real estate mortgage-backed securities, and shorter-term U.S. Treasury notes. The Company has also invested in debt securities issued by municipalities and debt and preferred equity securities issued by government-sponsored agencies and certain financial institutions. When purchasing investment securities, the Company considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to prepayment and other risks assumed. The Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, or credit risk associated with a particular security. The size of the investment securities portfolio is influenced by such factors as demand for loans, which generally yield more than investment securities, ongoing repayments, the level of deposits, and management of balance sheet size and resulting capital ratios. Money-market assets, which are comprised of interest-earning deposits at banks, interest-earning trading account assets, Federal funds sold and agreements to resell securities, averaged $517 million in 1999, compared with $230 million in 1998 and $123 million in 1997. Core deposits represent the most significant source of funding to the Company and consist of noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and nonbrokered domestic time deposits under $100,000. Core deposits generally carry lower interest rates than wholesale funds of comparable maturities. The Company's branch network is its principal source of core deposits. Certificates of deposit under $100,000 generated on a nationwide basis by M&T Bank, N.A. are also included in core deposits. Average core deposits were $11.9 billion in 1999, up from $10.7 billion in 1998 and $8.3 billion in 1997. The increases in average core deposits in 1999 and 1998 reflect the 1999 Chase branch and FNB -29-
acquisitions and the 1998 ONBANCorp acquisition. Core deposits obtained in the Chase branch acquisition as of September 24, 1999 and in the FNB acquisition as of June 1, 1999 were $618 million and $419 million, respectively. Core deposits obtained in the acquisition of ONBANCorp totaled approximately $2.8 billion on April 1, 1998. Average core deposits of M&T Bank, N.A. were $429 million in 1999, $401 million in 1998 and $432 million in 1997. Funding provided by core deposits totaled 62% of average earning assets in 1999, compared with 63% in 1998 and 65% in 1997. The accompanying table 7 summarizes average core deposits in 1999 and percentage changes in the components over the past two years. Supplementing 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. Domestic time deposits over $100,000, excluding brokered certificates of deposit, averaged $1.6 billion in 1999, compared with $1.3 billion in 1998 and $1.0 billion in 1997. Offshore branch deposits, comprised primarily of accounts with balances of $100,000 or more, averaged $254 million in 1999, compared with $288 million and $230 million in 1998 and 1997, respectively. Brokered deposits averaged $1.1 billion in 1999, compared with $1.4 billion in 1998 and 1997, and totaled $1.0 billion at December 31, 1999. Brokered deposits have been used as an alternative to short-term borrowings to lengthen the average maturity of interest-bearing liabilities. The weighted-average remaining term to maturity of brokered deposits at December 31, 1999 was 1.3 years. However, 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 similar to the amounts and terms of many of the brokered deposits. Additional amounts of brokered deposits may be solicited in the future depending on market conditions and the cost of funds available from alternative sources at the time. The Company also uses borrowings from banks, securities dealers, the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Pittsburgh (together, the "FHLB"), and others as sources of funding. Short-term borrowings averaged $2.1 billion in 1999, $1.9 billion in 1998 and $812 million in 1997. The average balance of long-term borrowings was $1.7 billion in 1999, compared with $835 million in 1998 and $373 million in 1997. Included in average long-term borrowings were amounts borrowed from the FHLB of $1.2 billion in 1999, $343 million in 1998 and $2 million in 1997, as well as $175 million of subordinated capital notes issued in prior years by M&T Bank. Average long-term borrowings also include trust preferred securities with a carrying value of $319 million that were issued by special-purpose entities in 1997. Further information regarding the trust preferred securities, as well as information regarding contractual maturities of long-term borrowings, is provided in note 8 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 described herein, as well as changes in interest rates and spreads. Net interest spread, or the difference between the yield on earning assets and the rate paid on interest-bearing liabilities, was 3.48% in 1999, compared with 3.44% in 1998. The yield on earning assets decreased 29 basis points (hundredths of one percent) to 7.79% in 1999 from 8.08% in 1998. Similarly, the rate paid on interest-bearing liabilities decreased 33 basis points to 4.31% in 1999 from 4.64% in 1998. The declines in yields on earning assets and rates paid on interest-bearing liabilities were due to generally lower interest rates in 1999 when compared with 1998. However, actions taken by the Federal Reserve during the third and fourth quarters of 1999 have resulted in an increase in interest rates. In 1997, the net interest spread was 3.73%, the yield on earning assets was 8.39% and the rate paid on interest-bearing -30-
liabilities was 4.66%. Lower yielding residential real estate loans, consumer loans and investment securities acquired in the ONBANCorp transaction; the July 1998 sale of the Company's retail credit card business; 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 in 1998 as compared with 1997. Net interest-free funds consist largely of noninterest-bearing demand deposits and stockholders' equity, partially offset by goodwill and core deposit intangible, bank owned life insurance and other non-earning assets. Net interest-free funds contributed .54% to net interest margin in 1999, compared with .57% in 1998 and .69% in 1997. Average net interest-free funds totaled $2.4 billion in 1999, $2.1 billion in 1998 and $1.9 billion in 1997. The decline in the contribution to net interest margin of net interest-free funds in 1999 and 1998 from 1997 was due, in part, to the goodwill and core deposit intangible assets recorded in conjunction with the FNB, Chase branch and ONBANCorp acquisitions (which averaged $587 million in 1999 and $413 million in 1998) and the cash surrender value of bank owned life insurance (which averaged $379 million in 1999, compared with $314 million in 1998 and $41 million in 1997). Increases in the cash surrender value of bank owned life insurance are not included in interest income, but rather are recorded in "other revenues from operations." These two noninterest-earning assets mitigated much of the benefit derived from increases in stockholders' equity and/or noninterest-bearing deposits resulting from the FNB, Chase branch and ONBANCorp transactions. Future changes in market interest rates or spreads, as well as changes in the composition of the Company's portfolios of earning assets and interest-bearing liabilities that result in reductions in spreads could adversely impact the Company's net interest margin and net interest income. Management assesses the potential impact of future changes in interest rates and spreads by projecting net interest income under a number of different interest rate scenarios. As part of the management of interest rate risk, the Company utilizes interest rate swap agreements to modify the repricing characteristics of certain portions of the loan and deposit portfolios. Revenue and expense arising from these agreements are reflected in either the yields earned on assets or, as appropriate, the rates paid on interest-bearing liabilities. Excluding forward-starting swaps, the notional amount of interest rate swaps entered into for interest rate risk management purposes as of December 31, 1999 was approximately $1.7 billion. In general, under the terms of these swaps, the Company receives payments based on the outstanding notional amount of the swaps at fixed rates of interest and makes payments at variable rates. However, under terms of $99 million of swaps, the Company pays a fixed rate of interest and receives a variable rate. To help manage exposure resulting from changing interest rates in future years, as of December 31, 1999, the Company had also entered into forward-starting swaps with an aggregate notional amount of $373 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 December 31, 1999. The average notional amounts of interest rate swaps entered into for interest rate risk management purposes, the related effect on net interest income and margin, and the weighted-average rate paid or received on those swaps are presented in the accompanying table 8. The Company estimates that as of December 31, 1999 it would have received approximately $25 million if all interest rate swap agreements entered into for interest rate risk management purposes had been terminated, compared with $23 million and $16 million at December 31, 1998 and 1997, respectively. The 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. With the exception of swaps having a notional amount of -31-
$50 million that were entered into for the purpose of modifying the repricing characteristics of fixed-rate, available for sale investment securities, 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. Additional information about interest rate swaps is included in note 16 of Notes to Financial Statements. PROVISION FOR CREDIT LOSSES The purpose of the provision for credit losses is to adjust the Company's allowance for credit losses to a level that is adequate to absorb losses inherent in the loan and lease portfolio. The provision for credit losses was $44.5 million in 1999, compared with $43.2 million in 1998 and $46.0 million in 1997. Net loan charge-offs in 1999 were $40.3 million, compared with $39.4 million in 1998 and $41.8 million in 1997. Net loan charge-offs as a percentage of average loans outstanding were .25% in 1999, .28% in 1998 and .38% in 1997. Nonperforming loans totaled $103.2 million or .59% of loans and leases outstanding at December 31, 1999, compared with $117.0 million or .74% a year earlier and $80.7 million or .70% at December 31, 1997. The allowance for credit losses was $316.2 million or 1.82% of net loans and leases at the end of 1999, compared with $306.3 million or 1.94% at December 31, 1998 and $274.7 million or 2.39% at December 31, 1997. The ratio of the allowance to nonperforming loans at year-end 1999, 1998 and 1997 was 306%, 262% and 341%, respectively. The decline in the allowance as a percentage of total loans at December 31, 1999 and 1998 as compared with December 31, 1997 and prior years reflects management's evaluation of the loan and lease portfolio as of each date, the relatively favorable economic environment for many commercial borrowers in the two recent years, the July 1998 sale of the retail credit card business, 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 with the amount of commercial and industrial loans to businesses in areas of 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 credit losses as of December 31, 1999. Based upon the results of such review, management believes that the allowance for credit losses at December 31, 1999 was adequate to absorb credit losses inherent in the portfolio as of that date. The accompanying table 10 presents a comparative allocation of the allowance for credit losses for each of the past five year-ends. Amounts were allocated to specific loan categories based upon management's classification of loans under the Company's internal loan grading system and assessment of near-term charge-offs and losses existing in specific larger balance loans that are reviewed in detail by the Company's internal loan review department and pools of other loans that are not individually analyzed. The unallocated portion of the allowance is intended to provide for probable losses that are not otherwise identifiable resulting from (i) comparatively poorer economic conditions and an unfavorable business climate -32-
in market regions served by the Company, in particular areas of New York State outside of the New York City metropolitan area that have not experienced the same degree of economic growth evident in much of the rest of the country in recent years, (ii) portfolio concentrations regarding loan type, collateral type and geographic location, in particular the large concentration of commercial real estate loans secured by properties in the New York City metropolitan area and other areas of New York State, (iii) the effect of expansion into new markets, including market areas of New York State and Pennsylvania entered through the acquisition of ONBANCorp, and/or new loan product types, including expansion of automobile loan and leasing activities in recent years, and, (iv) the possible use of imprecise estimates in determining the allocated portion of the allowance. The economy in New York State, in general, and the Upstate New York region (comprised of areas outside of metropolitan New York City), in particular, continues to lag behind the rest of the country. Marginal job growth, coupled with a declining population base, has left the Upstate New York region susceptible to potential credit problems, particularly related to commercial customers. Given the Company's high concentration of commercial loans and commercial real estate loans in New York State, including the Upstate New York region, and considering the other factors already discussed, the level of the unallocated portion of the allowance for credit losses is deemed prudent and reasonable. Nevertheless, the allowance is general in nature and is available to absorb losses from any loan or lease category. Accordingly, the amounts presented in the table are not necessarily indicative of future losses within the individual loan categories. Several factors influence the Company's credit loss experience, including overall economic conditions affecting businesses and consumers, in general, and, due to the size of the Company's commercial real estate loan portfolio, real estate valuations, in particular. Commercial real estate valuations include many assumptions and, as a result, can be highly subjective. Commercial real estate values can be significantly affected over relatively short periods of time by changes in business climate and economic conditions, and, in many cases, the results of operations of businesses and other occupants of the real property. Nonperforming commercial real estate loans totaled $13.4 million, $19.3 million and $17.4 million at December 31, 1999, 1998 and 1997, respectively. During 1999, the Company realized net recoveries of charged-off commercial real estate loans of $2.2 million. During 1998 and 1997, net charge-offs of commercial real estate loans were $3.6 million and $.9 million, respectively. Net charge-offs of consumer loans and leases were $21.7 million in 1999, or .72% of average consumer loans outstanding during the year, compared with $31.5 million or 1.13% in 1998 and $35.8 million or 1.55% in 1997. Charge-offs of credit card balances and indirect automobile loans and leases represented the most significant types of consumer loans charged off during the past three years. Net credit card and indirect automobile loan charge-offs during 1999 were $.6 million and $8.3 million, respectively, compared with $14.4 million and $10.5 million, respectively, in 1998 and $19.0 million and $11.2 million, respectively, in 1997. As previously noted, the Company sold its retail credit card business in July 1998. Nonperforming consumer loans and leases totaled $27.3 million or .88% of outstanding consumer loans at December 31, 1999, compared with $28.3 million or .98% at December 31, 1998 and $21.9 million or .99% at December 31, 1997. Net charge-offs of commercial loans and leases in 1999 totaled $17.0 million, compared with $2.7 million in 1998 and $1.9 million in 1997. The increase in charge-offs in 1999 compared with prior years was largely the result of two commercial loans with partial charge-offs aggregating $15.0 million. Nonperforming commercial loans and leases totaled $22.5 million, $20.6 million and $10.2 million at December 31, 1999, 1998 and 1997, respectively. -33-
Net charge-offs of residential real estate loans were $3.9 million in 1999, compared with $1.6 million and $3.1 million in 1998 and 1997, respectively. Residential real estate loans classified as nonperforming at December 31, 1999, 1998 and 1997 totaled $40.0 million, $48.9 million and $31.2 million, respectively. Commercial real estate loans secured by multi-family properties in the New York City metropolitan area represented 9% of loans outstanding at December 31, 1999. The Company had no concentrations of credit extended to any specific industry that exceeded 10% of total loans at December 31, 1999. Furthermore, the Company had no exposure to less developed countries, and only $22 million of outstanding foreign loans at December 31, 1999. Assets acquired in settlement of defaulted loans totaled $10.0 million at December 31, 1999, compared with $11.1 million a year earlier and $8.4 million at the end of 1997. OTHER INCOME Other income rose 14% to $282 million in 1999 from $248 million in 1998, after excluding $15.3 million of tax-exempt income in 1998 resulting from the previously noted transfer of appreciated investment securities to an affiliated, tax-exempt charitable foundation. Growth in mortgage banking revenues, fees earned from deposit services, and a full year of revenues associated with operations obtained in the ONBANCorp acquisition contributed to the improvement. Other income was $191 million in 1997. Revenues related to operations and/or market areas associated with the ONBANCorp acquisition, along with higher revenues from mortgage banking, trust activities and bank owned life insurance contributed to the increase from 1997 to 1998. Approximately 40% of the increase from 1997 to 1998 was attributable to revenues related to operations and/or market areas associated with the former ONBANCorp. Mortgage banking revenues, which consist of residential mortgage loan servicing fees, gains from sales of residential mortgage loans and loan servicing rights, and other residential mortgage loan-related fees, increased to $71.8 million in 1999 from $65.6 million in 1998 and $51.5 million in 1997. Revenues from servicing residential mortgage loans for others were $26.8 million in 1999, compared with $29.3 million in 1998 and $25.7 million in 1997. Gains from sales of residential mortgage loans and loan servicing rights totaled $39.7 million in 1999, $32.4 million in 1998 and $23.1 million in 1997. The Company maintains residential mortgage loan origination offices in New York State, as well as in Arizona, Colorado, Idaho, Massachusetts, Ohio, Oregon, Pennsylvania, Utah and Washington. Residential mortgage loans originated for sale to other investors totaled $2.5 billion in 1999, compared with $2.8 billion and $1.6 billion in 1998 and 1997, respectively. Residential mortgage loans serviced for others were $7.2 billion, $7.3 billion and $7.5 billion at December 31, 1999, 1998 and 1997, respectively. Capitalized servicing assets were $61 million at December 31, 1999 and 1997, compared with $62 million at December 31, 1998. Reflecting a third quarter 1999 increase in fees, combined with the impact of the FNB, Chase branch and ONBANCorp acquisitions, service charges on deposit accounts rose 28% to $73.6 million in 1999 from $57.4 million in 1998, and 70% from $43.4 million in 1997. Fees for services provided to customers in the areas formerly served by ONBANCorp contributed approximately three-fourths of the increase from 1997 to 1998. Trust income increased 7% to $40.8 million in 1999 from $38.2 million in 1998 and 33% from $30.7 million in 1997. The increases in both 1999 and 1998 were largely due to higher revenues for investment management services. Merchant discount and other credit card fees in 1999 totaled $7.5 million, compared with $12.4 -34-
million in 1998 and $19.4 million in 1997. As noted earlier, during 1997 and 1998 the Company terminated all of its co-branded credit card programs, and sold its retail credit card business on July 31, 1998. Total credit card fees included in merchant discount and credit card fees in 1999 were approximately $2 million, compared with approximately $9 million and $16 million in 1998 and 1997, respectively. Through the date of sale, the results of operations of the retail credit card business in 1998, including internal allocations of the provision for credit losses, interest expense and other expenses, were essentially break-even. On the same basis, the Company's retail credit card business incurred losses of approximately $10 million in 1997. Trading account and foreign exchange activity resulted in gains of $315 thousand in 1999, down from $4.0 million in 1998 and $3.7 million in 1997. The decline in 1999 was largely the result of an approximate $3 million loss incurred as a result of a counterparty defaulting on the settlement of outstanding foreign exchange contracts. During 1999, the Company sold bank investment securities resulting in gains of $1.6 million. Similar gains on sales of bank investment securities in 1998 were $1.8 million, compared with losses of $280 thousand in 1997. Other revenues from operations increased to $86.8 million in 1999, compared with $68.3 million in 1998 (excluding the effect of the contribution of securities to the affiliated foundation) and $42.1 million in 1997. Such amounts include $22.5 million, $17.6 million and $2.3 million in 1999, 1998 and 1997, respectively, of tax-exempt income earned from bank owned life insurance. Also included in other revenues from operations were revenues from the sales of mutual funds and annuities of $24.5 million, $18.0 million and $15.3 million in 1999, 1998 and 1997, respectively. A $7.0 million increase in revenues from letter of credit and other credit-related fees also contributed to the rise in other revenues from operations in 1999 from 1998. Other items that contributed to the increase in 1998 as compared with 1997 include a $3.2 million gain from the sale of the Company's retail credit card business and higher revenues for automated teller machine service fees. OTHER EXPENSE Excluding amortization of goodwill and core deposit intangible of $49.7 million in 1999, $34.5 million in 1998 and $7.3 million in 1997; nonrecurring merger-related expenses of $4.7 million and $21.3 million in 1999 and 1998, respectively; and $24.6 million of expense recognized in 1998 related to the previously discussed transfer of securities to an affiliated charitable foundation, other expense totaled $525 million in 1999, 8% higher than $486 million in 1998 and 27% higher than $414 million in 1997. Expenses related to acquired operations significantly contributed to the higher expense levels in 1999 and 1998. However, since the operating systems and support operations related to ONBANCorp, FNB and the former Chase branches have been combined with those of the Company, the Company's operating expenses cannot be precisely divided between or attributed directly to the acquired operations or to the Company as it existed prior to each transaction. Salaries and employee benefits expense was $285 million in 1999, 10% higher than the $259 million in 1998 and 29% higher than the $220 million in 1997. Salaries and benefits related to acquired operations, merit salary increases, higher expenses for incentive compensation arrangements and higher medical benefit costs were factors for the increase in 1999 from 1998. Salaries and employee benefits related to the operations acquired from ONBANCorp largely contributed to the increased expense level in 1998 over 1997. Merit salary increases and expenses associated with incentive compensation plans also contributed to the 1998 increase. Partially offsetting the impact of these higher expenses were decreases in expense associated with stock appreciation rights of $4.4 million in 1999 as compared with 1998 and $6.3 million in 1998 as compared with 1997. The number of -35-
full-time equivalent employees was 6,171 at December 31, 1999, compared with 6,044 at December 31, 1998 and 4,781 at December 31, 1997. Excluding one time merger-related expenses, the already discussed charitable contributions expense in 1998, and amortization of goodwill and core deposit intangible, nonpersonnel expense totaled $240 million in 1999, 5% higher than $228 million in 1998. Higher equipment and net occupancy expenses, largely attributable to the impact of the operations acquired in 1998 and 1999, were significant factors contributing to the rise. Nonpersonnel expense was $194 million in 1997, after excluding amortization of goodwill and core deposit intangible. The increase in expenses from 1997 to 1998 was largely the result of expenses related to the acquired operations of ONBANCorp plus an increase in the amortization of capitalized servicing rights. Amortization of capitalized servicing rights totaled $19.8 million in 1999, $19.7 million in 1998 and $14.4 million in 1997. Partially offsetting the expense increases from 1997 to 1998 was an $8.1 million decline in co-branded credit card rebate and other operating expenses based on card usage. INCOME TAXES The provision for income taxes was $153 million in 1999, up from $118 million in 1998 and $106 million in 1997. The effective tax rates were 36.5% in 1999, 36.1% in 1998 and 37.5% in 1997. A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to pre-tax income is provided in note 11 of Notes to Financial Statements. INTERNATIONAL ACTIVITIES The Company's net investment in international assets was $27 million and $33 million at December 31, 1999 and 1998, respectively. Total offshore deposits were $243 million at December 31, 1999 and $303 million at December 31, 1998. LIQUIDITY, MARKET RISK, AND INTEREST RATE SENSITIVITY As a financial intermediary, the Company is exposed to various risks including liquidity and market risk. Liquidity refers to the Company's ability to ensure that sufficient cash flow and liquid assets are available to satisfy demands for loans and deposit withdrawals, to fund operating expenses, and to be used for other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. Core deposits have historically been the most significant funding source for the Company. Core deposits are generated from a large base of consumer, corporate and institutional customers, which over the past several years has become more geographically diverse as a result of acquisitions and expansion of the Company's businesses. Nevertheless, in recent years the Company has faced increased competition in offering services and products from a large array of financial market participants, including banks, thrifts, mutual funds, securities dealers and others. As a result, and consistent with banking industry experience in general, the Company has experienced a reduction in the percentage of earning assets funded by core deposits. Core deposits financed 63% of the Company's earning assets at December 31, 1999, compared with 62% and 64% at December 31, 1998 and 1997, respectively. The Company supplements funding provided through core deposits with -36-
various short-term and long-term wholesale borrowings, including Federal funds purchased and securities sold under agreements to repurchase, brokered certificates of deposit, and borrowings from the FHLB and others. M&T Bank had a credit facility with the FHLB aggregating $2.3 billion at December 31, 1999. Outstanding borrowings totaled $1.8 billion at December 31, 1999 and $1.5 billion at December 31, 1998. Such borrowings are secured by loans and investment securities. M&T Bank and M&T Bank, N.A. had available lines of credit with the Federal Reserve Bank of New York totaling approximately $4 billion. The amounts of these lines are dependent upon the balance of loans and securities pledged as collateral. There were no borrowings outstanding under these lines at either December 31, 1999 or 1998. Although informal and sometimes reciprocal, sources of funding are available to the Company through various arrangements for unsecured short-term borrowings from a wide group of banks and other financial institutions. In addition to deposits and borrowings, other sources of liquidity include maturities of money-market assets and investment securities, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services. M&T's primary source of funds to pay for operating expenses, stockholder dividends and treasury stock repurchases has historically been the receipt of dividends from its banking subsidiaries, which are subject to various regulatory limitations. These historic sources of cash flow were augmented in 1997 by the proceeds from issuance of $250 million of trust preferred securities, which provided a substantial portion of M&T's funding needs during 1998 and 1997. Additional information regarding the trust preferred securities is included in note 8 of Notes to Financial Statements. M&T also maintains a $30 million line of credit with an unaffiliated commercial bank, of which borrowings outstanding at December 31, 1999 totaled $29 million. A similar $25 million line of credit that expired during 1999 was entirely available for borrowing at December 31, 1998. Management closely monitors the Company's liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs anticipated in the normal course of business. Furthermore, 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. 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, which 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 years 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 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 Company has entered into interest rate swap agreements to help manage exposure to interest rate risk. At December 31, 1999, the aggregate notional amount of interest rate swaps entered into for interest rate risk management purposes was approximately $2.0 billion, including approximately $373 million of forward starting swaps. Information about interest rate swaps entered into for interest rate risk -37-
management purposes is included herein under "Net Interest Income/Lending and Funding Activities" and in note 16 of Notes to Financial Statements. The Company's Asset-Liability Committee, which includes members of senior management, monitors 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 action, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and entering into or modifying existing interest rate swap agreements. The accompanying table 14 as of December 31, 1999 and 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. Many assumptions were utilized by the Company to calculate the impact that changes in interest rates may have on the Company's net interest income. The more significant assumptions relate to the rate of prepayments of mortgage-related assets, cash flows from derivative and other financial instruments held for non-trading purposes, loan and deposit volumes and pricing, and deposit maturities. The Company also assumed gradual changes in rates of 100 and 200 basis points up and down during a twelve-month period. As these assumptions are inherently uncertain, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly from those presented due to timing, magnitude, and frequency of interest rate changes and changes in market conditions, as well as any actions, such as those previously described, which management may take to counter these changes. In accordance with industry practice, cumulative totals of net assets (liabilities) repricing on a contractual basis within the specified time frames, as adjusted for the impact of interest rate swap agreements entered into for interest rate risk management purposes, are presented in the accompanying table 15. Management believes this measure does not appropriately depict interest rate risk since changes in interest rates do not necessarily affect all categories of earning assets and interest-bearing liabilities equally nor, as assumed in the table, on the contractual maturity or repricing date. Furthermore, this static presentation of interest rate risk fails to consider the effect of ongoing lending and deposit gathering activities, projected changes in balance sheet composition or any subsequent interest rate risk management activities the Company is likely to implement. The Company engages in trading activities to meet the financial needs of customers and to profit from perceived market opportunities. Trading activities are conducted utilizing financial instruments that include forward and futures contracts related to foreign currencies 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 and other option and futures contracts totaled $799 million and $573 million, -38-
respectively, at December 31, 1999 and $436 million and $2.0 billion, respectively, at December 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 values of all trading account assets and liabilities were $641 million and $633 million, respectively, at December 31, 1999 and $173 million and $51 million, respectively, at December 31, 1998. Included in trading account assets at December 31, 1999 were mortgage-backed securities which M&T held as collateral securing certain agreements to resell securities. The obligations to return such collateral were recorded as noninterest-bearing trading account liabilities and were included in accrued interest and other liabilities in the Company's consolidated balance sheet. The fair value of such collateral (and the related obligation to return collateral) was $600 million at December 31, 1999. There was no similar collateral held at December 31, 1998. Given the Company's policies, limits and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading activities was not material as of December 31, 1999 and 1998. Additional information related to trading derivative contracts is included in note 16 of Notes to Financial Statements. CAPITAL Stockholders' equity at December 31, 1999 was $1.8 billion or 8.02% of total assets, compared with $1.6 billion or 7.78% at December 31, 1998 and $1.0 billion or 7.36% at December 31, 1997. On a per share basis, stockholders' equity increased 12% to $232.41 at December 31, 1999 from $207.94 at December 31, 1998 and was up 49% from $155.86 at December 31, 1997. Excluding goodwill and core deposit intangible, net of applicable tax effect, tangible equity per share was $151.40 at December 31, 1999, compared with $139.89 at December 31, 1998 and $153.24 at December 31, 1997. The ratio of average total stockholders' equity to average total assets was 8.24%, 8.20% and 7.16% in 1999, 1998 and 1997, respectively. M&T issued shares of common stock in 1999 and 1998 to complete the acquisitions of FNB and ONBANCorp. On June 1, 1999, 122,516 shares of common stock were issued to former holders of FNB common stock resulting in an addition to stockholders' equity of $58.7 million. 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 to purchase 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 December 31, 1999 reflected a loss of $26.0 million, or $3.37 per share, for the net after-tax impact of unrealized losses on investment securities classified as available for sale, compared with unrealized gains of $2.9 million, or $.37 per common share, at December 31, 1998 and $12.0 million, or $1.82 per common share, at December 31, 1997. Such unrealized gains or losses are generally due to changes in interest rates and 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. -39-
Cash dividends on M&T's common stock of $35.1 million were paid in 1999, compared with $29.0 million and $21.2 million in 1998 and 1997, respectively. In the third quarter of 1999 M&T's quarterly common stock dividend rate was increased to $1.25 per share from $1.00 per share. In total, dividends per common share increased to $4.50 in 1999 from $3.80 in 1998 and $3.20 in 1997. The rate of internal capital generation, or net income (excluding the after-tax effect of gains or losses from sales of bank investment securities) less dividends paid expressed as a percentage of average total stockholders' equity, was 13.22% in 1999, 11.86% in 1998 and 16.28% in 1997. During 1999, 1998 and 1997, M&T repurchased an aggregate of 854,438 shares of its common stock at an aggregate cost of $379.4 million: 167,833 shares in 1999, 479,532 shares in 1998 and 207,073 shares in 1997, at a cost of $79.8 million, $231.8 million and $67.8 million, respectively. In November 1999, M&T announced its intent to repurchase and hold as treasury stock up to 190,465 shares of common stock for reissuance upon the possible future exercise of outstanding stock options. As of December 31, 1999, M&T had repurchased 31,910 shares of common stock pursuant to such plan at an average cost of $465.28 per share. 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. Core capital includes the $319 million carrying value of trust preferred securities. As of December 31, 1999, total capital further included $130 million of subordinated notes issued by M&T Bank in prior years. The capital ratios of the Company and its banking subsidiaries, M&T Bank and M&T Bank, N.A., as of December 31, 1999 and 1998 are presented in note 20 of Notes to Financial Statements. YEAR 2000 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. Over the past several years the Company devoted resources to identify, remediate as appropriate, and test its own Computer Systems and to monitor and test as appropriate Computer Systems of entities doing business with or providing services to the Company. As a result of such efforts, the Company is not aware of any significant adverse impact resulting from the failure of Computer Systems on which it relies to accurately process date data before or after January 1, 2000. Nevertheless, in 2000 the Company will continue to monitor its Computer Systems and the performance of commercial and other loan customers, funds providers, and capital market/asset management counterparties for indications of Year 2000-related problems. Through December 31, 1999, the Company spent approximately $8.6 million (including approximately $3.2 million during 1999, $3.8 million in 1998 and $1.2 million in 1997) in addressing its potential Year 2000 problems. Management believes that the Company is continuing to devote appropriate financial and human resources to monitor its Computer Systems and the ongoing performance of customers and others, however, it is anticipated that additional costs related to such activities will not be significant. A majority of the Company's Year 2000-related costs were internal costs and constituted resources that would otherwise have been reallocated within the Company. Such reallocation did not have a material adverse impact on the -40-
Company's financial condition or results of operations. 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. FOURTH QUARTER RESULTS M&T reported net income in the fourth quarter of 1999 of $66.1 million or $8.20 of diluted earnings per common share, increases of 14% and 15%, respectively, from $57.8 million or $7.14 per diluted share in the final quarter of 1998. Basic earnings per share were up 14% to $8.48 in the recent quarter from $7.44 in the year-earlier quarter. Net income for the fourth quarter of 1999 expressed as an annualized rate of return on average assets was 1.18% compared with 1.14% in the comparable 1998 quarter. The annualized rate of return on average common stockholders' equity in the recent quarter was 14.58%, compared with 14.20% in 1998's fourth quarter. Cash net income in the fourth quarter of 1999 rose to $78.4 million, up 17% from $67.3 million earned in the year-earlier quarter. Diluted cash earnings per share increased 17% to $9.73 in 1999's final quarter from $8.31 in the comparable 1998 period. Cash return on average tangible assets was an annualized 1.45% in the recent quarter, compared with 1.36% in the corresponding 1998 quarter. Cash return on average tangible common equity rose to an annualized 26.67% in the fourth quarter of 1999 from 24.57% in the year-earlier quarter. Excluding nonrecurring expenses and amortization of acquired intangibles, the impact of the Chase branch acquisition in the fourth quarter of 1999 on net income was negligible. Taxable-equivalent net interest income rose to $199 million in the fourth quarter of 1999, an increase of $22 million or 12% from $177 million in the comparable 1998 quarter. An 11% increase in average loans and leases outstanding and a widening of the net interest margin were significant factors contributing to the improvement in net interest income. Average loans and leases for the fourth quarter of 1999 totaled $17.1 billion, up from $15.4 billion during the year-earlier quarter. Earning assets averaged $19.8 billion in the final quarter of 1999, an 8% increase from $18.4 billion in the corresponding 1998 quarter. Net interest margin was 3.99% in the fourth quarter of 1999, up from 3.82% in 1998's final quarter. The yield on earning assets was 7.85% in the recent quarter, up 8 basis points from 7.77% in the year-earlier period when competitive pressure on interest rates charged for loans originated in 1998 had the impact of lowering loan yields. The rate paid on interest-bearing liabilities was 4.43% in 1999's final quarter, compared with 4.50% in the year-earlier period. The resulting net interest spread was 3.42% in the recent quarter, compared with 3.27% in the fourth quarter of 1998. During the third and fourth quarters of 1999, the Federal Reserve took actions to increase the general level of interest rates. Although not necessarily indicative of a trend or of future results, the net interest spread in 1999's fourth quarter was below that achieved in any other quarter of 1999. The provision for credit losses was $14.0 million in the fourth quarter of 1999, up from $7.5 million in the corresponding 1998 quarter. Net charge-offs totaled $12.8 million in 1999's fourth quarter, compared with $10.7 million in the year-earlier period. The increase in net charge-offs from the fourth quarter of 1998 was largely due to a $5.0 million partial charge-off of a commercial loan in the recent quarter. Net charge-offs as an annualized percentage of average loans and leases were .30% in the final 1999 quarter, compared with .28% in the corresponding 1998 quarter. Largely due to the impact of the third quarter increase in fees charged for certain deposit services and higher revenues from letter of credit and other credit-related -41-
fees, other income increased 8% to $70.4 million in the fourth quarter of 1999 from $65.0 million in the fourth quarter of 1998. Reflecting the impact of expenses related to the FNB and Chase branch transactions, primarily expenses for salaries and benefits, equipment and net occupancy, and amortization of goodwill and core deposit intangible, other expense increased 7% to $149.0 million in 1999's final quarter from $138.8 million in the corresponding 1998 period. SEGMENT INFORMATION In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related 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 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 19 of Notes to Financial Statements. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, reported segments and the financial results of such segments are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. Financial information about the Company's segments is presented in note 19 of Notes to Financial Statements. The Commercial Banking segment provides a wide range of credit products and banking services for middle-market and large commercial customers, largely within the markets the Company serves. Among the services provided by this segment are commercial lending and leasing, deposit products, and cash management services. The Commercial Banking segment's earnings rose 15% to $77.6 million in 1999 from $67.4 million in 1998. The higher net income in 1999 when compared with 1998 resulted largely from increases of $17.8 million in net interest income, resulting from a 17% increase in average loans outstanding, and of $6.1 million in letter of credit and other credit-related fee income. Growth in most markets served by the Company, as well as the full year impact of loans acquired from ONBANCorp, contributed to the higher loan balances. Reflecting higher net charge-offs, including charge-offs of $11.2 million related to one commercial customer, the segment's provision for credit losses increased to $11.3 million in 1999 from $3.0 million in 1998. Net income in 1997 was $54.3 million. Higher net interest income of $26.8 million, the result of commercial loans obtained from ONBANCorp and loan growth in most of the markets already served by the Company, was the leading factor contributing to the increase in net income from 1997 to 1998. The Commercial Real Estate segment provides credit and deposit services to its customers. Loans are largely secured by properties in the New York City metropolitan area and in Western New York, however, loans are also originated in the other regions in New York State and northeastern Pennsylvania. Commercial real estate loans may be secured by apartment/multifamily buildings, office space, retail space, industrial space or other types of collateral. The Commercial Real Estate segment earned $64.2 million in 1999, an increase of 12% from $57.3 million earned a year -42-
earlier. Higher net interest income of $12.8 million, the result of a 15% increase in average loan balances outstanding, was the major factor for the increase in net income. Higher loan balances were due to loan growth in substantially all markets served by the Company and the full-year impact of commercial real estate loans acquired from ONBANCorp. The Commercial Real Estate segment earned $53.0 million in 1997. The impact of commercial real estate loans added to the Company's portfolio in the ONBANCorp transaction contributed to the growth in this segment's net income from 1997 to 1998. The Discretionary Portfolio segment includes securities, residential mortgage loans and other assets; short-term and long-term borrowed funds; brokered certificates of deposit and interest rate swaps related thereto; and offshore branch deposits. This segment also provides services to commercial customers and consumers that include foreign exchange, securities trading and municipal bond underwriting and sales. The Discretionary Portfolio segment contributed net income of $38.2 million in 1999, compared with $31.7 million in 1998 and $18.5 million in 1997. A $4.9 million increase in tax-exempt income earned from bank owned life insurance and higher net interest income from holdings of residential mortgage loans contributed to the increase in 1999. Partially offsetting these increases was the previously mentioned $3 million settlement loss on foreign exchange contracts. The improvement from 1997 to 1998 was attributable to a $15.3 million rise in tax-exempt income earned from bank owned life insurance. The April 1, 1998 ONBANCorp acquisition added approximately $.9 billion of residential mortgage loans and $.8 billion of investment securities to the average balance of the Company's discretionary portfolio that also contributed to 1998's improvement. The Residential Mortgage Banking segment originates and services residential mortgage loans for consumers and sells substantially all of those loans in the secondary market to investors or to banking subsidiaries of M&T. The Company maintains mortgage loan origination offices in New York State, as well as Arizona, Colorado, Idaho, Massachusetts, Ohio, Oregon, Pennsylvania, Utah and Washington. The Company also periodically purchases the rights to service residential mortgage loans. Residential mortgage loans held for sale are included in this segment. Net income of this segment was $20.8 million in 1999, compared with $19.5 million in 1998 and $11.0 million in 1997. A $6.2 million decrease in noninterest expenses associated with origination and servicing activities, partially offset by a $4.1 million decline in revenue, led to the improved net income in this segment during 1999 as compared with 1998. The lower expense level included a $1.7 million decrease in the valuation allowance for capitalized servicing assets during 1999, compared with a $1.0 million addition to such allowance in 1998. The decline in revenue was the result of a lower volume of loans originated for sale during 1999 as compared with 1998, including loans originated for transfer to M&T's bank subsidiaries. The increase in net income from 1997 to 1998 was largely the result of an 81% increase in residential mortgage loans originated and a 14% increase in loans serviced, including loans transferred to and serviced for M&T's bank subsidiaries. A favorable interest rate environment was the primary factor leading to the increased origination volume in 1998. The Retail Banking segment offers a variety of consumer and small business services through several delivery channels which include traditional and "in-store" banking offices, automated teller machines, telephone banking and personal computer banking. The Company has banking offices throughout New York State and in northeastern Pennsylvania. The Retail Banking segment also offers certain deposit and loan products on a nationwide basis through M&T Bank, N.A. Credit services offered by this segment include consumer installment loans, student loans, automobile loans and leases (both directly and indirectly through dealers), home equity loans and lines of credit, and loans and leases to small businesses. The financial results of Retail Banking also include the $3.2 million gain that resulted from the sale of the -43-
retail credit card business in July 1998 and the results of providing retail credit card services to customers. The segment also offers to its customers deposit products, including demand, savings and time accounts; investment products, including mutual funds and annuities; and other services. The Retail Banking segment reported net income of $111.5 million in 1999, up 11% from $100.1 million in 1998. The impact of the acquisitions of FNB on June 1, 1999 and ONBANCorp on April 1, 1998 and increased service charges on deposit accounts, reflecting third quarter 1999 rate increases, were the leading factors contributing to the increase. In 1997, Retail Banking had net income of $65.7 million. The increase from 1997 to 1998 was largely the result of the April 1, 1998 acquisition of ONBANCorp and a $16.3 million decrease in the provision for credit losses. The decrease in the provision was largely due to the July 1998 sale of the Company's retail credit card business and the 1997 and 1998 termination of all of the Company's co-branded credit card programs. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board ("FASB") issued 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. Pursuant to SFAS No. 133, the accounting for changes in the fair value of a derivative will depend on the intended use of the derivative and the resulting designation. An entity that elects to apply hedge accounting will be 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 was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB amended SFAS No. 133, deferring the effective date by one year. Initial application of SFAS No. 133 must be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of the statement. Early application of all of the provisions of SFAS No. 133 is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of the statement. SFAS No. 133 may not be applied retroactively to financial statements of prior periods. The manner of adoption expected to be utilized by the Company has yet to be determined and, as a result, the estimated impact that adopting the provisions of SFAS No. 133 will have on the Company's financial statements has not been quantified. The Company anticipates that adoption of SFAS No. 133 could increase the volatility of reported earnings and stockholders' equity and could result in the modification of certain data processing systems and hedging practices. -44-
FORWARD-LOOKING STATEMENTS This Financial Review and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. 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; legislation affecting the financial services industry as a whole, and the Company individually; 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. -45-
- ------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- Table 1 FINANCIAL HIGHLIGHTS <TABLE> <CAPTION> - ------------------------------------------------------------------------------- 1999 1998 Change - ------------------------------------------------------------------------------- <S> <C> <C> <C> FOR THE YEAR PERFORMANCE Net income (thousands) $265,626 207,974 + 28% Return on Average assets 1.26% 1.14% Average common equity 15.30% 13.86% Net interest margin 4.02% 4.01% Net charge-offs/average loans .25% .28% Efficiency ratio* 54.80% 56.24% - ------------------------------------------------------------------------------- PER COMMON SHARE DATE Basic earnings $ 34.05 27.30 + 25% Diluted earnings 32.83 26.16 + 25% Cash dividends 4.50 3.80 + 18% - ------------------------------------------------------------------------------- CASH (TANGIBLE) OPERATING RESULTS** Net income (thousands)*** $311,001 251,922 + 23% Diluted earnings per common share*** 38.44 31.69 + 21% Return on Average tangible assets 1.52% 1.41% Average tangible common equity 26.71% 23.08% Efficiency ratio* 50.06% 52.51% - ------------------------------------------------------------------------------- AT DECEMBER 31 - ------------------------------------------------------------------------------- BALANCE SHEET DATA (MILLIONS) Loans and leases, net of unearned discount $ 17,407 15,792 + 10% Total assets 22,409 20,584 + 9% Deposits 15,374 14,737 + 4% Stockholders' equity 1,797 1,602 + 12% - ------------------------------------------------------------------------------- LOAN QUALITY Allowance for credit losses/net loans 1.82% 1.94% Nonperforming assets ratio .65% .81% - ------------------------------------------------------------------------------- CAPITAL Tier 1 risk-based capital ratio 8.27% 8.40% Total risk-based capital ratio 10.25% 10.56% Leverage ratio 6.92% 7.02% Common equity/total assets 8.02% 7.78% Common equity (book value) per share $ 232.41 207.94 + 12% Tangible common equity per share 151.40 139.89 + 8% Market price per share: Closing 414.25 518.94 - 20% High 582.50 582.00 Low 406.00 400.00 - ------------------------------------------------------------------------------- </TABLE> *Excludes impact of nonrecurring merger-related expenses, net securities transactions and contribution of appreciated investment securities to affiliated, tax-exempt charitable foundation in 1998. **Excludes amortization and balances related to goodwill and core deposit intangible and nonrecurring merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. ***Cash net income excludes the after tax impact of nonrecurring merger-related expenses of $3.0 million of $.37 per diluted share in 1999 and $14.0 million or $1.76 per diluted share in 1998. -46-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 2 QUARTERLY TRENDS <TABLE> <CAPTION> 1999 Quarters - ------------------------------------------------------------------------------------------------------------------- Fourth Third Second First - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> EARNINGS AND DIVIDENDS AMOUNTS IN THOUSANDS, EXCEPT PER SHARE Interest income (taxable-equivalent basis) $391,792 375,021 361,158 358,370 Interest expense 192,766 179,961 171,269 175,238 - ------------------------------------------------------------------------------------------------------------------- Net interest income 199,026 195,060 189,889 183,132 Less: provision for credit losses 14,000 13,500 8,500 8,500 Other income 70,354 72,499 66,806 72,716 Less: other expense 149,047 144,898 145,547 139,466 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 106,333 109,161 102,648 107,882 Applicable income taxes 38,132 39,633 35,772 39,151 Taxable-equivalent adjustment 2,083 1,964 1,838 1,825 - ------------------------------------------------------------------------------------------------------------------- Net income $ 66,118 67,564 65,038 66,906 - ------------------------------------------------------------------------------------------------------------------- Per common share data Basic earnings $8.48 8.57 8.35 8.65 Diluted earnings 8.20 8.29 8.00 8.34 Cash dividends $1.25 1.25 1.00 1.00 Average common shares outstanding Basic 7,795 7,880 7,793 7,731 Diluted 8,058 8,147 8,132 8,023 - ------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS, ANNUALIZED Return on Average assets 1.18% 1.27% 1.27% 1.34% Average common stockholders' equity 14.58% 14.97% 15.23% 16.56% Net interest margin on average earning 3.99% 4.03% 4.09% 3.98% assets (taxable-equivalent basis) Nonperforming assets to total assets, at end of quarter .51% .58% .56% .62% Efficiency ratio * 55.33% 53.62% 55.72% 54.56% - ------------------------------------------------------------------------------------------------------------------- CASH (TANGIBLE) OPERATING RESULTS ** Net income (in thousands) $78,443 79,714 76,511 76,333 Diluted net income per common share 9.73 9.78 9.41 9.51 Annualized return on Average tangible assets 1.45% 1.54% 1.53% 1.57% Average tangible common stockholders' equity 26.67% 26.43% 26.13% 27.66% Efficiency ratio * 49.71% 48.91% 51.36% 50.31% - ------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA DOLLARS IN MILLIONS, EXCEPT PER SHARE Average balances Total assets $22,147 21,183 20,579 20,298 Earning assets 19,806 19,184 18,636 18,664 Investment securities 1,974 2,048 2,064 2,497 Loans and leases, net of unearned discount 17,147 16,678 16,056 15,761 Deposits 15,472 14,821 14,578 14,497 Stockholders' equity 1,800 1,791 1,713 1,638 - ------------------------------------------------------------------------------------------------------------------- At end of quarter Total assets $22,409 21,759 21,205 20,285 Earning assets 19,964 19,467 19,050 18,382 Investment securities 1,901 1,953 2,078 2,088 Loans and leases, net of unearned discount 17,407 16,984 16,513 15,813 Deposits 15,374 15,417 14,909 14,476 Stockholders' equity 1,797 1,817 1,773 1,667 Equity per common share 232.41 230.51 224.81 215.34 Tangible equity per common share 151.40 149.37 149.14 148.95 - ------------------------------------------------------------------------------------------------------------------- MARKET PRICE PER COMMON SHARE High $512 575 582 1/2 518 3/4 Low 406 412 1/2 462 1/2 464 Closing 414 1/4 459 550 479 - ------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> 1998 Quarters - ----------------------------------------------------------------------------------------------------------------------- Fourth Third Second First - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> EARNINGS AND DIVIDENDS AMOUNTS IN THOUSANDS, EXCEPT PER SHARE Interest income (taxable-equivalent basis) 360,571 361,921 364,838 279,306 Interest expense 183,424 184,850 184,644 134,585 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 177,147 177,071 180,194 144,721 Less: provision for credit losses 7,500 10,500 13,200 12,000 Other income 64,985 63,986 65,075 68,893 Less: other expense 138,756 138,490 155,004 133,873 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 95,876 92,067 77,065 67,741 Applicable income taxes 36,064 33,693 30,587 17,245 Taxable-equivalent adjustment 1,969 1,897 1,779 1,541 - ----------------------------------------------------------------------------------------------------------------------- Net income 57,843 56,477 44,699 48,955 - ----------------------------------------------------------------------------------------------------------------------- Per common share data Basic earnings 7.44 7.09 5.55 7.34 Diluted earnings 7.14 6.81 5.32 7.01 Cash dividends 1.00 1.00 1.00 .80 Average common shares outstanding Basic 7,778 7,966 8,051 6,666 Diluted 8,105 8,288 8,409 6,981 - ----------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS, ANNUALIZED Return on Average assets 1.14% 1.15% .92% 1.41% Average common stockholders' equity 14.20% 13.48% 10.77% 18.86% Net interest margin on average earning 3.82% 3.93% 4.02% 4.39% assets (taxable-equivalent basis) Nonperforming assets to total assets, at end of quarter .62% .67% .69% .53% Efficiency ratio* 57.56% 56.30% 56.45% 54.29% - ----------------------------------------------------------------------------------------------------------------------- CASH (TANGIBLE) OPERATING RESULTS** Net income (in thousands) 67,326 67,703 65,445 51,448 Diluted net income per common share 8.31 8.17 7.78 7.37 Annualized return on Average tangible assets 1.36% 1.42% 1.38% 1.49% Average tangible common stockholders' equity 24.57% 23.90% 23.50% 20.13% Efficiency ratio* 53.03% 51.78% 52.01% 53.37% - ----------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA DOLLARS IN MILLIONS, EXCEPT PER SHARE Average balances Total assets 20,101 19,455 19,547 14,055 Earning assets 18,401 17,881 17,992 13,357 Investment securities 2,617 2,533 2,858 1,614 Loans and leases, net of unearned discount 15,389 15,124 14,978 11,602 Deposits 14,617 14,552 14,726 10,988 Stockholders' equity 1,616 1,662 1,664 1,053 - ----------------------------------------------------------------------------------------------------------------------- At end of quarter Total assets 20,584 19,478 20,138 14,570 Earning assets 18,926 17,905 18,419 13,778 Investment securities 2,786 2,446 2,707 1,530 Loans and leases, net of unearned discount 15,792 15,163 15,245 12,033 Deposits 14,737 14,394 14,813 11,085 Stockholders' equity 1,602 1,649 1,659 1,069 Equity per common share 207.94 209.03 207.18 160.06 Tangible equity per common share 139.89 141.43 139.37 157.75 - ----------------------------------------------------------------------------------------------------------------------- MARKET PRICE PER COMMON SHARE High 539 1/2 582 554 504 Low 400 410 480 429 Closing 518 15/16 461 554 499 7/8 - ----------------------------------------------------------------------------------------------------------------------- </TABLE> * Excludes impact of nonrecurring merger-related expenses, net securities transactions and contribution of appreciated investment securities to affiliated, tax-exempt charitable foundation during the quarter ended March 31, 1998. ** Excludes amortization and balances related to goodwill and core deposit intangible and nonrecurring merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. -47-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 3 EARNINGS SUMMARY DOLLARS IN MILLIONS <TABLE> <CAPTION> Increase (decrease)* Compound 1998 to 1999 1997 to 1998 growth rate - -------------- ------------- 5 years Amount % Amount % 1999 1998 1997 1996 1995 1994 to 1999 - -------- ---- ------- ---- -------------------------------- --------- -------- -------- -------- -------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> $ 119.7 9 $ 293.3 27 Interest income** $ 1,486.3 1,366.6 1,073.3 1,004.4 935.1 15 % 31.7 5 179.4 35 Interest expense 719.2 687.5 508.1 466.4 441.7 21 - -------- ---- ------- ---- -------------------------------- --------- -------- -------- -------- -------- ------------ 88.0 13 113.9 20 Net interest income** 767.1 679.1 565.2 538.0 493.4 10 Less: provision for 1.3 3 (2.8) (6) credit losses 44.5 43.2 46.0 43.3 40.4 (6) Gain (loss) on sales of bank (.2) - 2.1 - investment securities 1.6 1.8 (.3) - 4.5 - 19.6 8 70.4 37 Other income 280.8 261.2 190.8 167.8 142.8 18 Less: 25.3 10 39.5 18 Salaries and employee benefits 284.8 259.5 220.0 208.3 188.2 12 (12.5) (4) 104.8 52 Other expense 294.1 306.6 201.8 200.7 186.3 11 - -------- ---- ------- ---- -------------------------------- --------- -------- -------- -------- -------- ------------ 93.3 28 44.9 16 Income before income taxes 426.1 332.8 287.9 253.5 225.8 16 Less: .6 8 1.4 24 Taxable-equivalent adjustment** 7.8 7.2 5.8 4.5 4.7 14 35.1 30 11.7 11 Income taxes 152.7 117.6 105.9 97.9 90.1 15 - -------- ---- ------- ---- -------------------------------- --------- -------- -------- -------- -------- ------------ 57.6 28 $ 31.8 18 Net income $ 265.6 208.0 176.2 151.1 131.0 18 % - -------- ---- ------- ---- -------------------------------- --------- -------- -------- -------- -------- ------------ </TABLE> * CHANGES WERE CALCULATED FROM UNROUNDED AMOUNTS. ** INTEREST INCOME DATA ARE ON A TAXABLE-EQUIVALENT BASIS. THE TAXABLE-EQUIVALENT ADJUSTMENT REPRESENTS ADDITIONAL INCOME TAXES THAT WOULD BE DUE IF ALL INTEREST INCOME WERE SUBJECT TO INCOME TAXES. THIS ADJUSTMENT, WHICH IS RELATED TO INTEREST RECEIVED ON QUALIFIED MUNICIPAL SECURITIES, INDUSTRIAL REVENUE FINANCINGS AND PREFERRED EQUITY SECURITIES OF GOVERNMENT-SPONSORED AGENCIES, IS BASED ON A COMPOSITE INCOME TAX RATE OF APPROXIMATELY 41% FOR 1999, 1998 AND 1997, AND 42% FOR 1996 AND 1995. -48-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 4 <TABLE> <CAPTION> AVERAGE LOANS AND LEASES (NET OF UNEARNED DISCOUNT) Percent increase (decrease) from -------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 to 1999 1997 to 1998 - --------------------------- -------------- -------------------- -------------------- <S> <C> <C> <C> Commercial, financial, etc. $3,331 18% 25% Real estate - commercial 5,908 18 20 Real estate - consumer 4,182 14 65 Consumer Automobile 1,446 11 25 Home equity 805 11 12 Credit cards 10 (93) (49) Other 733 20 73 - --------------------------- -------------- -------------------- -------------------- Total consumer 2,994 8 20 - --------------------------- -------------- -------------------- -------------------- Total $16,415 15% 30% - --------------------------- -------------- -------------------- -------------------- </TABLE> -49-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 5 AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES <TABLE> <CAPTION> 1999 1998 ----------------------------------------- ---------------------- Average Average Average AVERAGE BALANCE IN MILLIONS; INTEREST IN THOUSANDS balance Interest rate balance Interest - ------------------------------------------------------ --------------- ----------------------- -------- ----------- <S> <C> <C> <C> <C> <C> Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. $ 3,331 $ 268,279 8.05% 2,831 235,628 Real estate 10,090 807,761 8.01 8,682 715,666 Consumer 2,994 249,670 8.34 2,773 249,567 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Total loans and leases, net 16,415 1,325,710 8.08 14,286 1,200,861 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Money-market assets Interest-bearing deposits at banks 2 87 3.78 10 400 Federal funds sold and agreements to resell securities 467 24,491 5.24 153 8,293 Trading account 48 3,221 6.71 67 4,524 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Total money-market assets 517 27,799 5.37 230 13,217 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Investment securities** U.S. Treasury and federal agencies 920 53,108 5.77 1,448 88,030 Obligations of states and political subdivisions 74 4,660 6.28 73 4,566 Other 1,150 75,064 6.53 887 59,962 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Total investment securities 2,144 132,832 6.20 2,408 152,558 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- TOTAL EARNING ASSETS 19,076 1,486,341 7.79 16,924 1,366,636 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Allowance for credit losses (312) (302) Cash and due from banks 464 394 Other assets 1,829 1,293 - ------------------------------------------------------ --------------- -------- Total assets $21,057 18,309 - ------------------------------------------------------ --------------- -------- Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 389 4,683 1.21 327 4,851 Savings deposits 5,163 121,888 2.36 4,430 115,345 Time deposits 7,074 367,889 5.20 7,022 388,185 Deposits at foreign office 254 12,016 4.73 288 14,973 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Total interest-bearing deposits 12,880 506,476 3.93 12,067 523,354 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Short-term borrowings 2,056 104,911 5.10 1,923 105,582 Long-term borrowings 1,748 107,847 6.17 835 58,567 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- TOTAL INTEREST-BEARING LIABILITIES 16,684 719,234 4.31 14,825 687,503 - ------------------------------------------------------ --------------- ----------------------- -------- ------------- Noninterest-bearing deposits 1,965 1,666 Other liabilities 672 317 - ------------------------------------------------------ --------------- -------- Total liabilities 19,321 16,808 - ------------------------------------------------------ --------------- -------- Stockholders' equity 1,736 1,501 - ------------------------------------------------------ --------------- -------- Total liabilities and stockholders' equity $21,057 18,309 - ------------------------------------------------------ --------------- -------- Net interest spread 3.48 Contribution of interest-free funds .54 - ------------------------------------------------------ ----------------------- ------------- Net interest income/margin on earning assets $ 767,107 4.02% 679,133 - ------------------------------------------------------ ----------------------- ------------- </TABLE> *INCLUDES NONACCRUAL LOANS. <TABLE> <CAPTION> 1997 ------------ ------------------------------------------------- Average Average Average AVERAGE BALANCE IN MILLIONS; INTEREST IN THOUSANDS rate balance Interest rate - ------------------------------------------------------ ------- ---------- ------------------ ------------- <S> <C> <C> <C> <C> Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. 8.32 % 2,257 190,189 8.43 % Real estate 8.24 6,408 552,793 8.63 Consumer 9.00 2,308 213,942 9.27 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Total loans and leases, net 8.41 10,973 956,924 8.72 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Money-market assets Interest-bearing deposits at banks 3.86 42 2,475 5.95 Federal funds sold and agreements to resell securities 5.43 55 2,989 5.42 Trading account 6.79 26 1,937 7.27 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Total money-market assets 5.75 123 7,401 6.00 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Investment securities** U.S. Treasury and federal agencies 6.08 1,122 70,968 6.33 Obligations of states and political subdivisions 6.29 43 2,832 6.61 Other 6.76 534 35,214 6.59 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Total investment securities 6.33 1,699 109,014 6.42 - ------------------------------------------------------ ----------- --------------- ------------- ------------- TOTAL EARNING ASSETS 8.08 12,795 1,073,339 8.39 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Allowance for credit losses (273) Cash and due from banks 308 Other assets 479 - ------------------------------------------------------ --------------- Total assets 13,309 - ------------------------------------------------------ --------------- Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts 1.48 257 3,455 1.34 Savings deposits 2.60 3,420 90,907 2.66 Time deposits 5.53 5,818 327,611 5.63 Deposits at foreign office 5.20 230 12,160 5.29 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Total interest-bearing deposits 4.34 9,725 434,133 4.46 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Short-term borrowings 5.49 812 44,341 5.46 Long-term borrowings 7.02 373 29,619 7.94 - ------------------------------------------------------ ----------- --------------- ------------- ------------- TOTAL INTEREST-BEARING LIABILITIES 4.64 10,910 508,093 4.66 - ------------------------------------------------------ ----------- --------------- ------------- ------------- Noninterest-bearing deposits 1,228 Other liabilities 218 - ------------------------------------------------------ --------------- Total liabilities 12,356 - ------------------------------------------------------ --------------- Stockholders' equity 953 - ------------------------------------------------------ --------------- Total liabilities and stockholders' equity 13,309 - ------------------------------------------------------ --------------- Net interest spread 3.44 3.73 Contribution of interest-free funds .57 .69 - ------------------------------------------------------ ----------- ------------- ------------- Net interest income/margin on earning assets 4.01 % 565,246 4.42 % - ------------------------------------------------------ ----------- ------------- ------------- </TABLE> *INCLUDES NONACCRUAL LOANS. -50-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES <TABLE> <CAPTION> 1996 -------------------------------------------------------- Average Average AVERAGE BALANCE IN MILLIONS; INTEREST IN THOUSANDS balance Interest rate - ------------------------------------------------------ --------------- -------------------- ------------- <S> <C> <C> <C> Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. $ 2,031 166,170 8.18 % Real estate 5,893 514,619 8.73 Consumer 2,190 204,831 9.35 - ------------------------------------------------------ --------------- -------------------- ------------- Total loans and leases, net 10,114 885,620 8.76 - ------------------------------------------------------ --------------- -------------------- ------------- Money-market assets Interest-bearing deposits at banks 38 2,413 6.30 Federal funds sold and agreements to resell securities 55 2,985 5.45 Trading account 17 1,100 6.53 - ------------------------------------------------------ --------------- -------------------- ------------- Total money-market assets 110 6,498 5.91 - ------------------------------------------------------ --------------- -------------------- ------------- Investment securities** U.S. Treasury and federal agencies 1,200 74,023 6.17 Obligations of states and political subdivisions 41 2,678 6.57 Other 565 35,598 6.30 - ------------------------------------------------------ --------------- -------------------- ------------- Total investment securities 1,806 112,299 6.22 - ------------------------------------------------------ --------------- -------------------- ------------- TOTAL EARNING ASSETS 12,030 1,004,417 8.35 - ------------------------------------------------------ --------------- -------------------- ------------- Allowance for credit losses (269) Cash and due from banks 334 Other assets 384 - ------------------------------------------------------ --------------- Total assets $ 12,479 - ------------------------------------------------------ --------------- Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 659 9,430 1.43 Savings deposits 2,956 84,822 2.87 Time deposits 5,137 286,088 5.57 Deposits at foreign office 239 12,399 5.19 - ------------------------------------------------------ --------------- -------------------- ------------- Total interest-bearing deposits 8,991 392,739 4.37 - ------------------------------------------------------ --------------- -------------------- ------------- Short-term borrowings 1,121 59,442 5.30 Long-term borrowings 189 14,227 7.51 - ------------------------------------------------------ --------------- -------------------- ------------- TOTAL INTEREST-BEARING LIABILITIES 10,301 466,408 4.53 - ------------------------------------------------------ --------------- -------------------- ------------- Noninterest-bearing deposits 1,169 Other liabilities 146 - ------------------------------------------------------ --------------- Total liabilities 11,616 - ------------------------------------------------------ --------------- Stockholders' equity 863 - ------------------------------------------------------ --------------- Total liabilities and stockholders' equity $ 12,479 - ------------------------------------------------------ --------------- Net interest spread 3.82 Contribution of interest-free funds .65 - ------------------------------------------------------ -------------------- ------------- Net interest income/margin on earning assets 538,009 4.47 % - ------------------------------------------------------ -------------------- ------------- </TABLE> <TABLE> <CAPTION> 1995 ------------------------------------------------------- Average Average AVERAGE BALANCE IN MILLIONS; INTEREST IN THOUSANDS balance Interest rate - ------------------------------------------------------ --------------- ------------------- ------------ <S> <C> <C> <C> Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. 1,804 155,951 8.64 % Real estate 5,301 473,833 8.94 Consumer 1,752 169,149 9.65 - ------------------------------------------------------ --------------- ------------------- ------------ Total loans and leases, net 8,857 798,933 9.02 - ------------------------------------------------------ --------------- ------------------- ------------ Money-market assets Interest-bearing deposits at banks 110 8,181 7.44 Federal funds sold and agreements to resell securities 48 3,007 6.29 Trading account 20 1,339 6.82 - ------------------------------------------------------ --------------- ------------------- ------------ Total money-market assets 178 12,527 7.06 - ------------------------------------------------------ --------------- ------------------- ------------ Investment securities** U.S. Treasury and federal agencies 1,242 74,248 5.98 Obligations of states and political subdivisions 50 3,420 6.90 Other 743 45,988 6.19 - ------------------------------------------------------ --------------- ------------------- ------------ Total investment securities 2,035 123,656 6.08 - ------------------------------------------------------ --------------- ------------------- ------------ TOTAL EARNING ASSETS 11,070 935,116 8.45 - ------------------------------------------------------ --------------- ------------------- ------------ Allowance for credit losses (254) Cash and due from banks 326 Other assets 343 - ------------------------------------------------------ --------------- Total assets 11,485 - ------------------------------------------------------ --------------- Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts 761 11,902 1.56 Savings deposits 2,922 87,612 3.00 Time deposits 4,112 239,882 5.83 Deposits at foreign office 133 6,952 5.23 - ------------------------------------------------------ --------------- ------------------- ------------ Total interest-bearing deposits 7,928 346,348 4.37 - ------------------------------------------------------ --------------- ------------------- ------------ Short-term borrowings 1,423 84,225 5.92 Long-term borrowings 146 11,157 7.64 - ------------------------------------------------------ --------------- ------------------- ------------ TOTAL INTEREST-BEARING LIABILITIES 9,497 441,730 4.65 - ------------------------------------------------------ --------------- ------------------- ------------ Noninterest-bearing deposits 1,093 Other liabilities 112 - ------------------------------------------------------ --------------- Total liabilities 10,702 - ------------------------------------------------------ --------------- Stockholders' equity 783 - ------------------------------------------------------ --------------- Total liabilities and stockholders' equity 11,485 - ------------------------------------------------------ --------------- Net interest spread 3.80 Contribution of interest-free funds .66 - ------------------------------------------------------ ------------------- ------------ Net interest income/margin on earning assets 493,386 4.46 % - ------------------------------------------------------ ------------------- ------------ </TABLE> *INCLUDES NONACCRUAL LOANS. **INCLUDES AVAILABLE FOR SALE SECURITIES AT AMORTIZED COST. -51-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 6 COMMERCIAL REAL ESTATE LOANS (net of unearned discount) December 31, 1999 <TABLE> <CAPTION> Percent of dollars outstanding by loan size Out- ------------------------------------------- Dollars in millions standings $0-1 $1-5 $5-10 $10+ - ------------------------------------------------ ---------- --------- -------- ------- -------- <S> <C> <C> <C> <C> <C> Metropolitan New York City Apartments/Multifamily $ 1,625.2 7 % 22 % 7 % 14 % Office 399.4 1 3 3 5 Retail 659.9 3 10 4 3 Construction 127.0 - 1 1 1 Industrial 37.2 1 1 - - Other 395.0 1 4 3 5 - ------------------------------------------------ --------- ----- ------ ------ ----- Total Metropolitan New York City $ 3,243.7 13 % 41 % 18 % 28 % - ------------------------------------------------ --------- ----- ------ ------ ----- Other New York State Apartments/Multifamily $ 309.6 4 % 6 % 2 % - % Office 810.2 9 15 5 2 Retail 304.2 4 5 1 1 Construction 237.1 1 3 2 3 Industrial 239.6 5 4 1 - Other 745.6 11 10 3 3 - ------------------------------------------------ --------- ----- ------ ------ ----- Total other New York State $ 2,646.3 34 % 43 % 14 % 9 % - ------------------------------------------------ --------- ----- ------ ------ ----- Other Apartments/Multifamily $ 203.5 4 % 17 % 5 % 7 % Office 21.9 1 2 - - Retail 120.0 1 6 3 9 Construction 31.4 - 2 1 2 Industrial 54.9 1 6 2 - Other 187.5 3 13 5 10 - ------------------------------------------------ --------- ----- ------ ------ ----- Total other $ 619.2 10 % 46 % 16 % 28 % - ------------------------------------------------ --------- ----- ------ ------ ----- Total commercial real estate loans $ 6,509.2 21 % 42 % 16 % 21 % - ------------------------------------------------ --------- ----- ------ ------ ----- </TABLE> -52-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 7 AVERAGE CORE DEPOSITS <TABLE> <CAPTION> Percent increase from Dollars in millions 1999 1998 to 1999 1997 to 1998 - ------------------------------- ------------- -------------------- --------------------- <S> <C> <C> <C> NOW accounts $ 389 19 % 27 % Savings deposits 5,163 17 30 Time deposits under $100,000 4,348 1 25 Noninterest-bearing deposits 1,965 18 36 - ------------------------------- ------------- -------------------- --------------------- Total $ 11,865 11 % 29 % - ------------------------------- ------------- -------------------- --------------------- - ------------------------------- ------------- -------------------- --------------------- </TABLE> -53-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 8 INTEREST RATE SWAPS <TABLE> <CAPTION> Year ended December 31 ----------------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ------------------------- ---------------------------- DOLLARS IN THOUSANDS Amount Rate* Amount Rate* Amount Rate* - --------------------------------- ----------- ---------- ------------ -------- ------------- --------- <S> <C> <C> <C> <C> <C> <C> Increase (decrease) in: Interest income $ 12,750 .07 % $ 3,378 .02 % $ (142) --- % Interest expense (13,350) (.08) (12,778) (.09) (14,231) (.13) - --------------------------------- ----------- ---------- ----------- -------- ----------- --------- Net interest income/margin $ 26,100 .14 % $ 16,156 .10 % $ 14,089 .11 % - --------------------------------- ----------- ---------- ----------- -------- ----------- --------- Average notional amount** $ 1,944,813 $ 2,521,426 $ 2,691,638 Rate received*** 6.69 % 6.70 % 6.68 % Rate paid*** 5.35 % 6.06 % 6.16 % - --------------------------------- ---------- -------- --------- - --------------------------------- ---------- -------- --------- </TABLE> * Computed as a percentage of average earning assets or interest-bearing liabilities. ** Excludes forward-starting interest rate swaps. *** Weighted-average rate paid or received on interest rate swaps in effect during year. -54-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 9 LOAN CHARGE-OFFS, PROVISION AND ALLOWANCE FOR CREDIT LOSSES <TABLE> <CAPTION> DOLLARS IN THOUSANDS 1999 1998 1997 1996 1995 - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> Allowance for credit losses beginning balance $ 306,347 274,656 270,466 262,344 243,332 - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Charge-offs during year Commercial, financial, agricultural, etc. 19,246 5,457 4,539 6,120 5,475 Real estate - construction - 950 - - - Real estate - mortgage 5,241 7,210 9,910 7,389 10,750 Consumer 35,168 42,684 44,880 36,037 14,982 - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Total charge-offs 59,655 56,301 59,329 49,546 31,207 - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Recoveries during year Commercial, financial, agricultural, etc. 2,244 2,783 2,609 3,671 3,967 Real estate - construction 406 - - 50 87 Real estate - mortgage 3,201 2,894 5,869 3,049 2,137 Consumer 13,486 11,210 9,041 7,573 3,678 - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Total recoveries 19,337 16,887 17,519 14,343 9,869 - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Net charge-offs 40,318 39,414 41,810 35,203 21,338 Provision for credit losses 44,500 43,200 46,000 43,325 40,350 Allowance for credit losses acquired during the year 5,636 27,905 - - - - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Allowance for credit losses ending balance $ 316,165 306,347 274,656 270,466 262,344 - ----------------------------------------------------- ----------- ------------ ------------ ---------- ---------- Net charge-offs as a percent of: Provision for credit losses 90.60 % 91.24 % 90.89 % 81.25 % 52.88 % Average loans and leases, net of unearned discount .25 % .28 % .38 % .35 % .24 % - ----------------------------------------------------- ----------- ------------ ------------ ---------- --------- Allowance for credit losses as a percent of loans and leases, net of unearned discount, at year-end 1.82 % 1.94 % 2.39 % 2.52 % 2.75 % - ----------------------------------------------------- ----------- ------------ ------------ ---------- --------- - ----------------------------------------------------- ----------- ------------ ------------ ---------- --------- </TABLE> -55-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 10 ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES TO LOAN CATEGORIES <TABLE> <CAPTION> December 31 ------------------------------------------------------------ DOLLARS IN THOUSANDS 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Commercial, financial, agricultural, etc. $ 78,019 57,744 42,816 39,556 36,793 Real estate - mortgage 92,982 91,692 70,354 73,879 75,894 Consumer 46,235 45,356 57,757 34,224 23,385 Unallocated 98,929 111,555 103,729 122,807 126,272 - ------------------------------------------------------------------------------------------------------- Total $ 316,165 306,347 274,656 270,466 262,344 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- As a percentage of gross loans and leases outstanding - ------------------------------------------------------------------------------------------------------- Commercial, financial, agricultural, etc. 2.11% 1.76% 1.78% 1.79% 1.83% Real estate - mortgage 0.92 0.99 1.04 1.19 1.34 Consumer 1.45 1.53 2.47 1.30 1.10 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- </TABLE> -56-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 11 NONPERFORMING ASSETS DOLLARS IN THOUSANDS <TABLE> <CAPTION> ---------- ---------- ---------- ---------- ---------- December 31 1999 1998 1997 1996 1995 - ----------------------------------------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> Nonaccrual loans $ 61,816 70,999 38,588 58,232 75,224 Loans past due 90 days or more 31,017 37,784 30,402 39,652 17,842 Renegotiated loans 10,353 8,262 11,660 - - - ----------------------------------------- ---------- ---------- ---------- ---------- ---------- Total nonperforming loans 103,186 117,045 80,650 97,884 93,066 - ----------------------------------------- ---------- ---------- ---------- ---------- ---------- Real estate and other assets owned 10,000 11,129 8,413 8,523 7,295 - ----------------------------------------- ---------- ---------- ---------- ---------- ---------- Total nonperforming assets $ 113,186 128,174 89,063 106,407 100,361 - ----------------------------------------- ---------- ---------- ---------- ---------- ---------- Government guaranteed nonperforming loans* $ 16,529 14,316 17,712 25,847 7,779 - ----------------------------------------- ---------- ---------- ---------- ---------- ----------- Nonperforming loans to total loans and leases, net of unearned discount .59 % .74 % .70 % .91 % .97 % Nonperforming assets to total net loans and leases and real estate and other assets owned .65 % .81 % .77 % .99 % 1.05 % - ----------------------------------------- ---------- ---------- ---------- ---------- ---------- - ----------------------------------------- ---------- ---------- ---------- ---------- ---------- </TABLE> * INCLUDED IN TOTAL NONPERFORMING LOANS. -57-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 12 MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT AND TIME DEPOSITS WITH BALANCES OF $100,000 OR MORE <TABLE> <CAPTION> IN THOUSANDS December 31, 1999 - ------------------------------------------------ ---------------- <S> <C> Under 3 months $ 1,086,712 3 to 6 months 482,737 6 to 12 months 331,832 Over 12 months 748,633 - ------------------------------------------------ ---------------- Total $ 2,649,914 ================================================ ================ </TABLE> -58-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 13 MATURITY DISTRIBUTION OF LOANS* IN THOUSANDS <TABLE> <CAPTION> 2001 - After December 31, 1999 Demand 2000 2004 2004 - ---------------------------------------------- -------------- ----------------- --------------- ----------------- <S> <C> <C> <C> <C> Commercial, financial, agricultural, etc. $ 2,280,423 440,930 569,321 252,656 Real estate - construction 95,121 328,670 93,201 7,576 - ---------------------------------------------- -------------- ----------------- --------------- ----------------- Total $ 2,375,544 769,600 662,522 260,232 - ---------------------------------------------- -------------- ----------------- --------------- ----------------- - ---------------------------------------------- -------------- ----------------- --------------- ----------------- Floating or adjustable interest rates $ 501,874 184,811 Fixed or predetermined interest rates 160,648 75,421 - ---------------------------------------------- --------------- ----------------- Total $ 662,522 260,232 - ---------------------------------------------- --------------- ----------------- - ---------------------------------------------- --------------- ----------------- </TABLE> *The data do not include nonaccrual loans. -59-
-------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES -------------------------------------------------------------------------- Table 14 SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES IN THOUSANDS <TABLE> <CAPTION> Calculated increase (decrease) in projected net interest income December 31 Changes in interest rates 1999 1998 - ------------------------------------------------------- ------------------------------------ <S> <C> <C> +200 basis points $7,996 (7,668) +100 basis points 4,476 335 - -100 basis points 4,198 5,161 - -200 basis points 2,462 4,498 - ------------------------------------------------------- ------------------------------------ - ------------------------------------------------------- ------------------------------------ </TABLE> -60-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 15 CONTRACTUAL REPRICING DATA DOLLARS IN THOUSANDS BY REPRICING DATE <TABLE> <CAPTION> Three Four to One to months twelve five After five December 31, 1999 or less months years years Total - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Loans and leases, net $ 6,582,272 1,575,935 4,918,278 4,330,286 17,406,771 Money-market assets 656,369 659 - - 657,028 Investment securities 277,614 324,942 392,694 905,272 1,900,522 - ----------------------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 7,516,255 1,901,536 5,310,972 5,235,558 19,964,321 - ----------------------------------------------------------------------------------------------------------------------- NOW accounts 583,471 - - - 583,471 Savings deposits 5,198,681 - - - 5,198,681 Time deposits 1,900,076 2,896,537 2,225,012 66,720 7,088,345 Deposits at foreign office 242,691 - - - 242,691 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING DEPOSITS 7,924,919 2,896,537 2,225,012 66,720 13,113,188 - ----------------------------------------------------------------------------------------------------------------------- Short-term borrowings 2,483,159 71,000 - - 2,554,159 Long-term borrowings 372 30,850 1,199,596 544,315 1,775,133 - ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 10,408,450 2,998,387 3,424,608 611,035 17,442,480 - ----------------------------------------------------------------------------------------------------------------------- Interest rate swaps (631,063) 580,635 427,706 (377,278) - - ----------------------------------------------------------------------------------------------------------------------- Periodic gap $ (3,523,258) (516,216) 2,314,070 4,247,245 Cumulative gap (3,523,258) (4,039,474) (1,725,404) 2,521,841 Cumulative gap as a % of total earning assets (17.6)% (20.2)% (8.6)% 12.6 % </TABLE> -61-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Table 16 MATURITY AND TAXABLE-EQUIVALENT YIELD OF INVESTMENT SECURITIES DOLLARS IN THOUSANDS <TABLE> <CAPTION> One year One to Five to Over December 31, 1999 or less five years ten years ten years Total - ----------------------------------------------- --------- ------------- ------------ ------------- ------------ <S> <C> <C> <C> <C> <C> INVESTMENT SECURITIES AVAILABLE FOR SALE* U.S. Treasury and federal agencies Carrying value $ 14,119 148,940 24,784 4,771 192,614 Yield 5.22 % 4.74 % 6.94 % 5.52 % 5.08 % Mortgage-backed securities** Government issued or guaranteed Carrying value 40,398 112,757 86,783 305,034 544,972 Yield 6.07 % 6.23 % 6.37 % 6.00 % 6.11 % Privately issued Carrying value 31,235 179,734 198,813 218,234 628,016 Yield 6.05 % 6.05 % 6.04 % 6.60 % 6.24 % Other debt securities Carrying value - 4,253 148,662 50 152,965 Yield - 5.64 % 6.46 % 6.13 % 6.44 % Equity securities Carrying value - - - - 162,193 Yield - - - - 8.11 % - ----------------------------------------------- --------- ------------ ----------- ------------ ----------- Total investment securities available for sale Carrying value $ 85,752 445,684 459,042 528,089 1,680,760 Yield 5.93 % 5.65 % 6.29 % 6.24 % 6.26 % - ----------------------------------------------- --------- ------------ ----------- ------------ ----------- INVESTMENT SECURITIES HELD TO MATURITY Obligations of states and political subdivisions Carrying value $ 60,036 12,987 5,111 1,055 79,189 Yield 6.30 % 6.90 % 7.14 % 9.87 % 6.50 % Other debt securities Carrying value - 13,427 - 1,955 15,382 Yield - 12.36 % - 7.97 % 11.80 % - ----------------------------------------------- --------- ------------ ----------- ------------ ----------- Total investment securities held to maturity Carrying value $ 60,036 26,414 5,111 3,010 94,571 Yield 6.30 % 9.67 % 7.14 % 8.64 % 7.36 % - ----------------------------------------------- --------- ------------ ----------- ------------ ----------- OTHER INVESTMENT SECURITIES - - - - 125,191 - ----------------------------------------------- --------- ------------ ----------- ------------ ----------- Total investment securities Carrying value $ 145,788 472,098 464,153 531,099 1,900,522 Yield 6.08 % 5.87 % 6.30 % 6.25 % 5.90 % - ----------------------------------------------- --------- ------------ ----------- ------------ ----------- - ----------------------------------------------- --------- ------------ ----------- ------------ ----------- </TABLE> * INVESTMENT SECURITIES AVAILABLE FOR SALE ARE PRESENTED AT ESTIMATED FAIR VALUE. YIELDS ON SUCH SECURITIES ARE BASED ON AMORTIZED COST. ** MATURITIES ARE REFLECTED BASED UPON CONTRACTUAL PAYMENTS DUE. ACTUAL MATURITIES ARE EXPECTED TO BE SIGNIFICANTLY SHORTER AS A RESULT OF LOAN REPAYMENTS IN THE UNDERLYING MORTGAGE POOLS. -62-
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Incorporated by reference to the discussion contained under the captions "Liquidity, Market Risk, and Interest Rate Sensitivity" and "Capital," and Table 14. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial Statements and Supplementary Data consist of the financial statements as indexed and presented below and table 2 "Quarterly Trends" presented in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants Consolidated Balance Sheet - December 31, 1999 and 1998 Consolidated Statement of Income - Years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Cash Flows - Years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997 Notes to Financial Statements -63-
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of M&T Bank Corporation: We have audited the accompanying consolidated balance sheet of M&T Bank Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of M&T Bank Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ PRICEWATERHOUSECOOPERS LLP Buffalo, New York January 10, 2000 -64-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> December 31 --------------------------------------- DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Assets Cash and due from banks $ 592,755 493,792 Money-market assets Interest-bearing deposits at banks 1,092 674 Federal funds sold and agreements to resell securities 643,555 229,066 Trading account 641,114 173,122 ------------------------------------------------------------------------------------------------ Total money-market assets 1,285,761 402,862 ------------------------------------------------------------------------------------------------ Investment securities Available for sale (cost: $1,724,713 in 1999; $2,578,940 in 1998) 1,680,760 2,583,740 Held to maturity (market value: $92,909 in 1999; $87,365 in 1998) 94,571 87,282 Other (market value: $125,191 in 1999; $114,542 in 1998) 125,191 114,542 ------------------------------------------------------------------------------------------------ Total investment securities 1,900,522 2,785,564 ------------------------------------------------------------------------------------------------ Loans and leases 17,572,861 16,005,701 Unearned discount (166,090) (214,171) Allowance for credit losses (316,165) (306,347) ------------------------------------------------------------------------------------------------ Loans and leases, net 17,090,606 15,485,183 ------------------------------------------------------------------------------------------------ Premises and equipment 173,815 162,842 Goodwill and core deposit intangible 648,040 546,036 Accrued interest and other assets 717,616 707,612 ------------------------------------------------------------------------------------------------ Total assets $ 22,409,115 20,583,891 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Liabilities Noninterest-bearing deposits $ 2,260,432 2,066,814 NOW accounts 583,471 509,307 Savings deposits 5,198,681 4,830,678 Time deposits 7,088,345 7,027,083 Deposits at foreign office 242,691 303,270 ------------------------------------------------------------------------------------------------ Total deposits 15,373,620 14,737,152 ------------------------------------------------------------------------------------------------ Federal funds purchased and agreements to repurchase securities 1,788,858 1,746,078 Other short-term borrowings 765,301 483,898 Accrued interest and other liabilities 909,157 446,854 Long-term borrowings 1,775,133 1,567,543 ------------------------------------------------------------------------------------------------ Total liabilities 20,612,069 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, 8,397 shares in 1999; 8,028 shares in 1998 3,937 3,752 Additional paid-in capital 458,729 480,014 Retained earnings 1,501,530 1,271,071 Accumulated other comprehensive income, net (26,047) 2,869 Treasury stock - common, at cost - 377,738 shares in 1999; 403,769 shares in 1998 (181,611) (195,848) ------------------------------------------------------------------------------------------------ Total stockholders' equity 1,797,046 1,602,366 ------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 22,409,115 20,583,891 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to financial statements. -65-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> Year ended December 31 -------------------------------------------------------------- IN THOUSANDS, EXCEPT PER SHARE 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest income Loans and leases, including fees $ 1,323,262 1,198,639 954,974 Money-market assets Deposits at banks 87 400 2,475 Federal funds sold and agreements to resell securities 24,491 8,293 2,989 Trading account 3,153 4,403 1,781 Investment securities Fully taxable 118,741 139,731 99,640 Exempt from federal taxes 8,897 7,984 5,640 - ------------------------------------------------------------------------------------------------------------------------- Total interest income 1,478,631 1,359,450 1,067,499 - ------------------------------------------------------------------------------------------------------------------------- Interest expense NOW accounts 4,683 4,851 3,455 Savings deposits 121,888 115,345 90,907 Time deposits 367,889 388,185 327,611 Deposits at foreign office 12,016 14,973 12,160 Short-term borrowings 104,911 105,582 44,341 Long-term borrowings 107,847 58,567 29,619 - ------------------------------------------------------------------------------------------------------------------------- Total interest expense 719,234 687,503 508,093 - ------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 759,397 671,947 559,406 Provision for credit losses 44,500 43,200 46,000 - ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 714,897 628,747 513,406 - ------------------------------------------------------------------------------------------------------------------------- Other income Mortgage banking revenues 71,819 65,646 51,547 Service charges on deposit accounts 73,612 57,357 43,377 Trust income 40,751 38,211 30,688 Merchant discount and other credit card fees 7,515 12,436 19,395 Trading account and foreign exchange gains 315 3,963 3,690 Gain (loss) on sales of bank investment securities 1,575 1,761 (280) Other revenues from operations 86,788 83,565 42,112 - ------------------------------------------------------------------------------------------------------------------------- Total other income 282,375 262,939 190,529 - ------------------------------------------------------------------------------------------------------------------------- Other expense Salaries and employee benefits 284,822 259,487 220,017 Equipment and net occupancy 73,131 66,553 53,299 Printing, postage and supplies 17,510 17,603 13,747 Amortization of goodwill and core deposit intangible 49,715 34,487 7,291 Other costs of operations 153,780 187,993 127,422 - ------------------------------------------------------------------------------------------------------------------------- Total other expense 578,958 566,123 421,776 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 418,314 325,563 282,159 Income taxes 152,688 117,589 105,918 - ------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 265,626 207,974 176,241 - ------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic $34.05 27.30 26.60 Diluted 32.83 26.16 25.26 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to financial statements. -66-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Year ended December 31 -------------------------------------- IN THOUSANDS 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Cash flows from Net income $ 265,626 207,974 176,241 operating activities Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses 44,500 43,200 46,000 Depreciation and amortization of premises and equipment 27,488 25,432 20,745 Amortization of capitalized servicing rights 19,773 19,650 14,366 Amortization of goodwill and core deposit intangible 49,715 34,487 7,291 Provision for deferred income taxes 1,816 (2,965) (7,331) Asset write-downs 1,771 3,905 1,501 Net gain on sales of assets (279) (4,607) (1,002) Net change in accrued interest receivable, payable 473 13,991 11,806 Net change in other accrued income and expense (124,772) 71,914 80,439 Net change in loans held for sale 206,448 (255,791) 4,234 Net change in trading account assets and liabilities 114,062 (120,542) 5,094 -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 606,621 36,648 359,384 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from Proceeds from sales of investment securities investing activities Available for sale 89,509 223,929 217,221 Other 7,224 11,906 - Proceeds from maturities of investment securities Available for sale 1,061,118 1,071,889 255,498 Held to maturity 55,096 91,060 89,161 Purchases of investment securities Available for sale (165,852) (846,020) (628,168) Held to maturity (52,793) (42,930) (54,218) Other (15,204) (21,872) (3,936) Net (increase) decrease in interest-bearing deposits at banks (418) (6) 46,657 Additions to capitalized servicing rights (17,257) (16,741) (29,818) Net increase in loans and leases (1,429,849) (1,299,195) (820,335) Proceeds from sale of retail credit card business - 189,818 - Capital expenditures, net (22,933) (16,785) (13,270) Acquisitions, net of cash acquired: Banks and bank holding companies (51,423) 20,790 - Deposits and banking offices 529,754 - 123,043 Purchases of bank owned life insurance - (150,000) (200,000) Other, net 19,808 (2,137) (356) -------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 6,780 (786,294) (1,018,521) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from Net increase (decrease) in deposits (508,240) (190,445) 508,930 financing activities Net increase (decrease) in short-term borrowings 324,370 648,784 (77,931) Proceeds from long-term borrowings 353,991 875,000 250,000 Payments on long-term borrowings (165,593) (3,136) (189) Purchases of treasury stock (79,784) (231,779) (67,771) Dividends paid - common (35,128) (28,977) (21,207) Other, net 10,435 16,165 4,212 -------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (99,949) 1,085,612 596,044 -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents $ 513,452 335,966 (63,093) Cash and cash equivalents at beginning of year 722,858 386,892 449,985 Cash and cash equivalents at end of year $ 1,236,310 722,858 386,892 - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental Interest received during the year $ 1,484,098 1,365,239 1,054,094 disclosure of cash Interest paid during the year 723,106 683,467 487,576 flow information Income taxes paid during the year 252,484 47,188 43,562 - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental schedule Real estate acquired in settlement of loans $ 11,631 8,503 9,142 of noncash investing Acquisition of banks and bank holding companies and financing activities Common stock issued 58,746 587,819 - Fair value of Assets acquired (noncash) 650,841 5,206,168 - Liabilities assumed 540,672 4,619,715 - Stock options - 19,424 - - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to financial statements. -67-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Accumulated Common Additional other Preferred Common stock paid-in Retained comprehensive IN THOUSANDS, EXCEPT PER SHARE stock stock issuable capital earnings income, net - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> 1997 Balance - January 1, 1997 $ - 40,487 - 96,597 937,072 (2,485) Comprehensive income: Net income - - - - 176,241 - Other comprehensive income, net of tax: Unrealized gains on investment securities, net of reclassification adjustment - - - - - 14,501 Purchases of treasury stock - - - - - - Exercise of stock options - - - 6,636 - - Common stock cash dividends - $3.20 per share - - - - (21,207) - - ------------------------------------------------------------------------------------------------------------------------------------ Balance - December 31, 1997 $ - 40,487 - 103,233 1,092,106 12,016 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 Comprehensive income: Net income - - - - 207,974 - Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment - - - - - (9,147) Purchases of treasury stock - - - - - - Acquisition of ONBANCorp: Common stock issued - 10 - 364,427 - - Fair value of stock options - - - 19,424 - - Stock-based compensation plans: Exercise of stock options - 11 - (7,114) - - Directors' stock plan - - - 49 - - Deferred bonus plan, net, including dividend equivalents - - 3,752 (5) (32) - Common stock cash dividends - $3.80 per share - - - - (28,977) - - ------------------------------------------------------------------------------------------------------------------------------------ Balance - December 31, 1998 $ - 40,508 3,752 480,014 1,271,071 2,869 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 Comprehensive income: Net income - - - - 265,626 - Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment - - - - - (28,916) Purchases of treasury stock - - - - - - Acquisition of FNB Rochester Corp.: Common stock issued - - - (718) - - Stock-based compensation plans: Exercise of stock options - - - (20,558) - - Directors' stock plan - - - 8 - - Deferred bonus plan, net, including dividend equivalents - - 185 (17) (39) - Common stock cash dividends - $4.50 per share - - - - (35,128) - - ------------------------------------------------------------------------------------------------------------------------------------ Balance - December 31, 1999 $ - 40,508 3,937 458,729 1,501,530 (26,047) - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> Treasury IN THOUSANDS, EXCEPT PER SHARE stock Total - -------------------------------------------------------------- ------------------------------------- <S> <C> <C> 1997 Balance - January 1, 1997 (166,012) 905,659 Comprehensive income: Net income - 176,241 Other comprehensive income, net of tax: Unrealized gains on investment securities, net of reclassification adjustment - 14,501 ------- 190,742 Purchases of treasury stock (67,771) (67,771) Exercise of stock options 16,207 22,843 Common stock cash dividends - $3.20 per share - (21,207) - -------------------------------------------------------------- ----------------------------------- Balance - December 31, 1997 (217,576) 1,030,266 - -------------------------------------------------------------- ----------------------------------- 1998 Comprehensive income: Net income - 207,974 Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment - (9,147) -------- 198,827 Purchases of treasury stock (231,779) (231,779) Acquisition of ONBANCorp: Common stock issued 223,382 587,819 Fair value of stock options - 19,424 Stock-based compensation plans: Exercise of stock options 29,788 22,685 Directors' stock plan 177 226 Deferred bonus plan, net, including dividend equivalents 160 3,875 Common stock cash dividends - $3.80 per share - (28,977) - -------------------------------------------------------------- ----------------------------------- Balance - December 31, 1998 (195,848) 1,602,366 - -------------------------------------------------------------- ----------------------------------- 1999 Comprehensive income: Net income - 265,626 Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment - (28,916) ------- 236,710 Purchases of treasury stock (79,784) (79,784) Acquisition of FNB Rochester Corp.: Common stock issued 59,464 58,746 Stock-based compensation plans: Exercise of stock options 33,791 13,233 Directors' stock plan 300 308 Deferred bonus plan, net, including dividend equivalents 466 595 Common stock cash dividends - $4.50 per share - (35,128) - -------------------------------------------------------------- ----------------------------------- Balance - December 31, 1999 (181,611) 1,797,046 - -------------------------------------------------------------- ----------------------------------- </TABLE> See accompanying notes to financial statements. -68-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. SIGNIFICANT ACCOUNTING POLICIES M&T Bank Corporation ("M&T") is a bank holding company headquartered in Buffalo, New York. Through subsidiaries, M&T provides individuals, corporations and other businesses, and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking, asset management and other financial services. Banking activities are largely focused on consumers residing in New York State and northeastern Pennsylvania and on small and medium-size businesses based in those areas. Certain subsidiaries also conduct activities in other states. The accounting and reporting policies of M&T and subsidiaries ("the Company") conform to generally accepted accounting principles and to general practices within the banking industry. Certain reclassifications have been made to the 1998 and 1997 financial statements to conform with 1999 financial statement presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting policies are as follows: Consolidation The consolidated financial statements include M&T and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements of M&T included in note 21 report investments in subsidiaries under the equity method. Consolidated Statement of Cash Flows For purposes of this statement, cash and due from banks, Federal funds sold and agreements to resell securities are considered cash and cash equivalents. Trading account Financial instruments used for trading purposes are stated at fair value. Realized gains and losses and unrealized changes in fair value of financial instruments utilized in trading activities are included in trading account and foreign exchange gains in the consolidated statement of income. Investment securities Investments in debt securities are classified as held to maturity and stated at amortized cost when management has the positive intent and ability to hold such securities to maturity. Investments in other debt securities and equity securities having readily determinable fair values are classified as available for sale and stated at estimated fair value. Unrealized gains or losses related to investment securities available for sale are reflected in -69-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Investment securities, continued accumulated other comprehensive income, net of applicable income taxes. Other securities are stated at cost and include stock of the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York. Amortization of premiums and accretion of discounts for investment securities available for sale and held to maturity are included in interest income. The cost basis of individual securities is written down to estimated fair value through a charge to earnings when declines in value below amortized cost are considered to be other than temporary. Realized gains and losses on the sales of investment securities are determined using the specific identification method. Loans Interest income on loans is accrued on a level yield method. Loans are placed on nonaccrual status and previously accrued interest thereon is charged against income when principal or interest is delinquent 90 days, unless management determines that the loan status clearly warrants other treatment. Loan balances are charged off when it becomes evident that such balances are not fully collectible. Loan fees and certain direct loan origination costs are deferred and recognized as an interest yield adjustment over the life of the loan. Net deferred fees have been included in unearned discount as a reduction of loans outstanding. Loans held for sale are carried at the lower of aggregate cost or fair market value. Valuation adjustments made on these loans are included in mortgage banking revenues. Except for consumer and residential mortgage loans that are considered smaller balance homogenous loans and are evaluated collectively, the Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Impaired loans are classified as either nonaccrual or as loans renegotiated at below market rates. Loans less than 90 days delinquent are deemed to have a minimum delay in payment and are generally not considered impaired. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of collateral if the loan is collateral dependent. Interest received on impaired loans placed on nonaccrual status is applied to reduce the carrying value of the loan or, if principal is considered fully collectible, recognized as interest income. -70-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Allowance for credit losses The allowance for credit losses represents the amount which, in management's judgment, will be adequate to absorb credit losses inherent in the loan and lease portfolio as of the balance sheet date. The adequacy of the allowance is determined by management's evaluation of the loan and lease portfolio based on such factors as the differing economic risks associated with each loan category, the current financial condition of specific borrowers, the economic environment in which borrowers operate, any delinquency in payments, and the value of any collateral. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets. Capitalized servicing rights Servicing rights retained in a sale or securitization of financial assets are measured at the date of transfer by allocating the previous carrying amount between the assets transferred and the servicing rights based on their relative fair values. Servicing assets purchased or servicing liabilities assumed are initially measured at fair value. Capitalized servicing assets are included in other assets and amortized in proportion to and over the period of estimated net servicing income. To estimate the fair value of servicing rights, the Company considers market prices for similar assets and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. Such assumptions include estimates of the cost of servicing loans, loan default rates, an appropriate discount rate, and prepayment speeds. For purposes of evaluating and measuring impairment of capitalized servicing rights, the Company stratifies such assets based on predominant risk characteristics of underlying financial instruments that are expected to have the most impact on projected prepayments, cost of servicing and other factors affecting future cash flows associated with the servicing rights. Such factors may include financial asset or loan type, note rate and term. The amount of impairment recognized is the amount by which the carrying value of the capitalized servicing rights for a stratum exceeds estimated fair value. Impairment is recognized through a valuation allowance. Goodwill and core deposit intangible The excess of the cost of acquired entities or operations over the fair value of identifiable assets acquired less liabilities assumed is recorded as goodwill. Substantially all of the Company's goodwill is being amortized -71-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Goodwill and core deposit intangible, continued using the straight-line method over twenty years. Core deposit intangibles are amortized using an accelerated method over estimated useful lives of seven to ten years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and core deposit intangible may be impaired. Impairment is measured using estimates of future cash flows or earnings potential of the operations acquired. Stock-based compensation Compensation expense is not recognized for stock option awards to employees under the Company's stock option plan since the exercise price of options is equal to the market price of the underlying stock at the date of grant. Compensation expense for stock appreciation rights issued separately from stock options is recognized based upon changes in the quoted market value of M&T's common stock. The pro forma effects of stock-based compensation arrangements are based on the estimated grant date fair value of stock options that are expected to vest calculated pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Pro forma compensation expense, net of applicable income tax effect, is recognized over the vesting period. Income taxes Deferred tax assets and liabilities are recognized for the future tax effects attributable to differences between the financial statement value of existing assets and liabilities and their respective tax bases and carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates and laws. Investment tax credits related to leveraged leasing property are amortized into income tax expense over the life of the lease agreement. Financial futures Outstanding financial futures contracts represent future commitments and are not included in the consolidated balance sheet. Futures contracts used in trading activities are marked to market and the resulting gains or losses are recognized in trading account and foreign exchange gains. On occasion the Company uses interest rate futures contracts as part of its management of interest rate risk. Gains and losses on futures contracts designated as hedges are amortized as an adjustment to interest income or expense over the life of the item hedged. Interest rate swap agreements For interest rate swap agreements used to manage interest rate risk arising -72-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Interest rate swap agreements, continued from financial assets and liabilities, amounts receivable or payable are recognized as accrued under the terms of the agreement and the net interest differential, including any amortization of premiums paid or accretion of discounts received, is recorded as an adjustment to interest income or expense of the related asset or liability. To qualify for such accounting treatment, an interest rate swap must (i) be designated as having been entered into for interest rate risk management purposes and linked to a specific financial instrument or pool of similar financial instruments in the Company's consolidated balance sheet and (ii) have interest rate and repricing characteristics that have a sufficient degree of correlation with the corresponding characteristics of the designated on-balance sheet financial instrument. Gains or losses resulting from early termination of interest rate swap agreements used to manage interest rate risk are amortized over the shorter of the remaining term or estimated life of the agreement or the on-balance sheet financial instrument to which the swap had been linked. Agreements that do not satisfy the requirements noted above, including those entered into for trading purposes, are marked to market with resulting gains or losses recorded in trading account and foreign exchange gains. Earnings per common share Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding and common shares issuable under deferred compensation arrangements during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings. Proceeds assumed to have been received on such exercise or conversion are assumed to be used to purchase shares of M&T common stock at the average market price during the period, as required by the "treasury stock method" of accounting. Treasury stock Repurchases of shares of M&T common stock are recorded at cost as a reduction of stockholders' equity. Reissuances of shares of treasury stock are recorded at average cost. 2. ACQUISITIONS On September 24, 1999, Manufacturers and Traders Trust Company ("M&T Bank"), M&T's principal banking subsidiary, acquired 29 upstate New York branches from The Chase Manhattan Bank ("Chase") in a cash transaction. The branches had approximately $634 million of deposits and approximately $44 million of -73-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. ACQUISITIONS, CONTINUED retail installment and commercial loans at the closing. In addition, on September 30, 1999 M&T Bank received from Chase investment management and custody accounts having assets of approximately $286 million. Chase also agreed to transfer up to approximately $195 million of other trust and fiduciary account assets to M&T Bank following the receipt of required court approvals. It is expected that this portion of the transaction will be completed in the first quarter of 2000. In connection with the transaction, the Company recorded approximately $55 million of intangible assets that are being amortized over periods ranging from five to seven years. On June 1, 1999, M&T consummated the merger of FNB Rochester Corp.("FNB"), a bank holding company headquartered in Rochester, New York, with and into Olympia Financial Corp. ("Olympia"), a wholly owned subsidiary of M&T. Following the merger with FNB, First National Bank of Rochester, a wholly owned subsidiary of FNB, was merged into M&T Bank. In accordance with the terms of the merger agreements with FNB, M&T paid $76.3 million in cash and issued 122,516 shares of M&T common stock in exchange for FNB shares outstanding at the time of the acquisition. The purchase price of the transaction was approximately $135 million based on the cash paid to FNB stockholders and the market price of M&T common shares on December 8, 1998 before the terms of the merger were agreed to and announced by M&T and FNB. Acquired assets, loans and deposits of FNB on June 1, 1999 totaled approximately $676 million, $393 million and $511 million, respectively. The transaction was accounted for as a purchase and, accordingly, operations acquired from FNB have been included in the Company's financial results since the acquisition date. In connection with the acquisition, the Company recorded approximately $86 million of goodwill and $12 million of core deposit intangible. The goodwill is being amortized over twenty years using the straight-line method and the core deposit intangible is being amortized over eight years using an accelerated method. On April 1, 1998, M&T consummated the merger of ONBANCorp, Inc. ("ONBANCorp") with and into Olympia. 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 M&T Bank. 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 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 value of ONBANCorp stock options converted into M&T stock options. -74-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. ACQUISITIONS, CONTINUED 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 over twenty years using the straight-line method and the core deposit intangible is being amortized over ten years using an accelerated method. In connection with the transactions described above, 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 $4.7 million ($3.0 million net of applicable income taxes) during 1999 and approximately $21.3 million ($14.0 million net of applicable income taxes) during 1998. Expenses related to systems conversions and other costs of integration are included in the consolidated statement of income for the years ended December 31, 1999 and 1998 as follows: <TABLE> <CAPTION> 1999 1998 ---- ---- (in thousands) <S> <C> <C> Salaries and employee benefits $ 188 2,141 Equipment and net occupancy 149 875 Printing, postage and supplies 685 1,079 Other costs of operations 3,654 17,250 ------- ------ $ 4,676 21,345 ------- ------ ------- ------ </TABLE> The expenses noted above consisted largely of professional services and other temporary help fees associated with the conversion of systems and/or integration of operations; recruiting and other incentive compensation; initial marketing and promotion expenses to introduce the Company to customers of the acquired operations; and printing, supplies and other costs. Since the systems conversions and integration of operations is complete, the Company does not expect to incur additional integration costs. Presented below is certain unaudited pro forma information as if FNB and ONBANCorp had been acquired on January 1, 1998. These results combine the historical results of FNB and ONBANCorp into the Company's consolidated statement of income and, while certain adjustments were made for the estimated impact of purchase accounting adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisitions taken place at that time. In particular, expenses related to systems conversions and other costs of integration associated with the acquisition of FNB are included in the 1999 periods in which such costs were incurred and, additionally, the Company expects to achieve further operating cost savings as a result of the mergers which are -75-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. ACQUISITIONS, CONTINUED not reflected in the pro forma amounts presented below: <TABLE> <CAPTION> Pro forma Year ended December 31 1999 1998 ---- ---- (in thousands, except per share) -------------------------------- <S> <C> <C> Interest income $1,495,877 1,480,391 Other income 285,052 274,337 Net income 265,455 200,328 Diluted earnings per common share 32.61 23.76 </TABLE> 3. INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities were as follows: <TABLE> <CAPTION> Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- (in thousands) <S> <C> <C> <C> <C> December 31, 1999 Investment securities available for sale: U.S. Treasury and federal agencies $ 202,283 - 9,669 192,614 Mortgage-backed securities Government issued or guaranteed 557,058 860 12,946 544,972 Privately issued 640,368 6,123 18,475 628,016 Other debt securities 155,805 606 3,446 152,965 Equity securities 169,199 464 7,470 162,193 ---------- ----- ------ --------- 1,724,713 8,053 52,006 1,680,760 ---------- ----- ------ --------- Investment securities held to maturity: Obligations of states and political subdivisions 79,189 - 361 78,828 Other debt securities 15,382 - 1,301 14,081 ---------- ----- ------ --------- 94,571 - 1,662 92,909 ---------- ----- ------ --------- Other securities 125,191 - - 125,191 ---------- ----- ------ --------- Total $1,944,475 8,053 53,668 1,898,860 ---------- ----- ------ --------- ---------- ----- ------ --------- </TABLE> -76-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 3. INVESTMENT SECURITIES, CONTINUED <TABLE> <CAPTION> Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- (in thousands) <S> <C> <C> <C> <C> December 31, 1998 Investment securities available for sale: U.S. Treasury and federal agencies $ 452,524 - 831 451,693 Mortgage-backed securities Government issued or guaranteed 867,065 8,121 5,879 869,307 Privately issued 952,298 3,445 1,620 954,123 Other debt securities 162,748 1,183 4,587 159,344 Equity securities 144,305 4,992 24 149,273 --------- ------ ------ --------- 2,578,940 17,741 12,941 2,583,740 --------- ------ ------ --------- Investment securities held to maturity: Obligations of states and political subdivisions 73,789 811 - 74,600 Other debt securities 13,493 - 728 12,765 --------- ------ ------ --------- 87,282 811 728 87,365 --------- ------ ------ --------- Other securities 114,542 - - 114,542 --------- ------ ------ --------- Total $2,780,764 18,552 13,669 2,785,647 --------- ------ ------ --------- --------- ------ ------ --------- </TABLE> No investment in securities of a single non-U.S. Government or government agency issuer exceeded ten percent of stockholders' equity at December 31, 1999. As of December 31, 1999, the latest available investment ratings of all privately issued mortgage-backed securities were A or better. The amortized cost and estimated fair value of collateralized mortgage obligations included in mortgage-backed securities were as follows: <TABLE> <CAPTION> December 31 1999 1998 ---- ---- (in thousands) <S> <C> <C> Amortized cost $ 792,331 1,265,588 Estimated fair value 772,819 1,265,487 --------- --------- --------- --------- </TABLE> Gross realized gains on the sale of investment securities were $1,626,000 in 1999, $1,808,000 in 1998 and $1,179,000 in 1997. Gross realized losses on the sale of investment securities were $51,000 in 1999, $47,000 in 1998 and $1,459,000 in 1997. -77-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 3. INVESTMENT SECURITIES, CONTINUED At December 31, 1999, the amortized cost and estimated fair value of debt securities by contractual maturity were as follows: <TABLE> <CAPTION> Estimated Amortized fair Cost Value --------- --------- (in thousands) Debt securities available for sale: <S> <C> <C> Due in one year or less $ 14,162 14,119 Due after one year through five years 161,129 153,193 Due after five years through ten years 177,831 173,446 Due after ten years 4,966 4,821 --------- --------- 358,088 345,579 Mortgage-backed securities available for sale 1,197,426 1,172,988 --------- --------- $1,555,514 1,518,567 ========= ========= Debt securities held to maturity: Due in one year or less $ 60,036 59,906 Due after one year through five years 26,414 25,096 Due after five years through ten years 5,111 4,926 Due after ten years 3,010 2,981 --------- --------- $ 94,571 92,909 ========= ========= </TABLE> At December 31, 1999, investment securities with a carrying value of $601,366,000, including $541,438,000 of investment securities available for sale, were pledged to secure demand notes issued to the U.S. Treasury, borrowings from the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Pittsburgh (together, the "Federal Home Loan Banks"), repurchase agreements, governmental deposits and interest rate swap agreements. -78-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. LOANS AND LEASES Total gross loans and leases outstanding were comprised of the following: <TABLE> <CAPTION> December 31 1999 1998 --------- --------- (in thousands) <S> <C> <C> Loans Commercial, financial, agricultural, etc. $ 3,564,470 3,101,016 Real estate: Residential 4,011,436 4,163,818 Commercial 6,141,469 5,125,703 Construction 525,241 489,112 Consumer 2,797,537 2,569,726 ---------- ---------- Total loans 17,040,153 15,449,375 ---------- ---------- Leases Commercial 132,588 110,411 Consumer 400,120 445,915 ---------- ---------- Total leases 532,708 556,326 ---------- ---------- Total loans and leases $17,572,861 16,005,701 ========== ========== </TABLE> One-to-four family residential mortgage loans held for sale were $238.7 million at December 31, 1999 and $445.1 million at December 31, 1998. One- to-four family residential mortgage loans serviced for others totaled approximately $7.2 billion and $7.3 billion at December 31, 1999 and 1998, respectively. As of December 31, 1999, approximately $23 million of one-to-four family residential mortgage loans serviced for others have been sold with recourse. The total credit loss exposure resulting from residential mortgage loans sold with recourse was considered negligible. Included in the preceding table are nonperforming loans (loans on which interest was not being accrued, or which were ninety days or more past due or had been renegotiated at below-market interest rates) of $103,186,000 at December 31, 1999 and $117,045,000 at December 31, 1998. If nonaccrual and renegotiated loans had been accruing interest at their originally contracted terms, interest income on these loans would have amounted to $8,998,000 in 1999 and $7,806,000 in 1998. The actual amount included in interest income during 1999 and 1998 on these loans was $1,589,000 and $2,367,000, respectively. The recorded investment in loans considered impaired was $45,124,000 and $47,248,000 at December 31, 1999 and 1998, respectively. The recorded investment in loans for which there was a related valuation allowance for impairment included in the allowance for credit losses and the amount of such impairment allowance were $24,536,000 and $6,005,000, respectively, at December 31, 1999 and $20,470,000 and $6,758,000, respectively, at December 31, 1998. The recorded investment in loans considered impaired for which there was no related valuation allowance for -79-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. LOANS AND LEASES, CONTINUED impairment was $20,588,000 and $26,778,000 at December 31, 1999 and 1998, respectively. The average recorded investment in impaired loans during 1999, 1998 and 1997 was $43,858,000, $42,485,000 and $37,732,000, respectively. Interest income recognized on impaired loans totaled $3,324,000, $2,351,000 and $2,051,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Borrowings by directors and certain officers of M&T and its banking subsidiaries, and by associates of such persons, exclusive of loans aggregating less than $60,000, amounted to $124,185,000 and $22,115,000 at December 31, 1999 and 1998, respectively. During 1999, new borrowings by such persons amounted to $104,715,000 (including borrowings of new directors or officers that were outstanding at the time of their election) and repayments and other reductions were $2,645,000. At December 31, 1999, approximately $2.9 billion of commercial mortgage loans and one-to-four family residential mortgage loans were pledged to secure outstanding borrowings. 5. ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ---- ---- ---- (in thousands) <S> <C> <C> <C> Beginning balance $306,347 274,656 270,466 Provision for credit losses 44,500 43,200 46,000 Allowance obtained through acquisitions 5,636 27,905 - Net charge-offs Charge-offs (59,655) (56,301) (59,329) Recoveries 19,337 16,887 17,519 ------- ------- ------- Net charge-offs (40,318) (39,414) (41,810) ------- ------- ------- Ending balance $316,165 306,347 274,656 ======= ======= ======= </TABLE> -80-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. PREMISES AND EQUIPMENT The detail of premises and equipment was as follows: <TABLE> <CAPTION> December 31 1999 1998 ---- ---- (in thousands) <S> <C> <C> Land $ 16,649 15,467 Buildings-owned 126,670 118,132 Buildings-capital leases 1,773 1,773 Leasehold improvements 44,639 39,800 Furniture and equipment-owned 171,158 152,301 Furniture and equipment-capital leases 1,156 429 ------- ------- 362,045 327,902 Less: accumulated depreciation and amortization Owned assets 186,137 163,074 Capital leases 2,093 1,986 ------- ------- 188,230 165,060 ------- ------- Premises and equipment, net $173,815 162,842 ======= ======= </TABLE> Net lease expense for all operating leases totaled $24,168,000 in 1999, $20,607,000 in 1998 and $16,983,000 in 1997. The Company occupies certain banking offices and uses certain equipment under noncancellable operating lease agreements expiring at various dates over the next 21 years. Minimum lease payments under noncancellable operating leases are summarized as follows: <TABLE> <CAPTION> Year ending December 31: (in thousands) <S> <C> 2000 $ 15,567 2001 14,516 2002 12,009 2003 11,101 2004 10,226 Later years 54,962 -------- Total minimum lease payments $118,381 -------- -------- </TABLE> Payments required under capital leases are not material. -81-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 7. CAPITALIZED SERVICING ASSETS Changes in capitalized servicing assets were as follows: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 -------- ------- ------- (in thousands) <S> <C> <C> <C> Beginning balance $ 63,995 61,877 38,890 Originations 17,240 12,276 7,819 Purchases 1,089 16,014 26,262 Amortization (19,773) (19,650) (14,366) Sales (1,649) (6,522) - Write-downs - - (802) Reclassification of excess servicing receivables - - 4,074 -------- ------- ------- 60,902 63,995 61,877 Valuation allowance (50) (1,798) (798) -------- ------- ------- Ending balance, net $ 60,852 62,197 61,079 ======== ======= ======= </TABLE> As a result of impairment of certain strata of capitalized servicing assets, additions to the valuation allowance totaling $1,000,000 and $500,000 were recorded during 1998 and 1997, respectively. During 1999, the valuation allowance was reduced by $1,748,000 since for most strata the estimated fair value of capitalized servicing assets exceeded carrying value. During 1997, the valuation allowance was reduced by $802,000 to reflect the write-down of the recorded value of certain capitalized servicing assets related to loans that had been repaid by borrowers. The estimated fair value of capitalized servicing assets was approximately $107 million at December 31, 1999 and $80 million at December 31, 1998. Such amounts were estimated using discounted cash flows that reflect current prepayment and discount rate assumptions as of each year-end. The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," on January 1, 1997. Among other things, SFAS No. 125 required that for each servicing contract in existence before January 1, 1997 previously recognized servicing rights and excess servicing receivables that did not exceed contractually specified servicing fees be combined. The carrying value of such excess servicing receivables at January 1, 1997 was $4,074,000. Retroactive application of the provisions of SFAS No. 125 to years prior to 1997 was not permitted. -82-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. BORROWINGS The amounts and interest rates of short-term borrowings were as follows: <TABLE> <CAPTION> Federal funds purchased and Other repurchase short-term Agreements Borrowings Total ---------- ---------- ----- (dollars in thousands) <S> <C> <C> <C> At December 31, 1999 Amount outstanding $1,788,858 765,301 2,554,159 Weighted-average interest rate 5.29% 5.36% 5.31% For the year ended December 31, 1999 Highest amount at a month-end $1,809,403 765,301 Daily-average amount outstanding 1,609,964 446,623 2,056,587 Weighted-average interest rate 5.09% 5.15% 5.10% ========== ========== ========= At December 31, 1998 Amount outstanding $1,746,078 483,898 2,229,976 Weighted-average interest rate 5.41% 5.55% 5.44% For the year ended December 31, 1998 Highest amount at a month-end $2,177,388 509,457 Daily-average amount outstanding 1,616,431 307,016 1,923,447 Weighted-average interest rate 5.48% 5.56% 5.49% ========== ========== ========= At December 31, 1997 Amount outstanding $ 930,775 120,143 1,050,918 Weighted-average interest rate 6.51% 5.41% 6.38% For the year ended December 31, 1997 Highest amount at a month-end $ 930,775 344,363 Daily-average amount outstanding 611,689 200,324 812,013 Weighted-average interest rate 5.43% 5.55% 5.46% ========== ========== ========= </TABLE> -83-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. BORROWINGS, CONTINUED In general, Federal funds purchased and repurchase agreements outstanding at December 31, 1999 mature within three days following year-end. Other short-term borrowings included borrowings from the Federal Home Loan Banks, the U.S. Treasury and others having original maturities of one year or less. At December 31, 1999, the Company had lines of credit under formal agreements as follows: <TABLE> <CAPTION> M&T M&T M&T Bank Bank, N.A. --- ---- ---------- (in thousands) <S> <C> <C> <C> Outstanding borrowings $29,000 1,836,549 - Unused 1,000 4,092,714 367,088 ======= ========= ======= </TABLE> M&T has a revolving credit agreement with an unaffiliated commercial bank whereby M&T may borrow up to $30,000,000 at its discretion through November 17, 2000. At December 31, 1999, M&T Bank had borrowing facilities available with the Federal Home Loan Banks whereby M&T Bank could borrow up to $2,273,436,000. Additionally, M&T Bank and M&T Bank, National Association ("M&T Bank, N.A."), a wholly owned subsidiary of M&T, had available lines of credit with the Federal Reserve Bank of New York totaling approximately $4 billion, under which there were no borrowings outstanding at December 31, 1999 or 1998. M&T Bank and M&T Bank, N.A. are required to pledge loans or investment securities as collateral for these borrowing facilities. Long-term borrowings were as follows: <TABLE> <CAPTION> December 31 1999 1998 --------- ------- (in thousands) <S> <C> <C> Subordinated notes of M&T Bank: 8 1/8% due 2002 $ 75,000 75,000 7% due 2005 100,000 100,000 Advances from Federal Home Loan Banks: - Variable rates 1,175,000 825,000 - Fixed rates 90,549 231,094 Preferred capital securities: M&T Capital Trust I - 8.234% 150,000 150,000 M&T Capital Trust II - 8.277% 100,000 100,000 M&T Capital Trust III - 9.25% 68,803 69,128 Other 15,781 17,321 --------- --------- $1,775,133 1,567,543 ========= ========= </TABLE> -84-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. BORROWINGS, CONTINUED The subordinated notes of M&T Bank are unsecured and are subordinate to the claims of depositors and other creditors of M&T Bank. Long-term variable rate advances from the Federal Home Loan Banks had contractual rates that ranged from 6.00% to 6.25% at December 31, 1999 and from 5.19% to 5.44% at December 31, 1998. The weighted-average contractual interest rates were 6.13% and 5.29% at December 31, 1999 and 1998, respectively. Long-term fixed-rate advances from the Federal Home Loan Banks had contractual rates of interest ranging from 4.05% to 8.45% at December 31, 1999 and 1998. The weighted-average contractual interest rates payable were 5.93% and 6.23% at December 31, 1999 and 1998, respectively. Advances from the Federal Home Loan Banks mature at various dates through 2006 and are secured by residential and commercial real estate loans. In December 1999, the names of First Empire Capital Trust I, First Empire Capital Trust II and OnBank Capital Trust I were changed to M&T Capital Trust I, M&T Capital Trust II and M&T Capital Trust III, respectively. In January 1997, M&T Capital Trust I ("Trust I") issued $150 million of 8.234% preferred capital securities. In June 1997, M&T Capital Trust II ("Trust II") issued $100 million of 8.277% preferred capital securities. In February 1997, M&T Capital Trust III ("Trust III" and, together with Trust I and Trust II, the "Trusts"), a business trust organized by ONBANCorp prior to its acquisition by M&T, 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 Trust III had a financial statement carrying value of approximately $69 million at December 31, 1999 and 1998. Other than the following payment terms (and the redemption terms described below), the preferred capital securities issued by the Trusts ("Capital Securities") are identical in all material respects: <TABLE> <CAPTION> Distribution Distribution Trust Rate Dates ----- ---- ----- <S> <C> <C> Trust I 8.234% February 1 and August 1 Trust II 8.277% June 1 and December 1 Trust III 9.25% February 1 and August 1 </TABLE> The common securities of Trust I and II are wholly owned by M&T and the common securities of Trust III 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 -85-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. BORROWINGS, CONTINUED interest expense. Under the Federal Reserve Board's current risk-based capital guidelines, the Capital Securities are includable in M&T'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") of M&T in the case of Trust I and Trust II and Olympia in the case of Trust III: <TABLE> <CAPTION> Capital Common Junior Subordinated Trust Securities Securities Debentures - ----- ---------- ---------- ---------- <S> <C> <C> <C> 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. Trust III $ 60 million $1.856 million $61.856 million aggregate liquidation amount of 9.25% Junior Subordinated Debentures due February 1, 2027. </TABLE> 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 or Trust II, or Olympia, in the case of Trust III, 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 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 or Trust II, or Olympia, in the case of Trust III, of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T and Olympia. -86-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. BORROWINGS, CONTINUED 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 Trust III, 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 Trust III (i) on or after the stated optional redemption dates, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of one or more of the Events, in each case subject to possible regulatory approval. The redemption price of the Capital Securities upon early redemption will be expressed as a percentage of the liquidation amount plus accumulated but unpaid distributions. In the case of Trust I, such percentage adjusts annually and ranges from 104.117% at February 1, 2007 to 100.412% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007. In the case of Trust II, such percentage adjusts annually and ranges from 104.139% at June 1, 2007 to 100.414% for the annual period ending May 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to June 1, 2007. In the case of Trust III, 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. Long-term borrowings at December 31, 1999 mature as follows: <TABLE> <CAPTION> Year ending December 31: (in thousands) <S> <C> <C> 2000 $ 31,222 2001 416,963 2002 189,275 2003 592,178 2004 1,180 Later years 544,315 ---------- $1,775,133 ---------- ---------- </TABLE> -87-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 9. STOCK-BASED COMPENSATION PLANS Stock option plan The stock option plan allows the grant of stock options and stock appreciation rights (either in tandem with options or independently) at prices which may not be less than the fair market value of the common stock on the date of grant. Except as described below, awards granted under the stock option plan generally vest over four years and are exercisable over terms not exceeding ten years and one day from the date of grant. When exercisable, the stock appreciation rights issued in tandem with stock options entitle grantees to receive cash, stock or a combination equal to the amount of stock appreciation between the dates of grant and exercise. Stock appreciation rights issued independently of stock options contain similar terms as the stock options, although upon exercise the holder is only entitled to receive cash instead of purchasing shares of M&T's common stock. In 1999, the Company granted options to substantially all employees who had not previously received awards under the stock option plan. The options granted under this award vest three years after the grant date and are exercisable for a period of seven years thereafter. -88-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 9. STOCK-BASED COMPENSATION PLANS, CONTINUED Stock option plan, continued A summary of stock option and stock appreciation rights activity follows: <TABLE> <CAPTION> Weighted-average exercise price Cash-only ------------------ Stock appreciation Cash-only options rights Stock appreciation outstanding outstanding options rights ----------- ----------- ------- ------------ <S> <C> <C> <C> <C> 1997 Beginning balance 769,215 54,950 $ 130.54 $ 60.34 Granted 151,077 - 297.37 - Exercised (138,723) (8,500) 87.66 57.00 Cancelled (4,375) - 221.65 - -------- -------- -------- -------- At year-end 777,194 46,450 170.11 60.95 1998 Granted 144,459 - 445.26 - Acquired (note 2) 61,772 - 185.56 - Exercised (148,467) (11,050) 105.57 59.52 Cancelled (25,045) - 250.86 - -------- -------- -------- ------- At year-end 809,913 35,400 229.70 61.40 1999 Granted 213,140 - 497.81 - Exercised (79,623) (16,500) 162.96 64.02 Cancelled (29,354) - 376.02 - -------- -------- -------- -------- At year-end 914,076 18,900 $ 293.34 $ 59.11 ======== ======== ======== ======== Exercisable at: December 31, 1999 446,223 18,900 $ 170.03 $ 59.11 ======== ======== ======== ======== December 31, 1998 384,494 35,400 144.97 61.40 ======== ======== ======== ======== December 31, 1997 344,757 46,450 110.39 60.95 ======== ======== ======== ======== </TABLE> At December 31, 1999 and 1998, respectively, there were 305,516 and 489,302 shares available for future grant. During 1998, the number of shares authorized for issuance under the stock option plan was increased to 2,500,000 shares from 2,000,000. -89-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 9. STOCK-BASED COMPENSATION PLANS, CONTINUED Stock option plan, continued A summary of stock options at December 31, 1999 follows: <TABLE> <CAPTION> Weighted-average Weighted- Stock --------------------- Stock average Range of options Exercise Life options exercise exercise price outstanding price (in years) exercisable price - ------------------ ----------- ------ --------- ----------- ------- <S> <C> <C> <C> <C> <C> $ 53.00 to $121.12 77,179 $ 89.05 1.7 77,179 $ 89.05 133.88 to 198.76 223,287 141.10 4.3 223,287 141.10 211.00 to 290.00 262,450 246.35 6.4 126,886 233.32 310.00 to 554.13 351,160 470.15 8.7 18,871 417.91 ------- ------ --------- ------- ------ 914,076 $293.34 6.4 446,223 $170.03 ======= ====== ========= ======= ====== </TABLE> The Company used a binomial option pricing model to estimate the grant date present value of stock options granted in 1999, 1998 and 1997. The weighted-average estimated value per option was $115.80 in 1999, $114.60 in 1998 and $79.26 in 1997. The values were calculated using the following weighted-average assumptions: an option term of 6.5 years (representing the estimated period between grant date and exercise date based on historical data since inception of the plan), a risk-free interest rate of 4.97% in 1999, 5.53% in 1998 and 6.37% in 1997 (representing the yield on a U.S. Treasury security with a remaining term equal to the expected option term), expected volatility of 19% in 1999 and 14% in 1998 and 1997, and estimated dividend yields of .85% in 1999, .72% in 1998 and .97% in 1997 (representing the approximate annualized cash dividend rate paid with respect to a share of common stock at or near the grant date). The Company reduced the estimated value per option to reflect an estimate of the probability of forfeiture prior to vesting. Based on historical data since inception of the plan and projected employee turnover rates, the weighted-average estimated forfeiture rate was 21% in 1999 and 10% in prior years. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the stock option plan. Accordingly, no compensation expense was recognized in 1999, 1998 and 1997 for stock option awards since the exercise price of stock options granted under the stock option plan was not less than the fair market value of the common stock at date of grant. Compensation expense (benefit) recognized for cash-only stock appreciation rights was $(2,199,000) in 1999, $2,238,000 in 1998 and $8,510,000 in 1997. Had compensation expense for stock option awards been determined consistent -90-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 9. STOCK-BASED COMPENSATION PLANS, CONTINUED Stock option plan, continued with SFAS No. 123, net income and earnings per share would be reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ------- ------- ------- (in thousands, except per share) <S> <C> <C> <C> Net income: As reported $265,626 207,974 176,241 Pro forma 252,401 198,323 169,432 Basic earnings per share: As reported $34.05 27.30 26.60 Pro forma 32.36 26.03 25.57 Diluted earnings per share: As reported $32.83 26.16 25.26 Pro forma 31.27 25.02 24.40 </TABLE> The pro forma effects are presented in accordance with the requirements of SFAS No. 123, however, such effects are not representative of the effects to be reported in future years due to the fact that options vest over several years and additional awards generally are made each year. Deferred bonus plan The Company provides a deferred bonus plan to eligible employees pursuant to which employees may elect to defer all or a portion of their current annual incentive compensation awards and allocate such awards to several investment options, including M&T common stock. Participants may elect the timing of distributions from the plan. Such distributions are payable in cash with the exception of balances allocated to M&T common stock, which effective January 1, 1998, are distributable in the form of M&T common stock. Shares of M&T common stock distributable pursuant to the terms of the deferred bonus plan were 8,397 and 8,028 at December 31, 1999 and 1998, respectively. In connection with the deferred bonus plan, 15,000 shares of M&T common stock were authorized for issuance, of which 1,295 shares have been issued. Directors' stock plan Effective January 1, 1998, the Company initiated a compensation plan for non-employee directors that provides for annual compensation payable to such directors to be paid fifty percent in cash and fifty percent in shares of M&T common stock. In connection with the directors' stock plan, 5,000 shares of M&T common stock were authorized for issuance, of which 1,068 shares have been issued. -91-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company provides defined benefit pension plan and other postretirement benefits (including health care and life insurance benefits) to qualified retired employees. Net periodic pension expense consisted of the following: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ---- ---- ---- (in thousands) <S> <C> <C> <C> Service cost $ 8,202 7,021 5,014 Interest cost on projected benefit obligation 9,225 8,135 6,786 Expected return on plan assets (14,308) (12,396) (9,723) Amortization of prior service cost 84 (24) (24) Amortization of initial net asset - (344) (858) Recognized net actuarial gain - (38) (47) Settlements and curtailments 349 218 - ------ ------ ------ Net periodic pension expense $ 3,552 2,572 1,148 ====== ====== ====== </TABLE> Net postretirement benefits expense consisted of the following: <TABLE> Year ended December 31 1999 1998 1997 ---- ---- ---- (in thousands) <S> <C> <C> <C> Service cost $ 325 288 146 Interest cost on projected benefit obligation 1,150 1,141 996 Expected return on plan assets (180) (226) (288) Amortization of prior service cost 14 (18) (204) Recognized net actuarial (gain) loss 39 25 (7) ------- ------ ------- Net postretirement benefits expense $ 1,348 1,210 643 ======= ====== ====== </TABLE> -92-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS, CONTINUED Data relating to the funding position of the plans were as follows: <TABLE> <CAPTION> Pension Postretirement benefits benefits -------------- --------------- 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands) <S> <C> <C> <C> <C> Change in benefit obligation: Benefit obligation at beginning of year $136,931 107,035 18,023 13,933 Service cost 8,202 7,021 325 288 Interest cost 9,225 8,135 1,150 1,141 Plan participants'contributions - - 202 119 Amendments 395 20 - 2,356 Actuarial (gain) loss (22,031) 5,864 (1,108) 1,119 Business combination 3,223 15,027 - 499 Benefits paid (9,256) (6,389) (1,830) (1,432) Settlements and curtailments 349 218 - - ------- ------- ------ ------ Benefit obligation at end of year $127,038 136,931 16,762 18,023 ------- ------- ------ ------ Change in plan assets: Fair value of plan assets at beginning of year $167,469 144,894 4,276 5,147 Actual return on plan assets (1,547) 6,669 525 292 Plan participants'contributions - - 388 269 Business combination 2,430 22,441 - - Benefits and other payments (6,480) (4,787) (1,830) (1,432) Settlements (2,516) (1,748) - - ------- ------- ------ ------ Fair value of plan assets at end of year $159,356 167,469 3,359 4,276 ------- ------- ------ ------ Funded status $ 32,318 30,538 (13,403) (13,747) Unrecognized net actuarial (gain) loss (24,493) (18,318) 736 2,229 Unrecognized prior service cost (237) (259) 321 336 ------- ------- ------ ------ Prepaid (accrued) benefit cost $ 7,588 11,961 (12,346) (11,182) ======= ======= ====== ====== Amounts recognized in the consolidated balance sheet were: Prepaid benefit cost (asset) $ 10,551 14,489 - - Accrued benefit cost (liability) (2,963) (2,528) (12,346) (11,182) ------- ------- ------- ------ $ 7,588 11,961 (12,346) (11,182) ======= ======= ======= ====== </TABLE> -93-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS, CONTINUED The Company has an unfunded supplemental pension plan for certain key executives. The projected benefit obligation and accumulated benefit obligation included in the preceding data related to such plan were $2,479,000 and $2,091,000, respectively, as of December 31, 1999 and $2,356,000 and $1,863,000, respectively, as of December 31, 1998. The assumed rates used in the actuarial computations were: <TABLE> <CAPTION> Pension Postretirement benefits benefits --------------- --------------- 1999 1998 1999 1998 ----- ----- ----- ----- <S> <C> <C> <C> <C> Discount rate 7.75% 6.75% 7.75% 6.75% Long-term rate of return on plan assets 9.00% 9.00% 4.25% 5.00% Rate of increase in future compensation levels 5.01% 5.10% - - </TABLE> For measurement purposes, an 8.0% annual rate of increase in the cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 6% over 4 years. A one-percentage point change in assumed health care cost trend rates would have the following effects: <TABLE> +1% -1% --- --- (in thousands) <S> <C> <C> Increase (decrease) in: Service and interest cost $ 54 (48) Accumulated postretirement benefit obligation 818 (745) </TABLE> Pension plan assets included common stock of M&T with a fair value of $11,645,000 and $14,674,000 at December 31, 1999 and 1998, respectively. The Company has a retirement savings plan ("Savings Plan") that is a defined contribution plan in which eligible employees of the Company may defer up to 15% of qualified compensation via contributions to the plan. The Company makes an employer matching contribution in an amount equal to 75% of an employee's contribution, up to 4.5% of the employee's qualified compensation. Employees' accounts, including employee contributions, employer matching contributions and accumulated earnings thereon, are at all times fully vested and nonforfeitable. The Company's contributions to the Savings Plan totaled $6,935,000, $6,085,000 and $5,221,000 in 1999, 1998 and 1997, respectively. -94-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 11. INCOME TAXES The components of income tax expense (benefit) were as follows: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ---- ---- ---- (in thousands) <S> <C> <C> <C> Current Federal $139,946 105,751 96,819 State and city 10,926 14,803 16,430 ------- ------- ------- Total current 150,872 120,554 113,249 ------- ------- ------- Deferred Federal 1,508 (2,309) (5,334) State and city 308 (656) (1,997) ------- ------- ------- Total deferred 1,816 (2,965) (7,331) ------- ------- ------- Total income taxes applicable to pre-tax income $152,688 117,589 105,918 ======= ======= ======= </TABLE> The Company files a consolidated federal income tax return reflecting taxable income earned by all subsidiaries. In prior years, applicable federal tax law allowed certain financial institutions the option of deducting as bad debt expense for tax purposes amounts in excess of actual losses. In accordance with generally accepted accounting principles, such financial institutions were not required to provide deferred income taxes on such excess. Recapture of the excess tax bad debt reserve established under the previously allowed method will result in taxable income if M&T Bank fails to maintain bank status as defined in the Internal Revenue Code or charges are made to the reserve for other than bad debt losses. At December 31, 1999 M&T Bank's tax bad debt reserve for which no federal income taxes have been provided was $74,021,000. No actions are planned that would cause this reserve to become wholly or partially taxable. The portion of income taxes attributable to gains or losses on sales of bank investment securities was an expense of $639,000 and $718,000 in 1999 and 1998, respectively, and a benefit of $114,000 in 1997. No alternative minimum tax expense was recognized in 1999, 1998 or 1997. -95-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 11. INCOME TAXES, CONTINUED Total income taxes differed from the amount computed by applying the statutory federal income tax rate to pre-tax income as follows: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ---- ---- ---- (in thousands) <S> <C> <C> <C> Income taxes at statutory rate $146,410 113,947 98,756 Increase (decrease) in taxes: Tax-exempt income (12,137) (15,266) (3,794) State and city income taxes, net of federal income tax effect 7,302 9,196 9,381 Amortization of goodwill 11,117 8,158 1,571 Other (4) 1,554 4 ------- ------- ------- $152,688 117,589 105,918 ======= ======= ======= </TABLE> Deferred tax assets (liabilities) were comprised of the following at December 31: <TABLE> <CAPTION> 1999 1998 1997 ------- ------- ------- (in thousands) <S> <C> <C> <C> Depreciation and amortization $ 11,090 10,489 8,130 Losses on loans and other assets 127,667 120,422 105,190 Postretirement and other supplemental employee benefits 9,276 5,316 7,163 Incentive compensation plans 14,041 20,395 12,302 Unrealized investment losses 17,906 - - Interest on loans - - 5,165 Other 7,217 3,140 11,140 ------- ------- ------- Gross deferred tax assets 187,197 159,762 149,090 ------- ------- ------- Interest on loans (5,495) (5,025) - Retirement benefits (4,077) (1,969) (3,459) Leasing transactions (115,586) (107,187) (83,347) Restructured interest rate swap agreements - (181) (3,999) Capitalized servicing rights (10,150) (6,868) (7,448) Unrealized investment gains - (1,931) (8,202) Other (54) (504) (45) ------- ------- ------- Gross deferred tax liabilities (135,362) (123,665) (106,500) ------- ------- ------- Net deferred tax asset $ 51,835 36,097 42,590 ======= ======= ======= </TABLE> The Company believes that it is more likely than not that the net deferred tax asset will be realized through taxable earnings or alternative tax strategies. -96-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 11. INCOME TAXES, CONTINUED The income tax credits shown in the statement of income of M&T in note 21 arise principally from operating losses before dividends from subsidiaries. 12. EARNINGS PER SHARE The computations of basic earnings per share follow: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ------- ------- ------- (in thousands, except per share) <S> <C> <C> <C> Income available to common stockholders Net income $265,626 207,974 176,241 Weighted-average shares outstanding (including common stock issuable) 7,800 7,619 6,625 Basic earnings per share $34.05 27.30 26.60 </TABLE> The computations of diluted earnings per share follow: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ------- ------- ------- (in thousands, except per share) <S> <C> <C> <C> Income available to common stockholders $265,626 207,974 176,241 Weighted-average shares outstanding 7,800 7,619 6,625 Plus: incremental shares from assumed conversion of stock options 290 331 352 ------- ------- ------- Adjusted weighted-average shares outstanding 8,090 7,950 6,977 Diluted earnings per share $32.83 26.16 25.26 </TABLE> -97-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 13. COMPREHENSIVE INCOME The following table displays the components of other comprehensive income: <TABLE> <CAPTION> Before-tax Income amount taxes Net ------ ----- --- (in thousands) <S> <C> <C> <C> For the year ended December 31, 1999 Unrealized losses on investment securities: Unrealized holding losses $(47,178) (19,198) (27,980) Reclassification adjustment for gains realized in net income 1,575 639 936 -------- -------- -------- Net unrealized losses $(48,753) (19,837) (28,916) -------- -------- -------- -------- -------- -------- For the year ended December 31, 1998 Unrealized losses on investment securities: Unrealized holding losses(a) $(13,657) (5,553) (8,104) Reclassification adjustment for gains realized in net income 1,761 718 1,043 -------- -------- -------- Net unrealized losses $(15,418) (6,271) (9,147) -------- -------- -------- -------- -------- -------- For the year ended December 31, 1997 Unrealized gains on investment securities: Unrealized holding gains $ 24,242 9,907 14,335 Reclassification adjustment for losses realized in net income (280) (114) (166) -------- -------- -------- Net unrealized gains $ 24,522 10,021 14,501 -------- -------- -------- -------- -------- -------- </TABLE> (a) Including the effect of the contribution of appreciated investment securities described in note 14. -98-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 14. OTHER INCOME AND OTHER EXPENSE The following items, which exceeded 1% of total interest income and other income in the respective period, were included in either other revenues from operations or other costs of operations in the consolidated statement of income: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ---- ---- ---- (in thousands) <S> <C> <C> <C> Other income: Mutual fund and annuity sales $24,480 17,974 15,336 Bank owned life insurance 22,487 17,629 Other expense: Professional services 31,527 30,537 22,845 Non-cash charitable contribution(a) 24,585 </TABLE> (a) 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 $.7 million. 15. INTERNATIONAL ACTIVITIES The Company engages in certain international activities consisting largely of collecting Eurodollar deposits, engaging in foreign currency trading and providing credit to support the international activities of domestic companies. Net assets identified with international activities amounted to $27,203,000 and $32,891,000 at December 31, 1999 and 1998, respectively. Deposits at M&T Bank's offshore branch office were $242,691,000 and $303,270,000 at December 31, 1999 and 1998, respectively. -99-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 16. DERIVATIVE FINANCIAL INSTRUMENTS As part of managing interest rate risk, the Company has entered into several interest rate swap agreements. The swaps modify the repricing characteristics of certain portions of the Company's portfolios of earning assets and interest-bearing liabilities. Interest rate swap agreements are generally entered into with counterparties that meet established credit standards and most contain collateral provisions protecting the at-risk party. The Company considers the credit risk inherent in these contracts to be negligible. Information about interest rate swaps entered into for interest rate risk management purposes summarized by type of financial instrument the swaps were intended to modify follows: <TABLE> <CAPTION> Estimated Notional Average Weighted-average Rate fair value- --------------------- amount maturity fixed variable gain(loss) ---------- --------- -------- --------- ------------- (in thousands) (in years) (in thousands) December 31, 1999 - ----------------- <S> <C> <C> <C> <C> <C> Fixed rate available for sale investment securities: Non-amortizing(a) $ 50,000 8.1 5.26% 6.46% $ 5,646 Variable rate loans: Non-amortizing 660,000 .3 6.29% 6.14% 540 Fixed rate loans: Amortizing(a) 49,279 8.5 6.81% 6.24% 1,244 Amortizing-forward- starting(b) 372,800 7.5 5.94% 5.64% 23,863 Fixed rate time deposits: Non-amortizing 847,000 1.5 6.46% 6.09% (5,014) Fixed rate borrowings: Non-amortizing 50,000 3.6 5.85% 6.07% (1,770) ---------- ---- ---- -------- ------------- $2,029,079 2.6 6.27% 6.04% $ 24,509 ========== ==== ==== ======== ============= </TABLE> -100-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 16. DERIVATIVE FINANCIAL INSTRUMENTS, CONTINUED <TABLE> <CAPTION> Estimated Notional Average Weighted-average rate fair value- --------------------- Amount maturity fixed variable gain(loss) ------ -------- ----- -------- ---------- (in thousands) (in years) (in thousands) <S> <C> <C> <C> <C> <C> DECEMBER 31, 1998 Fixed rate available for sale investment securities: Non-amortizing(a) $ 50,000 9.1 5.26% 5.55% $ 445 Variable rate loans: Non-amortizing 1,060,000 1.0 6.10% 5.28% 10,907 Fixed rate loans: Amortizing(a) 32,209 8.7 7.17% 5.55% (3,875) Amortizing-forward- starting(b) 390,800 8.6 5.95% 5.64% (8,380) Fixed rate time deposits: Non-amortizing 1,154,000 2.0 6.59% 5.21% 22,533 Fixed rate borrowings: Non-amortizing 125,000 2.1 5.75% 5.28% 1,360 --------- ---- ---- ---- ------ $2,812,009 2.7 6.26% 5.31% $22,990 ========= ==== ==== ==== ====== </TABLE> Under all swap agreements, the Company receives settlement amounts at a fixed rate and pays at a variable rate, except for: (a) Under the terms of these swaps, the Company receives settlement amounts at a variable rate and pays at a fixed rate. (b) Under the terms of these forward-starting swaps the Company will receive settlement amounts at a variable rate and pay at a fixed rate. Forward-starting swaps entered into as of December 31, 1999 will begin to accrue amounts receivable and payable beginning in the years indicated below: <TABLE> <CAPTION> Notional amount --------------- (in thousands) <S> <C> Year ending December 31: 2000 $186,044 2001 186,756 ------- $372,800 ========= </TABLE> -101-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 16. DERIVATIVE FINANCIAL INSTRUMENTS, CONTINUED The estimated fair value of interest rate swap agreements represents the amount the Company would have expected to receive (pay) to terminate such contracts. Since these swaps have been entered into for interest rate risk management purposes, the estimated market appreciation or depreciation should be considered in the context of the entire balance sheet of the Company. The estimated fair value of interest rate swaps entered into for interest rate risk management purposes is not recognized in the consolidated financial statements, except for swaps that modify the repricing characteristics of investment securities classified as available for sale. Changes in the fair value of such swaps and investment securities are included in other comprehensive income, net of applicable income taxes. The notional amounts of amortizing swaps may vary over the term of a swap agreement. The notional amount of the Company's amortizing swaps linked to fixed rate loans declines by the amount of scheduled principal payments of the loans. The notional amount of a non-amortizing swap does not change during the term of an agreement. At December 31, 1999 the notional amount of interest rate swaps outstanding mature as follows: <TABLE> AMORTIZING NON-AMORTIZING (in thousands) <S> <C> <C> Year ending December 31: 2000 $ 1,868 1,040,000 2001 8,184 213,000 2002 8,908 159,000 2003 10,693 80,000 2004 11,542 35,000 Later years 380,884 80,000 ------- --------- $422,079 1,607,000 ======= ========= </TABLE> The net effect of interest rate swaps was to increase net interest income by $26,100,000 in 1999, $16,156,000 in 1998 and $14,089,000 in 1997. Excluding forward-starting swaps, the average notional amount of interest rate swaps impacting net interest income which were entered into for interest rate risk management purposes were $1,944,813,000 in 1999, $2,521,426,000 in 1998 and $2,691,638,000 in 1997. During 1995 and 1994, the Company restructured several interest rate swap agreements with notional amounts of $260 million and $500 million, respectively, from amortizing to non-amortizing. The purpose of the restructurings was to enhance the effectiveness of the swaps in managing the Company's exposure to changing interest rates in future years. Losses resulting from the early termination of the amortizing swaps and equal amounts of purchase discount received on the restructured non-amortizing swaps were recognized as a result of these transactions and included in the carrying amount of loans which the swaps modified. The purchase discount is being accreted to interest income over the remaining term of the restructured -102-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 16. DERIVATIVE FINANCIAL INSTRUMENTS, CONTINUED swap. Deferred losses, which became fully amortized in 1999, had been amortized over the terms of the original swaps. The amortization of deferred losses and accretion of purchase discounts were $.3 million and $6.3 million, respectively, in 1999, $9.2 million and $9.1 million, respectively, in 1998 and $11.3 million and $9.6 million, respectively, in 1997. Purchase discounts related to a restructured swap remaining at December 31, 1999 were $403,000, all of which will accrete to interest income in 2000. Derivative financial instruments used for trading purposes included foreign exchange and other option contracts, foreign exchange forward and spot contracts, interest rate swap contracts and financial futures. The following table includes information about the estimated fair value of derivative financial instruments used for trading purposes: <TABLE> <CAPTION> 1999 1998 ------ ------ December 31: (in thousands) <S> <C> <C> Gross unrealized gains $29,088 54,424 Gross unrealized losses 32,303 49,833 Year ended December 31: Average gross unrealized gains $33,588 42,174 Average gross unrealized losses 32,622 39,083 ====== ====== </TABLE> Net losses arising from derivative financial instruments used for trading purposes were $1,699,000 in 1999. Net gains of $2,648,000 and $2,072,000 were realized in 1998 and 1997, respectively. 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the estimated "fair value" of financial instruments. "Fair value" is generally defined as the price a willing buyer and a willing seller would exchange for a financial instrument in other than a distressed sale situation. Disclosures related to fair value presented herein are as of December 31, 1999 and 1998. With the exception of marketable securities, certain off-balance sheet financial instruments and one-to-four family residential mortgage loans originated for sale, the Company's financial instruments are not readily marketable and market prices do not exist. The Company, in attempting to comply with the provisions of SFAS No. 107, has not attempted to market its financial instruments to potential buyers, if any exist. Since negotiated prices in illiquid markets depend greatly upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. -103-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED The estimated fair values of investments in readily marketable debt and equity securities were based on quoted market prices at the respective year-end. In arriving at estimated fair value of other financial instruments, the Company generally used calculations based upon discounted cash flows of the related financial instruments. In general, discount rates used for loan products were based on the Company's pricing at the respective year-end. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. As more fully described in note 3, the carrying value and estimated fair value of investment securities were as follows: <TABLE> <CAPTION> Carrying Estimated Value Fair Value -------- ---------- (in thousands) December 31 <S> <C> <C> 1999 $1,900,522 1,898,860 1998 2,785,564 2,785,647 ========= ========= </TABLE> The following table presents the carrying value and calculated estimates of fair value of loans and commitments related to loans originated for sale: <TABLE> <CAPTION> Carrying Calculated Value Estimate -------- ---------- (in thousands) <S> <C> <C> December 31, 1999 Commercial loans and leases $ 3,650,023 3,642,157 Commercial real estate loans 6,509,185 6,473,654 Residential real estate loans 4,128,831 4,051,351 Consumer loans and leases 3,118,732 3,134,102 ---------- ---------- $17,406,771 17,301,264 ========== ========== December 31, 1998 Commercial loans and leases $ 3,174,778 3,181,096 Commercial real estate loans 5,458,876 5,520,305 Residential real estate loans 4,261,555 4,320,221 Consumer loans and leases 2,896,321 2,925,269 ---------- ---------- $15,791,530 15,946,891 ========== ========== </TABLE> The allowance for credit losses represented the Company's assessment of the overall level of credit risk inherent in the portfolio and totaled $316,165,000 and $306,347,000 at December 31, 1999 and 1998, respectively. As described in note 18, in the normal course of business, various commitments and contingent liabilities are outstanding, such as loan commitments, credit guarantees and letters of credit. The Company's pricing -104-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Commitments generally have fixed expiration dates and contain termination and other clauses which provide for relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company's loan commitments, credit guarantees and letters of credit are competitive with other financial institutions operating in markets served by the Company. The Company believes that the carrying amounts are reasonable estimates of the fair value of these financial instruments. Such carrying amounts, comprised principally of unamortized fee income, are included in other liabilities and totaled $5,434,000 and $7,630,000 at December 31, 1999 and 1998, respectively. SFAS No. 107 requires that the estimated fair value ascribed to noninterest-bearing deposits, savings deposits and NOW accounts be established at carrying value because of the customers' ability to withdraw funds immediately. Additionally, time deposit accounts are required to be revalued based upon prevailing market interest rates for similar maturity instruments. The following summarizes the results of these calculations: <TABLE> <CAPTION> Carrying Calculated Value Estimate -------- ---------- (in thousands) <S> <C> <C> December 31, 1999 Noninterest-bearing deposits $2,260,432 2,260,432 Savings deposits and NOW accounts 5,782,152 5,782,152 Time deposits 7,088,345 7,085,462 Deposits at foreign office 242,691 242,691 ========= ========== December 31, 1998 Noninterest-bearing deposits $2,066,814 2,066,814 Savings deposits and NOW accounts 5,339,985 5,339,985 Time deposits 7,027,083 7,091,792 Deposits at foreign office 303,270 303,270 ========= ========== </TABLE> The Company believes that deposit accounts have a value greater than that prescribed by SFAS No. 107. The Company feels, however, that the value associated with these deposits is greatly influenced by characteristics of the buyer, such as the ability to reduce the costs of servicing the deposits and the expected deposit attrition which is customary in acquisitions. Accordingly, estimating the fair value of deposits with any degree of certainty is not practical. As more fully described in note 16, the Company had entered into interest rate swap agreements for purposes of managing the Company's exposure to changing interest rates. The estimated fair value of interest rate swap -105-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED agreements represents the amount the Company would have expected to receive or pay to terminate such swaps. The following table includes information about the estimated fair value of interest rate swaps entered into for interest rate risk management purposes: <TABLE> <CAPTION> Gross Gross Estimated Notional Unrealized Unrealized Fair Value - Amount Gains Losses Gain ---------- ---------- ---------- ------------ (in thousands) <S> <C> <C> <C> <C> December 31 1999 $2,029,079 32,415 (7,906) 24,509 1998 2,812,009 35,640 (12,650) 22,990 ========== ========== ========== ============ </TABLE> As described in note 16, the Company also uses certain derivative financial instruments as part of its trading activities. Interest rate contracts entered into for trading purposes had notional values and estimated fair value losses of $799 million and $515,000, respectively, at December 31, 1999 and notional values and estimated fair value gains of $436 million and $723,000, respectively, at December 31, 1998. The Company also entered into foreign exchange and other option and futures contracts totaling approximately $573 million and $2.0 billion at December 31, 1999 and 1998, respectively. Such contracts were valued at losses of $2,700,000 and at gains of $3,868,000 at December 31, 1999 and 1998, respectively. All trading account assets and liabilities are recorded in the consolidated balance sheet at estimated fair value. The fair values of all trading account assets and liabilities were $641 million and $633 million, respectively, at December 31, 1999 and $173 million and $51 million, respectively, at December 31, 1998. Included in trading account assets at December 31, 1999 were mortgage-backed securities which M&T held as collateral securing certain agreements to resell securities. The obligations to return such collateral were recorded as noninterest-bearing trading account liabilities and were included in accrued interest and other liabilities in the Company's consolidated balance sheet. The fair value of such collateral (and the related obligation to return collateral) was $600 million at December 31, 1999. There was no similar collateral held at December 31, 1998. Due to the near maturity of other money-market assets and short-term borrowings, the Company estimates that the carrying value of such instruments approximates estimated fair value. The carrying value and estimated fair value of long-term borrowings were $1,775,133,000 and $1,753,612,000, respectively, at December 31, 1999 and $1,567,543,000 and $1,613,040,000, respectively, at December 31, 1998. The Company does not believe that the estimated fair value information presented herein is representative of the earnings power or value of the Company. The preceding analysis, which is inherently limited in depicting fair value, also does not consider any value associated with existing -106-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED customer relationships nor the ability of the Company to create value through loan origination, deposit gathering or fee generating activities. Many of the fair value estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, since the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different. 18. COMMITMENTS AND CONTINGENCIES In the normal course of business, various commitments and contingent liabilities are outstanding, such as commitments to extend credit guarantees and "standby" letters of credit (approximately $522,356,000 and $410,357,000 at December 31, 1999 and 1998, respectively) which are not reflected in the consolidated financial statements. No material losses are expected as a result of these transactions. Additionally, the Company had outstanding commitments to originate loans of approximately $4.1 billion and $3.5 billion at December 31, 1999 and 1998, respectively. Since many loan commitments, credit guarantees and "standby" letters of credit expire without being funded in whole or part, the contract amounts are not necessarily indicative of future cash flows. Commitments to sell one-to-four family residential mortgage loans totaled $376,874,000 at December 31, 1999 and $695,444,000 at December 31, 1998. 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 the Company's consolidated financial position, but at the present time is not in a position to determine whether such litigation will have a material adverse effect on the Company's consolidated results of operations in any future reporting period. 19. SEGMENT INFORMATION In accordance with the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," 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 -107-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 19. SEGMENT INFORMATION, CONTINUED segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking. The financial information of the Company's segments has been compiled utilizing the accounting policies described in note 1 with certain exceptions. The more significant of these exceptions are described herein. The Company allocates interest income or interest expense using a methodology that charges users of funds (assets) interest expense and credits providers of funds (liabilities) with income based on the maturity, prepayment and/or repricing characteristics of the assets and liabilities. The net effect of this allocation is recorded in the "All Other" category. A provision for credit losses is allocated to segments in an amount based largely on actual net charge-offs incurred by the segment during the period plus or minus an amount necessary to adjust the segment's allowance for credit losses due to changes in loan balances. In contrast, the level of the consolidated provision for credit losses is determined using the methodologies described in note 1 to assess the overall adequacy of the allowance for credit losses. Indirect fixed and variable expenses incurred by certain centralized support areas are allocated to segments based on actual usage (for example, volume measurements) and other criteria. Certain types of administrative expenses and bankwide expense accruals (including amortization of goodwill and core deposit intangible) are generally not allocated to segments. Income taxes are allocated to segments based on the Company's marginal statutory tax rate adjusted for any tax-exempt income or non-deductible expenses. Equity is allocated to the segments based on regulatory capital requirements and in proportion to an assessment of the inherent risks associated with the business of the segment (including interest, credit and operating risk). The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. Information about the Company's segments is presented in the accompanying table. The Commercial Banking segment provides a wide range of credit products and banking services for middle-market and large commercial customers, largely within the markets the Company serves. Among the services provided by this segment are commercial lending and leasing, deposit products and cash management services. The Commercial Real Estate segment provides credit services which are secured by various types of multifamily residential and commercial real estate and deposit services to its customers. The Discretionary Portfolio segment includes securities, residential mortgage loans and other assets; short-term and long-term borrowed funds; brokered -108-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 19. SEGMENT INFORMATION, CONTINUED certificates of deposit and interest rate swaps related thereto; and offshore branch deposits. This segment also provides services to commercial customers and consumers which include foreign exchange, securities trading and municipal bond underwriting and sales. The Residential Mortgage Banking segment originates and services residential mortgage loans for consumers and sells substantially all of those loans in the secondary market to investors or to banking subsidiaries of M&T. Residential mortgage loans held for sale are included in the Residential Mortgage Banking segment. The Retail Banking segment offers a variety of consumer and small business services through several delivery channels which include traditional and "in-store" banking offices, automated teller machines, telephone banking and personal computer banking. The "All Other" category includes other operating activities of the Company that are not directly attributable to the reported segments as determined in accordance with SFAS No. 131, the difference between the provision for credit losses and the calculated provision allocated to the reportable segments, goodwill and core deposit intangible resulting from acquisitions of financial institutions, the net impact of the Company's internal funds transfer pricing methodology, eliminations of transactions between reportable segments, certain nonrecurring transactions, the residual effects of unallocated support systems and general and administrative expenses, and the impact of interest rate risk management strategies. The amount of intersegment activity eliminated in arriving at consolidated totals was included in the "All Other" category as follows: <TABLE> <CAPTION> Year ended December 31 1999 1998 1997 ------ ------ ------ (in thousands) <S> <C> <C> <C> Revenues $(41,829) (52,137) (31,023) Expenses (29,353) (19,916) (14,302) Income taxes (benefit) (5,076) (13,111) (6,804) Net income (loss) (7,400) (19,110) (9,917) </TABLE> The Company conducts substantially all of its operations in the United States. There are no transactions with a single customer that in the aggregate result in revenues that exceed ten percent of consolidated total revenues. -109-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 19. SEGMENT INFORMATION, CONTINUED <TABLE> <CAPTION> Commercial Commercial Discretionary IN THOUSANDS, EXCEPT ASSET DATA Banking Real Estate Portfolio - ------------------------------------------- ---------------- ---------------- ---------------- For the year ended December 31, 1999 <S> <C> <C> <C> Net interest income (a) $ 157,818 121,675 47,530 Noninterest income 30,177 4,351 22,766 - ------------------------------------------- ---------------- ---------------- ---------------- 187,995 126,026 70,296 Provision for credit losses 11,316 (143) 3,833 Amortization of goodwill and core deposit intangible - - - Depreciation and other amortization 442 333 153 Other noninterest expense (b) 44,145 14,402 17,183 - ------------------------------------------- ---------------- ---------------- ---------------- Income (loss) before taxes 132,092 111,434 49,127 Income tax expense (benefit) 54,457 47,190 10,898 - ------------------------------------------- ---------------- ---------------- ---------------- Net income (loss) $ 77,635 64,244 38,229 - ------------------------------------------- ================ ================ ================ Average total assets (in millions) $ 4,277 4,118 6,827 - ------------------------------------------- ================ ================ ================ Capital expenditures (in millions) $ - - - ================ ================ ================ For the year ended December 31, 1998 Net interest income (a) $ 140,033 108,863 40,611 Noninterest income (b) 20,215 4,624 20,726 - ------------------------------------------- ---------------- ---------------- ---------------- 160,248 113,487 61,337 Provision for credit losses 2,964 1,243 2,330 Amortization of goodwill and core deposit intangible - - - Depreciation and other amortization 467 352 97 Other noninterest expense (b) 42,100 12,336 17,477 - ------------------------------------------- ---------------- ---------------- ---------------- Income (loss) before taxes 114,717 99,556 41,433 Income tax expense (benefit) (b) 47,276 42,240 9,749 - ------------------------------------------- ---------------- ---------------- ---------------- Net income (loss) $ 67,441 57,316 31,684 - ------------------------------------------- ================ ================ ================ Average total assets (in millions) $ 3,653 3,527 6,025 - ------------------------------------------- ================ ================ ================ Capital expenditures (in millions) $ - - - ================ ================ ================ </TABLE> <TABLE> <CAPTION> Residential Mortgage Retail All IN THOUSANDS, EXCEPT ASSET DATA Banking Banking Other Total - ------------------------------------------- ----------------- ---------------- ------------------ -------------------- For the year ended December 31, 1999 <S> <C> <C> <C> <C> Net interest income (a) 26,854 375,803 29,717 759,397 Noninterest income 104,164 86,493 34,424 282,375 - ------------------------------------------- ----------------- ---------------- ------------------ -------------------- 131,018 462,296 64,141 1,041,772 Provision for credit losses 22 25,480 3,992 44,500 Amortization of goodwill and core deposit intangible 810 - 48,905 49,715 Depreciation and other amortization 20,587 12,462 13,284 47,261 Other noninterest expense (b) 78,836 235,767 91,649 481,982 - ------------------------------------------- ----------------- ---------------- ------------------ -------------------- Income (loss) before taxes 30,763 188,587 (93,689) 418,314 Income tax expense (benefit) 9,984 77,046 (46,887) 152,688 - ------------------------------------------- ----------------- ---------------- ------------------ -------------------- Net income (loss) 20,779 111,541 (46,802) 265,626 - ------------------------------------------- ================= ================ ================== ==================== Average total assets (in millions) 635 4,244 956 21,057 - ------------------------------------------- ================= ================ ================== ==================== Capital expenditures (in millions) - 12 11 23 ================= ================ ================== ==================== For the year ended December 31, 1998 Net interest income (a) 23,797 339,510 19,133 671,947 Noninterest income (b) 111,283 79,391 26,700 262,939 - ------------------------------------------- ----------------- ---------------- ------------------ -------------------- 135,080 418,901 45,833 934,886 Provision for credit losses (3) 19,557 17,109 43,200 Amortization of goodwill and core deposit intangible 810 - 33,677 34,487 Depreciation and other amortization 21,400 11,007 11,759 45,082 Other noninterest expense (b) 84,237 219,050 111,354 486,554 - ------------------------------------------- ----------------- ---------------- ------------------ -------------------- Income (loss) before taxes 28,636 169,287 (128,066) 325,563 Income tax expense (benefit) (b) 9,089 69,142 (59,907) 117,589 - ------------------------------------------- ----------------- ---------------- ------------------ -------------------- Net income (loss) 19,547 100,145 (68,159) 207,974 - ------------------------------------------- ================= ================ ================== ==================== Average total assets (in millions) 581 3,781 742 18,309 - ------------------------------------------- ================= ================ ================== ==================== Capital expenditures (in millions) 1 7 9 17 ================= ================ ================== ==================== </TABLE> -110-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 19. SEGMENT INFORMATION, CONTINUED <TABLE> <CAPTION> Commercial Commercial Discretionary IN THOUSANDS, EXCEPT ASSET DATA Banking Real Estate Portfolio - ------------------------------------------------------------ ---------------- ---------------- ---------------- <S> <C> <C> <C> For the year ended December 31, 1997 Net interest income (a) $ 113,193 101,413 43,898 Noninterest income 15,664 3,430 3,824 - ------------------------------------------------------------ ---------------- ---------------- ---------------- 128,857 104,843 47,722 Provision for credit losses 549 116 2,939 Amortization of goodwill and core deposit intangible - - - Depreciation and other amortization 410 407 107 Other noninterest expense 35,443 12,158 15,355 - ------------------------------------------------------------ ---------------- ---------------- ---------------- Income (loss) before taxes 92,455 92,162 29,321 Income tax expense (benefit) 38,194 39,204 10,856 - ------------------------------------------------------------ ---------------- ---------------- ---------------- Net income (loss) $ 54,261 52,958 18,465 - ------------------------------------------------------------ ================ ================ ================ Average total assets (in millions) $ 2,777 3,151 3,883 - ------------------------------------------------------------ ================ ================ ================ Capital expenditures (in millions) $ - - - ================ ================ ================ - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> Residential Mortgage Retail All IN THOUSANDS, EXCEPT ASSET DATA Banking Banking Other Total - ----------------------------------------- ---------------- ---------------- ---------------- ----------------- <S> <C> <C> <C> <C> For the year ended December 31, 1997 Net interest income (a) 17,847 279,928 3,127 559,406 Noninterest income 76,837 64,778 25,996 190,529 - ----------------------------------------- ---------------- ---------------- ---------------- ----------------- 94,684 344,706 29,123 749,935 Provision for credit losses (19) 35,866 6,549 46,000 Amortization of goodwill and core deposit intangible 810 - 6,481 7,291 Depreciation and other amortization 16,357 7,231 10,599 35,111 Other noninterest expense 62,069 190,002 64,347 379,374 - ----------------------------------------- ---------------- ---------------- ---------------- ----------------- Income (loss) before taxes 15,467 111,607 (58,853) 282,159 Income tax expense (benefit) 4,453 45,876 (32,665) 105,918 - ----------------------------------------- ---------------- ---------------- ---------------- ----------------- Net income (loss) 11,014 65,731 (26,188) 176,241 - ----------------------------------------- ================ ================ ================ ================= Average total assets (in millions) 360 3,066 72 13,309 - ----------------------------------------- ================ ================ ================ ================= Capital expenditures (in millions) 1 5 7 13 ================ ================ ================ ================= - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> (a) Net interest income is the difference between actual 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 $7,710,000 in 1999, $7,186,000 in 1998 and $5,840,000 in 1997 and is eliminated in "All Other" net interest income and income tax expense (benefit). (b) Including the impact in the "All Other" category of the nonrecurring merger-related expenses described in note 2 and, in 1998, the contribution of appreciated investment securities described in note 14. -111-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 20. REGULATORY MATTERS Payment of dividends by M&T's banking subsidiaries is restricted by various legal and regulatory limitations. Dividends from any banking subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current year and the preceding two years. For purposes of this test, at December 31, 1999, approximately $485,176,000 was available for payment of dividends to M&T from banking subsidiaries without prior regulatory approval. Banking regulations prohibit extensions of credit by the subsidiary banks to M&T unless appropriately secured by assets. Securities of affiliates are not eligible as collateral for this purpose. The banking subsidiaries are required to maintain noninterest-earning reserves against certain deposit liabilities. During the maintenance periods that included December 31, 1999 and 1998, cash and due from banks included a daily average of $180,666,000 and $158,696,000, respectively, for such purpose. Federal regulators have adopted capital adequacy guidelines for bank holding companies and banks. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company's financial statements. Under the capital adequacy guidelines, the so-called "Tier 1 capital" and "Total capital" as a percentage of risk- weighted assets and certain off-balance sheet financial instruments must be at least 4% and 8%, respectively. In addition to these risk-based measures, regulators also require banking institutions that meet certain qualitative criteria to maintain a minimum "leverage" ratio of "Tier 1 capital" to average total assets, adjusted for goodwill and certain other items, of at least 3% to be considered adequately capitalized. As of December 31, 1999, M&T and each of its banking subsidiaries exceeded all applicable capital adequacy requirements. As of December 31, 1999 and 1998, the most recent notifications from federal regulators categorized each of M&T's banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be considered well capitalized, a banking institution must maintain Tier 1 risk-based capital, total risk-based capital and leverage ratios of at least 6%, 10% and 5%, respectively. Management is unaware of any conditions or events since the latest notifications from federal regulators that have changed the capital adequacy category of M&T's banking subsidiaries. -112-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 20. REGULATORY MATTERS, CONTINUED The capital ratios and amounts of the Company and its banking subsidiaries as of December 31, 1999 and 1998 are presented below: <TABLE> <CAPTION> M&T M&T M&T (Consolidated) Bank Bank, N.A. -------------- ----- ---------- (dollars in thousands) <S> <C> <C> <C> December 31, 1999: Tier 1 Capital - -------------- Amount $1,489,676 1,436,204 50,334 Ratio(a) 8.27% 8.19% 10.74% Minimum required amount(b) 720,343 701,351 18,740 Total Capital - ------------- Amount 1,845,907 1,786,515 55,089 Ratio(a) 10.25% 10.19% 11.76% Minimum required amount(b) 1,440,686 1,402,702 37,479 Leverage - -------- Amount 1,489,676 1,436,204 50,334 Ratio(c) 6.92% 6.92% 6.18% Minimum required amount(b) 645,631 622,845 24,419 December 31, 1998: Tier 1 Capital - -------------- Amount $1,372,333 1,292,611 46,089 Ratio(a) 8.40% 8.07% 14.54% Minimum required amount(b) 653,408 640,897 12,680 Total Capital - ------------- Amount 1,725,020 1,639,940 51,499 Ratio(a) 10.56% 10.24% 16.25% Minimum required amount(b) 1,306,816 1,281,795 25,360 Leverage - -------- Amount 1,372,333 1,292,611 46,089 Ratio(c) 7.02% 6.80% 7.81% Minimum required amount(b) 586,468 570,226 17,704 </TABLE> (a) The ratio of capital to risk-weighted assets, as defined by regulation. (b) Minimum amount of capital to be considered adequately capitalized, as defined by regulation. (c) The ratio of capital to average assets, as defined by regulation. -113-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 21. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEET - -------------------------------------------------------------------------------- <TABLE> <CAPTION> December 31 In thousands 1999 1998 ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash In subsidiary bank $ 728 4,583 Other 20 20 - ----------------------------------------------------------------------------------------------------------------------------------- Total cash 748 4,603 Due from subsidiaries Money-market assets 1,387 4,335 Current income tax receivable 2,451 4,757 =================================================================================================================================== Total due from subsidiaries 3,838 9,092 Investments in subsidiaries Banks and bank holding company 2,062,694 1,830,222 Other 7,734 7,734 Other assets 15,215 14,817 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 2,090,229 1,866,468 =================================================================================================================================== LIABILITIES - ----------------------------------------------------------------------------------------------------------------------------------- Accrued expenses and other liabilities $ 6,450 6,369 Short-term borrowings 29,000 - Long-term borrowings 257,733 257,733 =================================================================================================================================== Total liabilities 293,183 264,102 - ----------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY 1,797,046 1,602,366 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,090,229 1,866,468 =================================================================================================================================== </TABLE> CONDENSED STATEMENT OF INCOME <TABLE> <CAPTION> Year ended December 31 In thousands, except per share 1999 1998 1997 <S> <C> <C> <C> INCOME Dividends from bank and bank holding company subsidiaries $ 76,000 121,500 192 Other income 2,618 20,222 8,558 - ----------------------------------------------------------------------------------------------------------------------------------- Total income 78,618 141,722 8,750 =================================================================================================================================== EXPENSE Interest on short-term borrowings 103 - - Interest on long-term borrowings 21,516 21,516 16,762 Other expense 2,635 27,168 2,710 - ----------------------------------------------------------------------------------------------------------------------------------- Total expense 24,254 48,684 19,472 =================================================================================================================================== Income (loss) before income taxes and equity in undistributed income of subsidiaries 54,364 93,038 (10,722) Income tax credits 8,621 17,541 4,496 Income (loss) before equity in undistributed income of subsidiaries 62,985 110,579 (6,226) - ----------------------------------------------------------------------------------------------------------------------------------- EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES Net income of subsidiaries 278,641 218,895 182,659 Less: dividends received (76,000) (121,500) (192) - ----------------------------------------------------------------------------------------------------------------------------------- Equity in undistributed income of subsidiaries 202,641 97,395 182,467 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 265,626 207,974 176,241 =================================================================================================================================== Net income per common share Basic $ 34.05 27.30 26.60 Diluted 32.83 26.16 25.26 </TABLE> -114-
M&T BANK CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS, CONTINUED 21. PARENT COMPANY FINANCIAL STATEMENTS, CONTINUED CONDENSED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Year ended December 31 In Thousands 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Net income $ 265,626 207,974 176,241 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiaries (202,641) (97,395) (182,467) Dividend-in-kind from subsidiary - - (83) Provision for deferred income taxes (209) 793 810 Net change in accrued income and expense (467) 3,558 (327) Transfer of noncash assets to charitable foundation - 9,272 - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities 62,309 124,202 (5,826) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------------------------------------------------------------------------------------------------------ Investment in subsidiary - (60,000) (19,734) Other , net (34) (808) (767) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (34) (60,808) (20,501) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from issuance of junior subordinated debt to subsidiaries - - 257,733 Net increase in short-term borrowings 29,000 - - Purchases of treasury stock (79,784) (231,779) (67,771) Dividends paid - common (35,128) (28,977) (21,207) Other, net 16,834 33,029 12,334 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (69,078) (227,727) 181,089 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents $ (6,803) (164,333) 154,762 Cash and cash equivalents at beginning of year 8,938 173,271 18,509 Cash and cash equivalents at end of year $ 2,135 8,938 173,271 - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ Interest received during the year $ 459 2,496 4,743 Interest paid during the year 21,266 21,516 10,550 Income taxes received during the year 16,965 40,208 2,027 </TABLE> -115-
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The terms in office of Roy M. Goodman and Russell A. King as directors of the Registrant will end on April 18, 2000, and they will not be nominees for reelection to the Board of Directors at the 2000 Annual Meeting of Stockholders. The identification of the Registrant's directors is incorporated by reference to the caption "NOMINEES FOR DIRECTOR" contained in the Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2000. The identification of the Registrant's executive officers is presented under the caption "Executive Officers of the Registrant" contained in Part I of this Annual Report on Form 10-K. Disclosure of compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, by the Registrant's directors and executive officers, and persons who are the beneficial owners of more than 10% of the Registrant's common stock, is incorporated by reference to the caption "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission on or about March 10, 2000. Item 11. EXECUTIVE COMPENSATION. Incorporated by reference to the Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2000. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference to the Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2000. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference to the Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or about March 10, 2000. -116-
PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial statements and financial statement schedules filed as part of this Annual Report on Form 10-K. See Part II, Item 8. "Financial Statements and Supplementary Data." Financial statement schedules are not required or are inapplicable, and therefore have been omitted. (b) Reports on Form 8-K. On December 28, 1999, the Registrant filed a Current Report on Form 8-K dated December 21, 1999, reporting on its December 21, 1999 public announcement that M&T Bank had entered into an agreement to acquire Matthews, Bartlett, Dedecker, Inc., a property and casualty insurance agency based in Buffalo, New York. On November 24, 1999, the Registrant filed a Current Report on Form 8-K dated November 24, 1999, reporting on its announcement on that date that its Board of Directors had authorized the Registrant to repurchase up to 190,465 shares of its common stock and that a previously reported repurchase program authorized in February 1999 had been completed on November 22, 1999. (c) Exhibits required by Item 601 of Regulation S-K. The exhibits listed on the Exhibit Index on pages 121 through 124 of this Annual Report on Form 10-K have been previously filed, are filed herewith or are incorporated herein by reference to other filings. (d) Additional financial statement schedules. None. -117-
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of February, 2000. M&T BANK CORPORATION By: /s/ Robert G. Wilmers ------------------------------------- Robert G. Wilmers President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date - --------- ----- ----- <S> <C> <C> Principal Executive Officer: /s/ Robert G. Wilmers President and - ------------------------------------- Chief Executive Officer February 24, 2000 Robert G. Wilmers ----------------- Principal Financial Officer: /s/ Michael P. Pinto Executive Vice President - ------------------------------------- and Chief Financial Officer February 24, 2000 Michael P. Pinto ----------------- Principal Accounting Officer: /s/ Michael R. Spychala Senior Vice President - ------------------------------------- and Controller February 24, 2000 Michael R. Spychala ------------------ </TABLE> -118-
A majority of the board of directors: - ------------------------------------- ---------------------- William F. Allyn /s/ Brent D. Baird February 24, 2000 - ------------------------------------- ---------------------- Brent D. Baird /s/ John H. Benisch February 24, 2000 - ------------------------------------- ---------------------- John H. Benisch /s/ Robert J. Bennett February 24, 2000 - ------------------------------------- ---------------------- Robert J. Bennett /s/ C. Angela Bontempo February 24, 2000 - ------------------------------------- ---------------------- C. Angela Bontempo - ------------------------------------- ---------------------- Robert T. Brady /s/ Patrick J. Callan February 24, 2000 - ------------------------------------- ---------------------- Patrick J. Callan /s/ R. Carlos Carballada February 24, 2000 - ------------------------------------- ---------------------- R. Carlos Carballada /s/ Michael J. Falcone February 24, 2000 - ------------------------------------- ---------------------- Michael J. Falcone - ------------------------------------- ---------------------- Richard E. Garman /s/ James V. Glynn February 24, 2000 - ------------------------------------- ---------------------- James V. Glynn - ------------------------------------- ---------------------- Roy M. Goodman /s/ Patrick W.E. Hodgson February 24, 2000 - ------------------------------------- ---------------------- Patrick W.E. Hodgson /s/ Samuel T. Hubbard, Jr. February 24, 2000 - ------------------------------------- ---------------------- Samuel T. Hubbard, Jr. /s/ Russell A. King February 24, 2000 - ------------------------------------- ---------------------- Russell A. King /s/ Reginald B. Newman, II February 24, 2000 - ------------------------------------- ---------------------- Reginald B. Newman, II -119-
/s/ Peter J. O'Donnell, Jr. February 24, 2000 - ------------------------------------- ---------------------- Peter J. O'Donnell, Jr. /s/ Jorge G. Pereira February 24, 2000 - ------------------------------------- ---------------------- Jorge G. Pereira /s/ Robert E. Sadler, Jr. February 24, 2000 - ------------------------------------- ---------------------- Robert E. Sadler, Jr. /s/ John L. Vensel February 24, 2000 - ------------------------------------- ---------------------- John L. Vensel /s/ Herbert L. Washington February 24, 2000 - ------------------------------------- ---------------------- Herbert L. Washington - ------------------------------------- ---------------------- John L. Wehle, Jr. /s/ Christine B. Whitman February 24, 2000 - ------------------------------------- ---------------------- Christine B. Whitman /s/ Robert G. Wilmers February 24, 2000 - ------------------------------------- ---------------------- Robert G. Wilmers -120-
EXHIBIT INDEX 2.1 Agreement and Plan of Reorganization dated as of December 9, 1998, by and among M&T Bank Corporation, Olympia Financial Corp. and FNB Rochester Corp. Incorporated by reference to Exhibit No. 99.1 to the Form 8-K dated December 9, 1998 (File No. 1-9861). 2.2 Stock Option Agreement dated as of December 9, 1998 by and between M&T Bank Corporation and FNB Rochester Corp. Incorporated by reference to Exhibit No. 99.2 to the Form 8-K dated December 9, 1998 (File No. 1-9861). 2.3 Form of Voting Agreement between the directors of FNB Rochester Corp. and M&T Bank Corporation, dated as of December 9, 1998. Incorporated by reference to Exhibit No. 99.3 to the Form 8-K dated December 9, 1998 (File No. 1-9861). 3.1 Restated Certificate of Incorporation of M&T Bank Corporation dated May 29, 1998. Incorporated by reference to Exhibit No. 3.1 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). 3.2 Bylaws of M&T Bank Corporation as last amended on February 16, 1999. Incorporated by reference to Exhibit No. 3.2 to the Form 10-K for the year ended December 31, 1998 (File No. 1- 9861). 4.1 Instruments defining the rights of security holders, including indentures. Incorporated by reference to Exhibit Nos. 3.1, 3.2, 10.1 and 10.2 hereof. 4.2 Amended and Restated Trust Agreement dated as of January 31, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Incorporated by reference to Exhibit No. 4.1 to the Form 8-K dated January 31, 1997 (File No. 1-9861). 4.3 Amendment to Amended and Restated Trust Agreement dated as of January 31, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Filed herewith. 4.4 Junior Subordinated Indenture dated as of January 31, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.2 to the Form 8-K dated January 31, 1997 (File No. 1-9861). 4.5 Supplemental Indenture dated December 23, 1999 by and between M&T Bank Corporation and Bankers Trust Company. Filed herewith. 4.6 Guarantee Agreement dated as of January 31, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.3 to Form 8-K dated January 31, 1997 (File No. 1-9861). 4.7 Amendment to Guarantee Agreement dated as of January 31, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Filed herewith. -121-
4.8 Amended and Restated Trust Agreement dated as of June 6, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Incorporated by reference to Exhibit No. 4.1 to the Form 8-K dated June 6, 1997 (File No. 1-9861). 4.9 Amendment to Amended and Restated Trust Agreement dated as of June 6, 1997 by and among M&T Bank Corporation, Bankers Trust Company, Bankers Trust (Delaware), and the Administrators named therein. Filed herewith. 4.10 Junior Subordinated Indenture dated as of June 6, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.2 to the Form 8-K dated June 6, 1997 (File No. 1-9861). 4.11 Supplemental Indenture dated December 23, 1999 by and between M&T Bank Corporation and Bankers Trust Company. Filed herewith. 4.12 Guarantee Agreement dated as of June 6, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Incorporated by reference to Exhibit No. 4.3 to Form 8-K dated June 6, 1997 (File No. 1-9861). 4.13 Amendment to Guarantee Agreement dated as of June 6, 1997 by and between M&T Bank Corporation and Bankers Trust Company. Filed herewith. 4.14 Amended and Restated Declaration of Trust dated as of February 4, 1997 by and among Olympia Financial Corp., The Bank of New York, The Bank of New York (Delaware), and the administrative trustees named therein. Filed herewith. 4.15 Amendment to Amended and Restated Declaration of Trust dated as of February 4, 1997 by and among Olympia Financial Corp., The Bank of New York, The Bank of New York (Delaware), and the administrative trustees named therein. Filed herewith. 4.16 Indenture dated as of February 4, 1997 by and between Olympia Financial Corp. and The Bank of New York. Filed herewith. 4.17 Supplemental Indenture dated as of December 17, 1999 by and between Olympia Financial Corp. and The Bank of New York. Filed herewith. 4.18 Common Securities Guarantee Agreement dated as of February 4, 1997 by and between Olympia Financial Corp. and The Bank of New York. Filed herewith. 4.19 Amendment to Common Securities Guarantee Agreement as of December 17, 1999 by and between Olympia Financial Corp. and The Bank of New York. Filed herewith. 4.20 Series A Capital Securities Guarantee Agreement dated as of February 4, 1997 by and between Olympia Financial Corp. and The Bank of New York. Filed herewith. 4.21 Amendment to Series A Capital Securities Guarantee Agreement dated as of December 17, 1999 by and between Olympia Financial Corp. and The Bank of New York. Filed herewith. -122-
10.1 Credit Agreement, dated as of November 19, 1999, between M&T Bank Corporation and CitiBank, N.A. Filed herewith. 10.2 M&T Bank Corporation 1983 Stock Option Plan as last amended on April 20, 1999. Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 1999 (File No. 1- 9861). 10.3 M&T Bank Corporation Annual Executive Incentive Plan. Incorporated by reference to Exhibit No. 10.3 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1 - 9861). Supplemental Deferred Compensation Agreements between Manufacturers and Traders Trust Company and: 10.4 Robert E. Sadler, Jr. dated as of March 7, 1985. Incorporated by reference to Exhibit No. (10)(d)(A) to the Form 10-K for the year ended December 31, 1984 (File No. 0-4561); 10.5 Brian E. Hickey dated as of July 21, 1994. Incorporated by reference to Exhibit No. 10.8 to the Form 10-K for the year ended December 31, 1995 (File No. 1-9861). 10.6 Supplemental Deferred Compensation Agreement, dated July 17, 1989, between The East New York Savings Bank and Atwood Collins, III. Incorporated by reference to Exhibit No. 10.11 to the Form 10-K for the year ended December 31, 1991 (File No. 1-9861). 10.7 M&T Bank Corporation Supplemental Pension Plan, as amended and restated. Incorporated by reference to Exhibit No. 10.7 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1- 9861). 10.8 M&T Bank Corporation Supplemental Retirement Savings Plan. Incorporated by reference to Exhibit No. 10.8 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). 10.9 M&T Bank Corporation Deferred Bonus Plan, as amended and restated. Incorporated by reference to Exhibit No. 10.9 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1- 9861). 10.10 M&T Bank Corporation Directors' Stock Plan, as amended and restated. Incorporated by reference to Exhibit No. 10.11 to Form 10-K for the year ended December 31, 1998 (File No. 1- 9861). 10.11 Restated 1987 Stock Option and Appreciation Rights Plan of ONBANCorp, Inc. Incorporated by reference to Exhibit 10.11 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1- 9861). 10.12 1992 ONBANCorp Directors' Stock Option Plan. Incorporated by reference to Exhibit 10.12 of the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). 10.13 Amended Franklin First Financial Corp. 1988 Stock Incentive Plan. Incorporated by reference to Exhibit 10.13 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). -123-
10.14 Employment Agreement, dated April 1, 1998, between M&T Bank Corporation and Robert J. Bennett. Incorporated by reference to Exhibit 10.14 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). 10.15 SERP Assumption Agreement, dated as of January 15, 1993, between Robert J. Bennett and ONBANCorp, Inc. Incorporated by reference to Exhibit 10.15 to the Form 10-Q for the quarter ended June 30, 1998 (File No. 1-9861). 11.1 Statement re: Computation of Earnings Per Common Share. Incorporated by reference to note 12 of Notes to Financial Statements filed herewith in Part II, Item 8, "Financial Statements and Supplementary Data." 21.1 Subsidiaries of the Registrant. Incorporated by reference to the caption "Subsidiaries" contained in Part I, Item 1 hereof. 23.1 Consent of PricewaterhouseCoopers LLP re: Registration Statement Nos. 33-32044 and 333-16077. Filed herewith. 23.2 Consent of PricewaterhouseCoopers LLP re: Registration Statement Nos. 33-12207, 33-58500, 33-63917, 333-43171, 333-43175 and 333-63985. Filed herewith. 27.1 Article 9 Financial Data Schedule for the year ended December 31, 1999. Filed herewith. -124-