UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9861 M&T BANK CORPORATION (Exact name of registrant as specified in its charter) New York 16-0968385 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One M & T Plaza Buffalo, New York 14240 (Address of principal (Zip Code) executive offices) (716) 842-5445 (Registrant's telephone number, including area code) FIRST EMPIRE STATE CORPORATION (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Number of shares of the registrant's Common Stock, $5 par value, outstanding as of the close of business on August 7, 1998: 7,984,895 shares.
M&T BANK CORPORATION FORM 10-Q For the Quarterly Period Ended June 30, 1998 <TABLE> <CAPTION> Table of Contents of Information Required in Report Page Part I. FINANCIAL INFORMATION <S> <C> Item 1. Financial Statements. CONSOLIDATED BALANCE SHEET - June 30, 1998 and December 31, 1997 3 CONSOLIDATED STATEMENT OF INCOME - Three and six months ended June 30, 1998 and 1997 4 CONSOLIDATED STATEMENT OF CASH FLOWS - Six months ended June 30, 1998 and 1997 5 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - Six months ended June 30, 1998 and 1997 6 CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES - Six months ended June 30, 1998 and 1997 6 NOTES TO FINANCIAL STATEMENTS 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 29 Part II. OTHER INFORMATION 29 Item 1. Legal Proceedings. 29 Item 2. Changes in Securities and Use of Proceeds. 29 Item 3. Defaults Upon Senior Securities. 29 Item 4. Submission of Matters to a Vote of Security Holders. 29 Item 5. Other Information. 30 Item 6. Exhibits and Reports on Form 8-K. 30 SIGNATURES 32 EXHIBIT INDEX 33 </TABLE> -2-
PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (Unaudited) <TABLE> <CAPTION> June 30, December 31, Dollars in thousands, except per share 1998 1997 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Assets Cash and due from banks $ 511,273 333,805 Money-market assets Interest-bearing deposits at banks 670 668 Federal funds sold and agreements to resell securities 336,410 53,087 Trading account 167,454 57,291 ---------------------------------------------------------------------------------------------- Total money-market assets 504,534 111,046 ---------------------------------------------------------------------------------------------- Investment securities Available for sale (cost: $2,450,378 at June 30, 1998; $1,563,055 at December 31, 1997) 2,461,545 1,583,273 Held to maturity (market value: $127,230 at June 30, 1998; $84,176 at December 31, 1997) 126,488 83,665 Other (market value: $118,542 at June 30, 1998; $58,280 at December 31, 1997) 118,542 58,280 ---------------------------------------------------------------------------------------------- Total investment securities 2,706,575 1,725,218 ---------------------------------------------------------------------------------------------- Loans and leases 15,487,386 11,765,533 Unearned discount (242,607) (268,965) Allowance for possible credit losses (310,811) (274,656) ---------------------------------------------------------------------------------------------- Loans and leases, net 14,933,968 11,221,912 ---------------------------------------------------------------------------------------------- Premises and equipment 173,678 121,984 Goodwill and core deposit intangible 566,878 17,288 Accrued interest and other assets 741,139 471,682 ---------------------------------------------------------------------------------------------- Total assets $ 20,138,045 14,002,935 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Liabilities Noninterest-bearing deposits $ 2,096,105 1,458,241 NOW accounts 476,381 346,795 Savings deposits 4,525,942 3,344,697 Time deposits 7,407,806 5,762,497 Deposits at foreign office 306,725 250,928 ---------------------------------------------------------------------------------------------- Total deposits 14,812,959 11,163,158 ---------------------------------------------------------------------------------------------- Federal funds purchased and agreements to repurchase securities 2,177,388 930,775 Other short-term borrowings 394,736 166,549 Accrued interest and other liabilities 399,360 284,368 Long-term borrowings 694,594 427,819 ---------------------------------------------------------------------------------------------- Total liabilities 18,479,037 12,972,669 - -------------------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $1 par, 1,000,000 shares authorized, none outstanding -- -- Common stock, $5 par, 15,000,000 shares authorized, 8,101,539 shares issued at June 30, 1998; 8,097,472 issued at December 31, 1997 40,508 40,487 Common stock issuable, 8,315 shares at June 30, 1998 3,885 -- Additional paid-in capital 487,926 103,233 Retained earnings 1,172,399 1,092,106 Accumulated other comprehensive income 6,642 12,016 Treasury stock - common, at cost - 102,295 shares at June 30, 1998; 1,487,123 shares at December 31, 1997 (52,352) (217,576) ---------------------------------------------------------------------------------------------- Total stockholders' equity 1,659,008 1,030,266 ---------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 20,138,045 14,002,935 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- </TABLE> -3-
- ------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME (Unaudited) <TABLE> <CAPTION> Three months ended June 30 Six months ended June 30 Amounts in thousands, except per share 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest income Loans and leases, including fees $ 315,307 235,226 $ 564,501 464,801 Money-market assets Deposits at banks 364 816 370 1,525 Federal funds sold and agreements to resell securities 1,247 860 2,969 1,265 Trading account 467 410 605 631 Investment securities Fully taxable 42,238 25,409 65,868 49,207 Exempt from federal taxes 2,101 1,220 3,673 2,278 ------------------------------------------------------------------------------------------------------- Total interest income 361,724 263,941 637,986 519,707 - ------------------------------------------------------------------------------------------------------------------------------- Interest expense NOW accounts 1,189 835 2,144 1,755 Savings deposits 30,636 22,495 53,243 44,743 Time deposits 105,500 82,254 186,134 156,011 Deposits at foreign office 3,562 2,873 6,801 6,112 Short-term borrowings 30,969 10,230 49,566 23,930 Long-term borrowings 12,788 7,047 21,341 12,504 ------------------------------------------------------------------------------------------------------- Total interest expense 184,644 125,734 319,229 245,055 ------------------------------------------------------------------------------------------------------- Net interest income 177,080 138,207 318,757 274,652 Provision for possible credit losses 13,200 11,000 25,200 22,000 ------------------------------------------------------------------------------------------------------- Net interest income after provision for possible credit losses 163,880 127,207 293,557 252,652 - ------------------------------------------------------------------------------------------------------------------------------- Other income Mortgage banking revenues 18,466 12,172 32,336 24,247 Service charges on deposit accounts 14,180 10,726 25,414 21,111 Trust income 9,938 7,233 19,423 14,136 Merchant discount and other credit card fees 4,330 4,234 8,568 9,465 Trading account and foreign exchange gains 506 596 2,285 1,945 Gain (loss) on sales of bank investment securities 322 (188) 322 (233) Other revenues from operations 18,668 9,210 48,458 19,235 ------------------------------------------------------------------------------------------------------- Total other income 66,410 43,983 136,806 89,906 - ------------------------------------------------------------------------------------------------------------------------------- Other expense Salaries and employee benefits 69,930 53,561 128,263 109,120 Equipment and net occupancy 17,878 13,155 31,357 26,388 Printing, postage and supplies 5,029 3,472 8,599 6,823 Amortization of goodwill and core deposit intangible 10,875 1,859 12,700 3,642 Other costs of operations 51,292 30,023 107,958 60,381 ------------------------------------------------------------------------------------------------------- Total other expense 155,004 102,070 288,877 206,354 ------------------------------------------------------------------------------------------------------- Income before income taxes 75,286 69,120 141,486 136,204 Income taxes 30,587 26,329 47,832 52,154 ------------------------------------------------------------------------------------------------------- Net income $ 44,699 42,791 $ 93,654 84,050 ------------------------------------------------------------------------------------------------------- Net income per common share Basic $ 5.55 6.46 $ 12.72 12.63 Diluted 5.32 6.17 12.16 11.98 - ------------------------------------------------------------------------------------------------------------------------------- Cash dividends per common share 1.00 .80 1.80 1.60 Average common shares outstanding Basic 8,051 6,627 7,363 6,656 Diluted 8,409 6,928 7,699 7,014 </TABLE> -4-
- ------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six months ended June 30 Dollars In thousands 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash flows from Net income $ 93,654 84,050 operating activities Adjustments to reconcile net income to net cash provided by operating activities Provision for possible credit losses 25,200 22,000 Depreciation and amortization of premises and equipment 11,897 10,294 Amortization of capitalized servicing rights 9,708 6,804 Amortization of goodwill and core deposit intangible 12,700 3,642 Provision for deferred income taxes (6,262) (5,123) Asset write-downs 3,166 619 Net gain on sales of assets (700) (1,229) Net change in accrued interest receivable, payable 1,936 4,668 Net change in other accrued income and expense 13,250 22,116 Net change in loans held for sale (134,486) 39,835 Net change in trading account assets and liabilities (123,711) 10,124 ---------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (93,648) 197,800 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from Proceeds from sales of investment securities investing activities Available for sale 112,890 200,942 Proceeds from maturities of investment securities Available for sale 502,169 118,275 Held to maturity 28,092 46,936 Other 7,930 - Purchases of investment securities Available for sale (35,514) (472,516) Held to maturity (18,969) (17,337) Other (21,873) (3,576) Net increase in interest-bearing deposits at banks (2) (48,791) Additions to capitalized servicing rights (6,469) (12,917) Net increase in loans and leases (659,515) (318,388) Capital expenditures, net (12,954) (5,650) Acquisitions, net of cash acquired: ONBANCorp, Inc. 26,264 - Deposits and banking offices - 123,043 Purchases of bank owned life insurance (150,000) - Other, net (2,963) (3,907) ---------------------------------------------------------------------------------------------------- Net cash used by investing activities (230,914) (393,886) - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from Net increase (decrease) in deposits (115,908) 539,565 financing activities Net increase (decrease) in short-term borrowings 978,727 (536,492) Proceeds from issuance of trust preferred securities - 250,000 Payments on long-term borrowings (1,591) (86) Purchases of treasury stock (74,711) (48,702) Dividends paid - common (13,345) (10,652) Other, net 12,181 (2,129) ---------------------------------------------------------------------------------------------------- Net cash provided by financing activities 785,353 191,504 ---------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents $ 460,791 (4,582) Cash and cash equivalents at beginning of period 386,892 449,985 Cash and cash equivalents at end of period $ 847,683 445,403 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Supplemental Interest received during the period $ 633,831 511,184 disclosure of cash Interest paid during the period 317,942 233,728 flow information Income taxes paid during the period 47,233 37,784 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Supplemental schedule of Real estate acquired in settlement of loans $ 3,387 3,941 noncash investing and Acquisition of ONBANCorp, Inc: financing activities Common stock issued 587,819 -- Fair value of: Assets acquired (noncash) 5,204,863 -- Liabilities assumed 4,618,411 -- Stock options 19,424 -- - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- </TABLE> -5-
- ------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------------------- Common Additional Preferred Common stock paid-in Retained Dollars in thousands, except per share stock stock issuable capital earnings - -------------------------------------------------------------------------------------------------------------------------------- 1997 <S> <C> <C> <C> <C> <C> Balance - January 1, 1997 $ -- 40,487 -- 96,597 937,072 Comprehensive income: Net income -- -- -- -- 84,050 Other comprehensive income, net of tax: Unrealized gains on investment securities, net of reclassification adjustment -- -- -- -- -- Exercise of stock options -- -- -- 4,721 -- Purchases of treasury stock -- -- -- -- -- Common stock cash dividends - $1.60 per share -- -- -- -- (10,652) - -------------------------------------------------------------------------------------------------------------------------------- Balance - June 30, 1997 $ - 40,487 - 101,318 1,010,470 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- 1998 Balance - January 1, 1998 $ -- 40,487 -- 103,233 1,092,106 Comprehensive income: Net income -- -- -- -- 93,654 Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment -- -- -- -- -- Exercise of stock options -- 11 -- 837 -- Purchases of treasury stock -- -- -- -- -- Acquisition of ONBANCorp: Common stock issued -- 10 -- 364,427 -- Fair value of stock options -- -- -- 19,424 -- Deferred bonus plan: Deferred stock awards, net -- -- 3,869 5 -- Dividend equivalents -- -- 16 -- (16) Common stock cash dividends - $1.80 per share -- -- -- -- (13,345) - -------------------------------------------------------------------------------------------------------------------------------- Balance - June 30,1998 $ - 40,508 3,885 487,926 1,172,399 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------ Accumulated other comprehensive Treasury Dollars in thousands, except per share income stock Total - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Balance - January 1, 1997 (2,485) (166,012) $ 905,659 Comprehensive income: Net income -- -- 84,050 Other comprehensive income, net of tax: Unrealized gains on investment securities, net of reclassification adjustment 5,913 -- 5,913 ---------- 89,963 Exercise of stock options -- 10,048 14,769 Purchases of treasury stock -- (48,702) (48,702) Common stock cash dividends - $1.60 per share -- -- (10,652) - ------------------------------------------------------------------------------------------------------------------ Balance - June 30, 1997 3,428 (204,666) $ 951,037 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 1998 Balance - January 1, 1998 12,016 (217,576) $1,030,266 Comprehensive income: Net income -- -- 93,654 Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment (5,374) -- (5,374) ---------- 88,280 Exercise of stock options -- 16,551 17,399 Purchases of treasury stock -- (74,711) (74,711) Acquisition of ONBANCorp: Common stock issued -- 223,382 587,819 Fair value of stock options -- -- 19,424 Deferred bonus plan: Deferred stock awards, net -- 2 3,876 Dividend equivalents -- -- -- Common stock cash dividends - $1.80 per share -- -- (13,345) - ------------------------------------------------------------------------------------------------------------------ Balance - June 30,1998 6,642 (52,352) $1,659,008 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ </TABLE> CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES (Unaudited) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------- Six months ended June 30 Dollars in thousands 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Beginning balance $ 274,656 270,466 Provision for possible credit losses 25,200 22,000 Allowance obtained through acquisition 27,905 -- Net charge-offs Charge-offs (25,292) (29,883) Recoveries 8,342 9,350 - ----------------------------------------------------------------------------------------------------------------------------- Total net charge-offs (16,950) (20,533) - ----------------------------------------------------------------------------------------------------------------------------- Ending balance $ 310,811 271,933 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- </TABLE> 6
NOTES TO FINANCIAL STATEMENTS 1. Significant accounting policies In May 1998, First Empire State Corporation ("First Empire") changed its name to M&T Bank Corporation ("M&T"). The consolidated financial statements of M&T and subsidiaries ("the Company") were compiled in accordance with the accounting policies set forth in Note 1 of Notes to Financial Statements on pages 39 through 41 of the Company's 1997 Annual Report to stockholders, except as described below. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature. 2. Earnings per share The computations of basic earnings per share follow: <TABLE> <CAPTION> Three months ended Six months ended June 30 June 30 1998 1997 1998 1997 (in thousands, except per share) Income available to common stockholders: <S> <C> <C> <C> <C> Net income $44,699 42,791 93,654 84,050 Weighted-average shares outstanding (including common stock issuable) 8,051 6,627 7,363 6,656 Basic earnings per share $ 5.55 6.46 12.72 12.63 </TABLE> The computations of diluted earnings per share follow: <TABLE> <CAPTION> Three months ended Six months ended June 30 June 30 1998 1997 1998 1997 (in thousands, except per share) <S> <C> <C> <C> <C> Income available to common stockholders $44,699 42,791 93,654 84,050 Weighted-average shares outstanding (including common stock issuable) 8,051 6,627 7,363 6,656 Plus: incremental shares from assumed conversions of stock options 358 301 336 358 ------ ------ ------ ------ Adjusted weighted-average shares outstanding 8,409 6,928 7,699 7,014 Diluted earnings per share $ 5.32 6.17 12.16 11.98 </TABLE> 3. Comprehensive income The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. Financial statements presented for periods prior to 1998 are required to be reclassified to reflect application of the provisions of SFAS No. 130. -7-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 3. Comprehensive income, continued The following table displays the components of other comprehensive income: <TABLE> <CAPTION> Six months ended June 30, 1998 Before-tax Income amount taxes Net <S> <C> <C> <C> Unrealized losses on investment securities: Unrealized holding losses during period(a) $(8,729) 3,546 (5,183) Less: reclassification adjustment for gains realized in net income 322 (131) 191 ------- ----- ------ Net unrealized losses $(9,051) 3,677 (5,374) ====== ===== ====== </TABLE> (a) Including the effect of the contribution of appreciated investment securities described in note 4. <TABLE> <CAPTION> Six months ended June 30, 1997 Before-tax Income amount taxes Net <S> <C> <C> <C> Unrealized gains on investment securities: Unrealized holding gains during period $ 9,786 (4,011) 5,775 Add: reclassification adjustment for losses realized in net income 233 95 138 ------ ----- ----- Net unrealized gains $10,019 (4,106) 5,913 ====== ===== ===== </TABLE> 4. Contribution of appreciated investment securities In January 1998, M&T contributed appreciated investment securities with a fair value of $24.6 million to an affiliated, tax-exempt private charitable foundation. As a result of this transfer, the Company recognized tax-exempt other income of $15.3 million and incurred charitable contributions expense of $24.6 million. These amounts are included in the Consolidated Statement of Income in "Other revenues from operations" and "Other costs of operations," respectively. The transfer provided an income tax benefit of approximately $10.0 million and, accordingly, resulted in an after-tax increase in net income of $0.7 million. 5. Acquisition of ONBANCorp, Inc. On April 1, 1998, M&T consummated the merger ("Merger") of ONBANCorp, Inc. ("ONBANCorp") with and into Olympia Financial Corp.("Olympia"), a wholly owned subsidiary of M&T. Following the Merger, OnBank & Trust Co., Syracuse, New York, and Franklin First Savings Bank, Wilkes-Barre, Pennsylvania, both wholly owned subsidiaries of ONBANCorp, were merged with and into Manufacturers and Traders Trust Company ("M&T Bank"), M&T's principal banking subsidiary. After application of the election, allocation and proration procedures contained in the merger agreement with ONBANCorp, M&T paid $266.3 million in cash and issued 1,429,998 shares of common stock in exchange for the ONBANCorp common shares outstanding at the time of acquisition. In addition, based on the merger agreement and the exchange ratio provided for therein, M&T converted outstanding and unexercised stock options granted by ONBANCorp into options to purchase 61,772 shares of M&T common stock. The purchase price of the transaction was approximately $873.6 million based on the cash paid to ONBANCorp stockholders, the market price of M&T common shares on October 28, 1997 before the terms of the Merger were agreed to and announced by M&T and ONBANCorp, and the estimated fair -8-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 5. Acquisition of ONBANCorp, Inc., continued value of ONBANCorp stock options converted into M&T stock options. Acquired assets, loans and deposits of ONBANCorp on April 1, 1998 totaled approximately $5.5 billion, $3.0 billion and $3.8 billion, respectively. The transaction has been accounted for as a purchase and, accordingly, operations acquired from ONBANCorp have been included in the Company's financial results since the acquisition date. In connection with the acquisition, the Company recorded approximately $501 million of goodwill and $61 million of core deposit intangible. The goodwill is being amortized on a straight-line basis over twenty years and the core deposit intangible is being amortized on an accelerated basis over ten years. The Company incurred expenses related to systems conversions and other costs of integrating and conforming the acquired operations with and into the Company of approximately $16.7 million and $18.4 million during the three and six month periods ended June 30, 1998, respectively. The Company expects to incur additional integration costs during the remainder of 1998 which will be expensed as incurred. Presented below is certain pro forma information as if ONBANCorp had been acquired on January 1, 1997. These results combine the historical results of ONBANCorp into the Company's Consolidated Statement of Income and, while certain adjustments were made for the estimated impact of purchase accounting adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisition taken place at that time. In particular, expenses related to systems conversions and other costs of integration are included in the 1998 periods in which such costs were incurred and, additionally, the Company expects to achieve further operating cost savings as a result of the Merger which are not reflected in the pro forma amounts presented below. <TABLE> <CAPTION> Pro forma Six months ended June 30 1998 1997 (in thousands, except per share) <S> <C> <C> Interest income $714,756 $691,102 Other income 143,874 110,087 Net income 83,736 85,543 Diluted earnings per common share $ 10.33 $ 10.50 </TABLE> 6. Borrowings In January 1997, First Empire Capital Trust I ("Trust I"), a Delaware business trust organized by the Company on January 17, 1997, issued $150 million of 8.234% preferred capital securities. In June 1997, First Empire Capital Trust II ("Trust II"), a Delaware business trust organized by the Company on May 30, 1997, issued $100 million of 8.277% preferred capital securities. As a result of the ONBANCorp acquisition, the Company assumed responsibility for similar preferred capital securities previously issued by a special-purpose subsidiary of ONBANCorp. In February 1997, OnBank Capital Trust I ("OnBank Trust I" and, together with Trust I and Trust II, the "Trusts"), a Delaware business trust organized by ONBANCorp on January 24, 1997, issued $60 million of 9.25% preferred capital securities. Other than the following payment terms (and the redemption terms described below), the preferred capital securities issued by the Trusts ("Capital Securities") are identical in all material respects: <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 OnBank Trust I 9.25% February 1 and August 1 </TABLE> -9-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. Borrowings, continued The common securities of Trust I and Trust II are wholly owned by M&T and the common securities of OnBank Trust I are wholly owned by Olympia. The common securities of each trust ("Common Securities") are the only class of each Trust's securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding Trust and are classified in the Company's consolidated balance sheet as long-term borrowings, with accumulated distributions on such securities included in interest expense. Under the Federal Reserve Board's current risk-based capital guidelines, the Capital Securities are includable in the Company's Tier 1 capital. The proceeds from the issuances of the Capital Securities and Common Securities were used by the Trusts to purchase the following amounts of junior subordinated deferrable interest debentures ("Junior Subordinated Debentures") issued by M&T in the case of Trust I and Trust II and Olympia in the case of OnBank Trust I: <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. OnBank Trust I $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 and Trust II, or Olympia, in the case of OnBank Trust I, exercise the right to extend the payment of interest on the Junior Subordinated Debentures for up to ten semi-annual periods, in which case payment of distributions on the respective Capital Securities will be deferred for a comparable period. During an extended interest period, M&T and/or Olympia may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of the respective company's capital stock. The agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T in the case of Trust I and Trust II and Olympia in the case of OnBank Trust I of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T and Olympia. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events ("Events") set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after the stated optional redemption dates (February 1, 2007 in the case of Trust I and OnBank Trust I, and June 1, 2007 in the case of Trust II) contemporaneously with the Company's optional redemption of the related Junior Subordinated Debentures in whole or in part. The Junior Subordinated Debentures are redeemable prior to their stated maturity dates at M&T's option in the case of Trust I and Trust II -10-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. Borrowings, continued and Olympia's option in the case of OnBank Trust I (i) on or after the stated optional redemption dates, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of one or more of the Events, in each case subject to possible regulatory approval. The redemption price of the Capital Securities upon their early redemption will be expressed as a percentage of the liquidation amount plus accumulated but unpaid distributions. In the case of Trust I, such percentage adjusts annually and ranges from 104.117% at February 1, 2007 to 100.412% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007. In the case of Trust II, such percentage adjusts annually and ranges from 104.139% at June 1, 2007 to 100.414% for the annual period ending May 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to June 1, 2007. In the case of OnBank Trust I, such percentage adjusts annually and ranges from 104.625% at February 1, 2007 to 100.463% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007. -11-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview Effective May 29, 1998, First Empire State Corporation changed its name to M&T Bank Corporation ("M&T"). M&T's common stock began trading on the New York Stock Exchange under the symbol "MTB" on June 1, 1998. On April 1, 1998, M&T completed its acquisition of ONBANCorp, Inc. ("ONBANCorp"), a bank holding company headquartered in Syracuse, New York. Immediately after the acquisition, ONBANCorp's two banking subsidiaries, OnBank & Trust Co. in Syracuse, which operated 59 offices in upstate New York, and Franklin First Savings Bank in Wilkes-Barre, Pennsylvania, which operated 19 offices in northeastern Pennsylvania, were merged with and into Manufacturers and Traders Trust Company ("M&T Bank"), M&T's principal banking subsidiary. The acquisition was accounted for using the purchase method of accounting and, accordingly, the operations acquired from ONBANCorp have been included in the financial results of M&T and its consolidated subsidiaries ("the Company") since the acquisition date. ONBANCorp's stockholders received $266.3 million in cash and 1,429,998 shares of M&T common stock in exchange for ONBANCorp shares outstanding at the time of acquisition. A summary of assets acquired and liabilities assumed on April 1, 1998 in connection with the ONBANCorp transaction follows (in thousands): Assets <TABLE> <S> <C> Investment securities $1,576,604 Loans and leases, net of unearned discount 2,970,306 Allowance for loan loss (27,905) --------- Loans and leases, net 2,942,401 Goodwill and core deposit intangible 562,290 Other assets 410,666 --------- Total assets $5,491,961 Liabilities Deposits $3,767,729 Short-term borrowings 543,734 Long-term borrowings 268,617 Other liabilities 38,331 --------- Total liabilities $4,618,411 </TABLE> In connection with the acquisition, the Company recorded approximately $562 million of goodwill and core deposit intangible, and incurred significant nonrecurring expenses related to systems conversions and other costs of integrating and conforming the acquired operations with and into M&T Bank. Such expenses totaled $16.7 million and $18.4 million during the three and six month periods ended June 30, 1998, respectively. The Company expects to incur additional integration costs during the remainder of 1998 which will be expensed as incurred. M&T's net income for the second quarter of 1998 was $44.7 million, up 4% from $42.8 million in the second quarter of 1997. Diluted earnings per common share were $5.32 in the recent quarter, a decrease of 14% from $6.17 in the year-earlier quarter. Net income was $49.0 million or $7.01 of diluted earnings per share in the first quarter of 1998. Basic earnings per share also declined 14% to $5.55 in the second quarter of 1998 from $6.46 in the corresponding 1997 quarter. Basic earnings per share were $7.34 in the initial 1998 quarter. The after-tax impact on the second quarter of 1998 of nonrecurring expenses associated with merging the operations of ONBANCorp into the Company was $11.3 million or $1.34 of diluted earnings per share and $1.40 of basic earnings per share. For the six months ended June 30, 1998, net income was $93.7 million or $12.16 per diluted share, up 11% and 2%, respectively, from $84.1 million or $11.98 per share during the first half of 1997. Basic earnings per share were $12.72 in the first six months of 1998, up from $12.63 in the corresponding 1997 period. Nonrecurring merger-related -12-
expenses lowered net income during the first half of 1998 by $12.3 million and diluted and basic earnings per share by $1.59 and $1.66, respectively. The annualized rate of return on average assets for the Company in the second quarter of 1998 was .92%, compared with 1.31% and 1.41% in the second quarter of 1997 and the first quarter of 1998, respectively. The annualized rate of return on average common stockholders' equity was 10.77% in the recent quarter, down from 18.55% in the year-earlier quarter and 18.86% in the initial 1998 quarter. During the first six months of 1998, the annualized rates of return on average assets and average common stockholders' equity were 1.12% and 13.89%, respectively, compared with 1.30% and 18.40%, respectively, in the corresponding 1997 period. Excluding the impact of merger-related expenses, the annualized returns on average assets and average common equity were 1.15% and 13.50%, respectively, during the second quarter of 1998 and 1.27% and 15.70%, respectively, during 1998's first half. Cash Operating Results As a result of the acquisition of ONBANCorp on April 1, 1998 and, to a significantly lesser extent, acquisitions of other entities in prior years, M&T had recorded as assets at June 30, 1998 goodwill and core deposit intangible totaling $566.9 million. Since the amortization of goodwill and core deposit intangible does not result in a cash expense, M&T believes that reporting its operating results on a "cash" basis (which excludes the after-tax effect of amortization of goodwill and core deposit intangible and the related asset balances) represents a more relevant measure of financial performance and better reflects the cash return on the investments made by M&T to improve and expand its franchise. Cash basis data presented herein do not exclude the effect of non-cash operating expenses such as depreciation, provision for possible credit losses, or deferred income taxes associated with the results of operations. Cash net income, excluding nonrecurring merger-related expenses, was $65.4 million in the second quarter of 1998, up 48% from $44.4 million in the year-earlier quarter. On the same basis, diluted earnings per share for the recent quarter were $7.78, an increase of 22% from $6.40 in the second quarter of 1997. Cash net income and diluted earnings per share, excluding one-time expenses, were $51.4 million and $7.37, respectively, in the first quarter of 1998. For the first half of 1998, excluding merger-related expenses, cash net income and diluted cash earnings per share were $116.9 million and $15.18, respectively, up 34% and 22%, respectively, from $87.1 million and $12.42 in the corresponding 1997 period. Cash return on average tangible assets, excluding nonrecurring merger-related expenses, was an annualized 1.38% in the recent quarter, compared with 1.36% in the second quarter of 1997 and 1.49% in the initial 1998 quarter. Cash return on average tangible common equity, also before one-time expenses, was an annualized 23.50% in the second quarter of 1998, up from 19.70% in the year-earlier quarter and 20.13% in the first quarter of 1998. For the first six months of 1998, excluding one-time merger-related expenses, the annualized cash return on average tangible assets and average tangible common stockholders' equity was 1.43% and 21.89%, respectively, compared with 1.35% and 19.55%, respectively, in the corresponding 1997 period. As noted earlier, the after-tax impact of merger-related expenses on net income and diluted earnings per share was $11.3 million and $1.34, respectively, in the second quarter of 1998 and $12.3 million and $1.59, respectively, in 1998's first half. Including the effect of merger-related expenses, the cash return on average tangible assets for the three and six month periods ended June 30, 1998 was 1.14% and 1.28%, respectively, and the cash return on average tangible common stockholders' equity was 19.45% and 19.60%, respectively. Taxable-equivalent Net Interest Income Taxable-equivalent net interest income increased to $178.9 million in the second quarter of 1998, up $39.3 million or 28% from $139.6 million in the year-earlier quarter and $35.6 million higher than the $143.2 million earned -13-
in the first quarter of 1998. The most significant factor contributing to the improvement in net interest income was growth in average loans and leases. Average loans and leases increased $4.1 billion, or 38%, to $15.0 billion in the second quarter of 1998 from $10.8 billion in the year-earlier quarter. Average loans and leases in the recent quarter were $3.4 billion, or 29%, higher than the first quarter of 1998. The primary reason for the higher loan balances was the $3.0 billion of loans obtained on April 1, 1998 in the ONBANCorp acquisition, including approximately $450 million of commercial loans, $380 million of commercial real estate loans, $1.2 billion of residential mortgage loans and $930 million of consumer loans. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio. AVERAGE LOANS AND LEASES (net of unearned discount) <TABLE> <CAPTION> Percent increase Dollars in millions (decrease) from 2nd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1998 -------- -------- ------ <S> <C> <C> <C> Commercial, financial, etc. $ 2,954 31 % 23 % Real estate - commercial 5,005 22 11 Real estate - consumer 3,946 84 57 Consumer Automobile 1,386 29 51 Home equity 750 17 15 Credit cards 216 (15) (12) Other 721 111 89 ------ --- -- Total consumer 3,073 33 40 ------ --- -- Total $14,978 38 % 29 % -------- -------- ----- -------- -------- ----- </TABLE> For the first six months of 1998, taxable-equivalent net interest income was $322.1 million, up from $277.3 million in the corresponding 1997 period. An increase in average loans and leases of $2.5 billion, including approximately $1.5 billion attributable to the loans acquired in the ONBANCorp transaction, was the leading factor contributing to this improvement. Including approximately $1.4 billion acquired in the ONBANCorp transaction, average investment securities increased to $2.9 billion in the recent quarter from $1.7 billion in the second quarter of 1997. Holdings of investment securities averaged $1.6 billion in the first quarter of 1998. Money-market assets averaged $156 million in 1998's second quarter, compared with $143 million in the year-earlier quarter and $141 million in the initial quarter of 1998. In general, the size of the investment securities and money-market assets portfolios are influenced by such factors as demand for loans, which generally yield more than investment securities and money-market assets, ongoing repayments, the levels of deposits, and management of balance sheet size and resulting capital ratios. As a result of the changes described herein, average earning assets increased 42% to $18.0 billion in the second quarter of 1998 from $12.7 billion in the second quarter of 1997. Average earning assets were $13.4 billion in the first quarter of 1998 and aggregated $15.7 billion and $12.6 billion for the six months ended June 30, 1998 and 1997, respectively. The impact of ONBANCorp-related earning assets on average earning assets in the second quarter and first six months of 1998 was $4.5 billion and $2.3 billion, respectively. Core deposits, consisting of noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and nonbrokered domestic time deposits under $100,000, represent the most significant source of funding to the Company and generally carry lower interest rates than wholesale funds of comparable maturities. The Company's branch network is the principal source of core deposits. Core deposits include certificates of deposit under $100,000 generated on a nationwide basis by M&T Bank, National Association ("M&T Bank, N.A."), a wholly owned bank subsidiary of M&T. Core deposits obtained in the acquisition of ONBANCorp were approximately $2.8 billion on the April 1, 1998 acquisition date. Average core deposits increased to $11.5 -14-
billion in the second quarter of 1998, up from $8.3 billion in the year-earlier quarter and $8.4 billion in the first quarter of 1998. Average core deposits of M&T Bank, N.A., were $406 million in the recently completed quarter, compared with $440 million in the second quarter of 1997 and $433 million in the first quarter of 1998. The accompanying table provides an analysis of quarterly changes in the components of average core deposits. For the six months ended June 30, 1998 and 1997, core deposits averaged $10.0 billion and $8.2 billion, respectively. AVERAGE CORE DEPOSITS <TABLE> <CAPTION> Dollars in millions Percent increase from 2nd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1998 -------- -------- ------ <S> <C> <C> <C> NOW accounts $ 304 18 % 13 % Savings deposits 4,718 39 37 Time deposits less than $100,000 4,741 37 39 Noninterest-bearing deposits 1,751 48 38 ------ -- -- Total $11,514 39 % 37 % ====== == == </TABLE> In addition to core deposits, the Company obtains funding through domestic time deposits of $100,000 or more, deposits originated through M&T Bank's offshore branch office, and brokered certificates of deposit. Brokered deposits are used as an alternative to short-term borrowings to lengthen the average maturity of interest-bearing liabilities. Brokered deposits averaged $1.5 billion during the recent quarter and totaled $1.5 billion at June 30, 1998, compared with an average balance of $1.3 billion during the comparable 1997 period and a total balance of $1.5 billion at June 30, 1997. Brokered deposits also averaged $1.3 billion in the initial quarter of 1998. The weighted average remaining term to maturity of brokered deposits at June 30, 1998 was 2.08 years. However, certain of the deposits have provisions that allow early redemption. Additional amounts of brokered deposits may be solicited in the future depending on market conditions and the cost of funds available from alternative sources at the time. In addition to deposits, the Company uses borrowings from banks, securities dealers, Federal Home Loan Banks ("FHLB") and others as sources of funding. Short-term borrowings averaged $2.2 billion in the recent quarter (including $476 million of borrowings assumed as a result of the ONBANCorp acquisition), compared with $749 million in the second 1997 quarter and $1.4 billion in the first quarter of 1998. Long-term borrowings averaged $695 million and $355 million in the second quarter of 1998 and 1997, respectively, and $428 million in the first quarter of 1998. During the second 1998 quarter, average long-term borrowings included $268 million of borrowings obtained in the ONBANCorp transaction. Long-term borrowings include $250 million of trust preferred securities issued by two special-purpose subsidiaries of M&T during the first and second quarters of 1997 and similar securities with a carrying value of $69 million that were issued in the first quarter of 1997 by a special-purpose subsidiary of ONBANCorp, as well as $175 million of subordinated capital notes issued in prior years by M&T Bank. Changes in the composition of the Company's earning assets and interest-bearing liabilities, as well as changes in interest rates and spreads, can impact net interest income. Net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities, was 3.44% in the second quarter of 1998, compared with 3.73% in the year-earlier quarter. The yield on earning assets decreased 28 basis points (hundredths of one percent) to 8.10% in the second quarter of 1998 from 8.38% in the second quarter of 1997. The decrease in the recent quarter's yield was primarily due to lower yielding residential real estate loans, consumer loans and investment securities acquired in the ONBANCorp transaction. The adverse impact of the ONBANCorp-related earning assets on M&T's yield on earning assets for the second quarter of 1998 was approximately 24 basis points. The rate paid on interest-bearing liabilities in the second quarter of 1998 was 4.66%, -15-
compared with 4.65% in the corresponding 1997 quarter. The net interest spread was 3.68% in the first quarter of 1998 when the yield on earning assets was 8.43% and the rate paid on interest-bearing liabilities was 4.75%. The contribution to net interest margin, or taxable equivalent net interest income expressed as an annualized percentage of average earning assets, of interest-free funds was .55% in the second quarter of 1998, down from .68% in the corresponding 1997 quarter and .67% in the first quarter of 1998. Average interest-free funds, which include noninterest-bearing demand deposits and stockholders' equity, totaled $2.1 billion in the second quarter of 1998, up from $1.9 billion a year earlier and in the initial 1998 quarter. The decline in the contribution to net interest margin of interest-free funds was due, in part, to the goodwill and core deposit intangible assets recorded in conjunction with the ONBANCorp acquisition, which averaged $557 million during the recent quarter, and the Company's ownership of bank-owned life insurance which averaged $322 million. Although there was no similar investment during the second quarter of 1997, bank-owned life insurance averaged $204 million during the first quarter of 1998. Increases in the cash surrender value of bank-owned life insurance are not included in interest income, but rather are recorded in "other revenue from operations." These two noninterest-earning assets mitigated much of the benefit derived from increases in noninterest-bearing deposits and stockholders' equity resulting from the ONBANCorp transaction. Due to the changes described above, the Company's net interest margin was 3.99% in 1998's second quarter, compared with 4.41% in the comparable quarter of 1997 and 4.35% in the initial 1998 quarter. During the first six months of 1998 and 1997, the net interest margin was 4.14% and 4.45%, respectively. The Company utilizes interest rate swap agreements as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the loan and deposit portfolios. Revenue and expense arising from these agreements are reflected in either the yields earned on loans or, as appropriate, rates paid on interest-bearing deposits and borrowings. The notional amount of interest rate swap agreements used as part of the Company's management of interest rate risk in effect at June 30, 1998 and 1997 was $2.5 billion and $2.9 billion, respectively. In general, under the terms of these swaps, the Company receives payments based on the outstanding notional amount of the swaps at fixed rates of interest and makes payments at variable rates. However, under the terms of a $33 million swap, the Company pays a fixed rate of interest and receives a variable rate. At June 30, 1998, the weighted average rates to be received and paid under interest rate swap agreements were 6.32% and 5.67%, respectively. As of June 30, 1998, the Company had also entered into forward-starting swaps with an aggregate notional amount of $205 million in which the Company will pay a fixed rate of interest and receive a variable rate, and $20 million in which the Company will pay a variable rate of interest and receive a fixed rate. Such forward-starting swaps had no effect on the Company's net interest income through June 30, 1998. The average notional amounts of interest rate swaps and the related effect on net interest income and margin are presented in the accompanying table. -16-
INTEREST RATE SWAPS Dollars in thousands <TABLE> <CAPTION> Three months ended June 30 ----------------------------------------------- 1998 1997 ---------------------- -------------------- Amount Rate * Amount Rate * ---------- ------ ---------- ------ <S> <C> <C> <C> <C> Increase (decrease) in: Interest income $ 408 .01 % $ (129) -- % Interest expense (3,129) (.08) (3,417) (.13) ---------- ---------- Net interest income/margin $ 3,537 .08 % $ 3,288 .10 % ---------- ------ ---------- ------ ---------- ------ ---------- ------ Average notional amount ** $2,457,962 $2,620,422 ---------- ---------- ---------- ---------- </TABLE> <TABLE> <CAPTION> Six months ended June 30 ----------------------------------------------- 1998 1997 ---------------------- -------------------- Amount Rate * Amount Rate * ---------- ------ --------- ------ <S> <C> <C> <C> <C> Increase (decrease) in: Interest income $ 690 - % $ 48 -- % Interest expense (6,334) (.09) (6,625) (.12) ---------- --------- Net interest income/margin $ 7,024 .09 % $ 6,673 .11 % ---------- ------ --------- ------ ---------- ------ --------- ------ Average notional amount ** $2,526,659 $2,454,677 ---------- --------- ---------- --------- </TABLE> * Computed as an annualized percentage of average earning assets or interest-bearing liabilities. ** Excludes forward-starting interest rate swaps. The Company estimates that as of June 30, 1998 it would have received approximately $18 million if all interest rate swap agreements entered into for interest rate risk management purposes had been terminated. This estimated fair value of the interest rate swap portfolio results from the effects of changing interest rates and should be considered in the context of the entire balance sheet and the Company's overall interest rate risk profile. Changes in the estimated fair value of interest rate swaps entered into for interest rate risk management purposes are not recorded in the consolidated financial statements. As a financial intermediary, the Company is exposed to various risks, including liquidity and market risk. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. Accordingly, a critical element in managing a financial institution is ensuring that sufficient cash flow and liquid assets are available to satisfy demands for loans and deposit withdrawals, to fund operating expenses, and to be used for other corporate purposes. Deposits and borrowings, maturities of money-market assets, repayments of loans and investment securities, and cash generated from operations, such as net interest income and fees collected for services, provide the Company with other sources of liquidity. Through membership in the FHLB, as well as other available borrowing facilities, M&T's banking subsidiaries have access to additional funding sources. M&T utilizes dividend payments from its banking subsidiaries, which are subject to various regulatory limitations, to pay dividends, repurchase treasury stock, and fund debt service and other operating expenses. The proceeds from $250 million of junior subordinated debt issued to two special-purpose subsidiaries provided additional funds to M&T in 1997. M&T also maintains a $25 million line of credit with an unaffiliated commercial bank, all of which was available for borrowing at June 30, 1998. Management does not anticipate engaging in any activities, either currently or in the long-term, which would cause a significant strain on liquidity at either M&T or its subsidiary banks. Furthermore, management closely monitors the Company's liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet anticipated funding needs. -17-
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Company's financial instruments. The core banking activities of lending and deposit-taking expose the Company to interest rate risk. As a result of interest rate risk, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability of net interest income under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and off-balance sheet financial instruments. Management's philosophy toward positioning the Company for interest rate movements is to attempt to limit such variability. The balances of both on- and off-balance sheet financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of mortgage-related assets and expected maturities of investment securities, loans and deposits. Management supplements the modeling technique described above with analyses of the Company's sensitivity to changes in the market values of financial instruments resulting from changing interest rates. The Asset-Liability Committee, which includes members of senior management, monitors the Company's interest rate sensitivity with the aid of a computer model which considers the impact of ongoing lending and deposit gathering activities, as well as statistically derived interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions, and intends to do so in the future, to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and entering into or modifying existing interest rate swap agreements. The accompanying table displays the estimated impact on net interest income from financial instruments held for non-trading purposes resulting from changes in interest rates during the first modeling year. SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES <TABLE> <CAPTION> (dollars in thousands) Calculated increase (decrease) in projected net Changes in Interest Rates interest income - ------------------------- ------------------- <S> <C> +200 basis points $ 1,207 +100 basis points 2,435 - -100 basis points (2,207) - -200 basis points (3,571) </TABLE> The calculation of the impact of changes in interest rates on net interest income is based upon many assumptions, including prepayments of mortgage-related assets, cash flows from derivative and other financial instruments held for non-trading purposes, loan and deposit volumes and pricing, and deposit maturities. The Company also assumes gradual changes in interest rates of 100 and 200 basis points up and down during a twelve-month period. These assumptions are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions, as well as any actions, such as those previously described, which management may take to counter these changes. The Company engages in trading activities to meet the financial needs of customers and to profit from perceived market opportunities. Trading activities are conducted utilizing financial instruments that include forward and futures contracts related to foreign currency exchange and mortgage-backed securities, U.S. Treasury and other government securities, and interest rate contracts such as swaps. As a result, the Company is exposed to foreign currency and interest rate risk resulting from trading activities. However, the Company generally mitigates exposure arising from trading -18-
activities by entering into offsetting positions. Accordingly, the Company's exposure to interest rate, foreign exchange or other price risk related to trading activities as of June 30, 1998 was not considered material. Provision for Possible Credit Losses The purpose of the provision is to replenish or build the Company's allowance for possible credit losses to a level necessary to maintain an adequate reserve position. Management regularly assesses the adequacy of the allowance by performing an ongoing evaluation of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the current financial condition of specific borrowers, the economic environment in which borrowers operate, the level of delinquent loans and the value of any collateral. Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. Based upon the results of such review, management believes that the allowance for possible credit losses at June 30, 1998 was adequate to absorb credit losses from existing loans and leases. The provision for possible credit losses in the second quarter of 1998 was $13.2 million, up from $11.0 million in the second quarter of 1997 and $12.0 million in 1998's first quarter. Net loan charge-offs totaled $9.0 million in the second quarter of 1998, compared with $12.6 million in the year-earlier quarter and $7.9 million in 1998's initial quarter. Net charge-offs as an annualized percentage of average loans and leases were .24% in the recent quarter, compared with .47% in the corresponding 1997 quarter and .28% in the first quarter of 1998. Net charge-offs of consumer loans in the recent quarter were $9.3 million, compared with $9.7 million in the second quarter of 1997 and $7.8 million in 1998's initial quarter. Net consumer loan charge-offs as an annualized percentage of average consumer loans and leases were 1.21% in the recent quarter, compared with 1.68% in the second quarter of 1997 and 1.45% in 1998's first quarter. Net charge-offs of credit card balances included in net consumer loan charge-offs were $4.6 million and $5.1 million in the second quarter of 1998 and 1997, respectively, and $4.5 million in the first quarter of 1998. For the six months ended June 30, 1998 and 1997, the provision for possible credit losses was $25.2 million and $22.0 million, respectively. Through June 30, net charge-offs were $17.0 million in 1998 and $20.5 million in 1997, representing .26% and .38%, respectively, of average loans and leases. Consumer loan net charge-offs totaled $17.1 million and $18.5 million during the six months ended June 30, 1998 and 1997, respectively. Net credit card charge-offs were $9.2 million during the first half of 1998 and $9.9 million during the corresponding 1997 period. Including $38.4 million of loans obtained in the acquisition of ONBANCorp, nonperforming loans were $127.2 million or .83% of total loans and leases outstanding at June 30, 1998, compared with $97.1 million or .88% at June 30, 1997 and $70.0 million or .58% at March 31, 1998. Nonperforming commercial real estate loans totaled $24.8 million at June 30, 1998, $29.2 million at June 30, 1997 and $10.7 million at March 31, 1998. Nonperforming commercial real estate loans include loans secured by properties located in the New York City metropolitan area of $3.6 million at June 30, 1998, $11.9 million at June 30, 1997 and $206 thousand at March 31, 1998. Nonperforming consumer loans and leases totaled $30.0 million at June 30, 1998, compared with $16.4 million at June 30, 1997 and $19.5 million at March 31, 1998. As a percentage of consumer loan balances outstanding, nonperforming consumer loans and leases were .99% at June 30, 1998 compared with .71% at June 30, 1997 and .90% at March 31, 1998. Assets acquired in settlement of defaulted loans were $12.2 million at June 30, 1998, $9.7 million at June 30, 1997 and $7.8 million at March 31, 1998. A comparative summary of nonperforming assets and certain credit quality ratios is presented in the accompanying table. -19-
NONPERFORMING ASSETS Dollars in thousands <TABLE> <CAPTION> 1998 Quarters 1997 Quarters Second First Fourth Third Second <S> <C> <C> <C> <C> <C> Nonaccrual loans $78,527 40,737 38,588 50,369 62,525 Loans past due 90 days or more 41,686 24,449 30,402 29,979 31,810 Renegotiated loans 7,025 4,819 11,660 5,413 2,741 ------- ------ ------ ------ ------ Total nonperforming loans 127,238 70,005 80,650 85,761 97,076 Real estate and other assets 12,211 7,828 8,413 8,239 9,698 ------- ------ ------ ------ ------ Total nonperforming assets $139,449 77,833 89,063 94,000 106,774 ======= ====== ====== ====== ======= Government guaranteed nonperforming loans* $ 16,062 14,787 17,712 17,853 20,656 ======= ====== ====== ====== ====== Nonperforming loans to total loans and leases, net of unearned discount .83% .58% .70% .76% .88% Nonperforming assets to total net loans and other real estate owned .91% .65% .77% .83% .97% === === === === === </TABLE> * Included in total nonperforming loans. The allowance for possible credit losses was $310.8 million, or 2.04% of total loans and leases at June 30, 1998, compared with $271.9 million or 2.48% a year earlier, $274.7 million or 2.39% at December 31, 1997 and $278.7 million or 2.32% at March 31, 1998. The ratio of the allowance for possible credit losses to nonperforming loans was 244% at the most recent quarter-end, compared with 280% a year earlier, 341% at December 31, 1997 and 398% at March 31, 1998. Other Income Reflecting strong growth in mortgage banking revenues, fees for trust and investment services, and approximately $7.6 million of revenues associated with operations obtained in the ONBANCorp acquisition, other income totaled $66.4 million in the second quarter of 1998, up 51% from $44.0 million in the year-earlier quarter. Other income was $55.1 million in the first quarter of 1998 excluding $15.3 million of tax-exempt other income the Company recognized in connection with the contribution of appreciated investment securities with a fair value of $24.6 million to an affiliated, tax-exempt private charitable foundation. As a result of the transfer, the Company also incurred $24.6 million of charitable contributions expense and realized income tax benefits of $10.0 million. Also excluding the effect of the transfer, other income was $121.5 million in the first half of 1998, up 35% from $89.9 million in the comparable 1997 period. Including $2.1 million of revenues associated with acquired ONBANCorp operations, mortgage banking revenues totaled $18.5 million in the recent quarter, compared with $12.2 million in the year-earlier quarter and $13.9 million in the first quarter of 1998. Residential mortgage loan servicing fees were $7.8 million in the second quarter of 1998, up from $6.2 million in the second quarter of 1997 and $7.2 million in the initial 1998 quarter. Gains from sales of residential mortgage loans and loan servicing rights were $9.9 million in the recently completed quarter, compared with $5.4 million in the year-earlier quarter and $5.9 million in 1998's first quarter. During the recent quarter, the Company completed bulk sales of servicing rights related to approximately $400 million of loans sold to investors in prior periods resulting in a gain of $1.2 million. Due, in part, to generally favorable interest rates for borrowers, during the second quarter of 1998 residential mortgage loans originated for sale to other investors totaled $953 million, up from $505 million in 1997's second quarter and $775 million in the initial 1998 quarter. Residential mortgage loans serviced for others -20-
totaled $8.1 billion and $6.5 billion at June 30, 1998 and 1997, respectively. Capitalized servicing assets were $67 million and $49 million at June 30, 1998 and 1997, respectively. Loans serviced for others and the related capitalized servicing assets obtained in the ONBANCorp acquisition were $988 million and $16 million, respectively, at April 1, 1998. Service charges on deposit accounts increased to $14.2 million in the second quarter of 1998, up from $10.7 million in the corresponding quarter of the previous year and $11.2 million in the first quarter of 1998. Fees for services provided to customers in the areas formerly served by ONBANCorp were $2.6 million in the recent quarter. Largely due to higher revenues for management, custody and securities clearing services, trust income was $9.9 million in the second quarter of 1998, compared with $7.2 million in last year's second quarter. Trust income was $9.5 million during the first three months of 1998. Merchant discount and credit card fees were $4.3 million in the recent quarter, compared with $4.2 million in both the year-earlier period and in the initial 1998 quarter. Trading account and foreign exchange activity resulted in gains of $506 thousand in the second quarter of 1998, compared with gains of $596 thousand and $1.8 million in the second quarter of 1997 and the first quarter of 1998, respectively. Other revenue from operations totaled $18.7 million in the recent quarter, compared with $9.2 million in the corresponding quarter of 1997 and $14.5 million in the first quarter of 1998 (excluding the $15.3 million of tax-exempt income related to the transfer of securities to the Company's affiliated foundation). Included in other revenue from operations in 1998's second quarter was $1.5 million relating to ONBANCorp-related activities. The remaining increase from the year-earlier period was due largely to $4.5 million of tax-exempt income earned from the Company's ownership of bank-owned life insurance, higher fees earned from the sales of mutual funds and annuities of $1.2 million, $1.1 million in fees for providing automated teller machine services and higher miscellaneous loan fees of $1.0 million. For the six-month period ended June 30, 1998, mortgage banking revenues totaled $32.3 million, up 33% from $24.2 million in the corresponding 1997 period. Compared with the first half of 1997, mortgage servicing fees and gains from sales of loans and loan servicing rights in 1998 were up by $2.9 million and $4.9 million, respectively. Compared with the same period in 1997, service charges on deposit accounts increased 20% to $25.4 million during the first six months of 1998, while trust income increased 37% to $19.4 million. As a result of the factors discussed in the next paragraph, merchant discount and credit card fees decreased 9% to $8.6 million from $9.5 million in the similar period of 1997. Trading account and foreign exchange activity resulted in gains of $2.3 million for the initial half of 1998, compared with gains of $1.9 million during the first six months of 1997. Excluding the effect of the transfer of securities to the affiliated charitable foundation, other revenues from operations increased 73% to $33.2 million in the first six months of 1998 from $19.2 million in the comparable 1997 period. The increase resulted largely from $7.4 million of tax-exempt income earned from bank-owned life insurance, $2.3 million of increased loan fees, $1.6 million in automated teller machine service fees and a $1.5 million increase in fees earned from the sales of mutual funds and annuities. These latter fees totaled $8.9 million during the first half of 1998. Due to poorer than expected results, during 1997 and 1998 the Company terminated all of its co-branded credit card programs. In addition, during the recently completed quarter, M&T agreed to sell its retail credit card business. The sale occurred on July 31, 1998 and resulted in a third quarter pre-tax gain of approximately $3 million. Following the sale, M&T continues to offer credit cards to customers in the name of M&T Bank, but the cardholder accounts are owned and serviced by the purchaser of that business. Credit card balances outstanding were $205.5 million, or 1.35% of total loans and leases, at June 30, 1998. Total credit card fees included in merchant discount and credit card fees in the first half of 1998 were $6.9 million, compared with $7.9 million in the corresponding 1997 period. Including internal allocations of the provision for possible credit losses, interest expense and other operating expenses, net income from credit card operations was less than 1.5% of the Company's net income during the first six months of 1998. -21-
Other Expense Excluding the impact of the $24.6 million of contributions expense already discussed, amortization of goodwill and core deposit intangible, and nonrecurring merger-related expenses, other expense totaled $127.4 million in the second quarter of 1998, up 27% from $100.2 million in the second quarter of 1997 and 20% from $105.8 million in the first quarter of 1998. On the same basis, through the first half of 1998, other expense totaled $233.2 million, an increase of 15% from $202.7 million in the comparable 1997 period. Nonrecurring merger-related expenses were $16.7 million and $1.6 million during the second and first quarters of 1998, respectively. Increases in operating expense levels compared with prior periods is predominately the effect of combining ONBANCorp with the Company. Since nearly all operating systems and support operations of ONBANCorp were converted to or combined with those of the Company during the recent quarter, the Company's operating expenses cannot be precisely divided between or attributed directly to ONBANCorp or the Company as it existed prior to the merger. Salaries and employee benefits expense was $69.9 million in the recent quarter, 31% higher than the $53.6 million in the corresponding 1997 quarter, and 20% higher than the $58.3 million in the first quarter of 1998. For the first six months of 1998, salaries and employee benefits expense increased 18% to $128.3 million from $109.1 million in the corresponding 1997 period. Salaries and employee benefits relating to the operations acquired from ONBANCorp were the predominant factor for the increased expense level. Other factors contributing to the higher expenses were merit salary increases and higher costs associated with incentive-based compensation arrangements, stock appreciation rights and employee benefits. Excluding the previously mentioned $24.6 million of contributions expense recognized in the first quarter of 1998, one-time merger-related expenses and amortization of goodwill and core deposit intangible, nonpersonnel expense totaled $58.8 million in the second quarter of 1998, up from $46.7 million in the second quarter of 1997 and $47.5 million in the first quarter of 1998. On the same basis, such expenses were $106.3 million during the first six months of 1998, an increase of 14% from $93.6 million during the corresponding 1997 period. The increases were the result of expenses related to the acquired operations of ONBANCorp. Partially offsetting these increases were decreases in co-branded credit card rebate and other operating expenses based on card usage of $1.5 million and $1.7 million compared with the second quarter of 1997 and the first quarter of 1998, respectively. Such expenses for the first half of 1998 were $2.6 million, compared with $6.1 million in the corresponding 1997 period. Capital Stockholders' equity at June 30, 1998 was $1.7 billion or 8.24% of total assets, compared with $951 million or 7.08% of total assets a year earlier and $1.0 billion or 7.36% at December 31, 1997. On a per share basis, stockholders' equity was $207.18 at June 30, 1998, up from $143.64 and $155.86 at June 30 and December 31, 1997, respectively. Excluding goodwill and core deposit intangible, net of applicable tax effect, tangible equity per share was $139.37 at June 30, 1998, compared with $140.43 at June 30, 1997 and $153.24 at December 31, 1997. To complete the acquisition of ONBANCorp on April 1, 1998, M&T issued 1,429,998 shares of common stock to former holders of ONBANCorp common stock and assumed employee stock options for 61,772 shares of M&T common stock resulting in additions to stockholders' equity of $587.8 million and $19.4 million, respectively. Stockholders' equity at June 30, 1998 reflected a gain of $6.6 million, or $.83 per share, for the net after-tax impact of unrealized gains on investment securities classified as available for sale, compared with unrealized gains of $3.4 million or $.52 per share at June 30, 1997 and $12.0 million or $1.82 per share at December 31, 1997. Such unrealized gains -22-
represent the difference, net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available for sale. The market valuation of investment securities should be considered in the context of the entire balance sheet of the Company. With the exception of investment securities classified as available for sale, trading account assets and liabilities, and residential mortgage loans held for sale, the carrying values of financial instruments in the balance sheet are generally not adjusted for appreciation or depreciation in market value resulting from changes in interest rates. Federal regulators generally require banking institutions to maintain "core capital" and "total capital" ratios of at least 4% and 8%, respectively, of risk-adjusted total assets. In addition to the risk-based measures, Federal bank regulators have also implemented a minimum "leverage" ratio guideline of 3% of the quarterly average of total assets. Under regulatory guidelines, unrealized gains or losses on investment securities classified as available for sale are not recognized in determining regulatory capital. Core capital includes the $250 million of trust preferred securities issued by two special-purpose subsidiaries of M&T in the first and second quarters of 1997 and similar securities having a carrying value of $69 million issued in February 1997 by a special-purpose subsidiary of ONBANCorp. As of June 30, 1998, total capital also included $160 million of subordinated notes issued by M&T Bank in prior years. Unrealized gains or losses on investment securities are not recognized in determining regulatory capital. The capital ratios of the Company and its banking subsidiaries, M&T Bank and M&T Bank, N.A., as of June 30, 1998 are presented in the accompanying table. REGULATORY CAPITAL RATIOS June 30, 1998 <TABLE> <CAPTION> M&T Bank Corp. M&T M&T (Consolidated) Bank Bank, N.A. ------------- ------ ---------- <S> <C> <C> <C> Core capital 9.08% 8.33% 17.73% Total capital 11.37% 10.65% 18.98% Leverage 7.40% 6.86% 8.47% </TABLE> The Company has historically maintained capital ratios in excess of minimum regulatory guidelines largely through a high rate of internal capital generation. The rate of internal capital generation, or net income less dividends paid expressed as an annualized percentage of average total stockholders' equity, was 8.84% during the second quarter of 1998, compared with 16.25% in the second quarter of 1997 and 16.80% in the initial 1998 quarter. During the second quarter of 1998, M&T acquired 88,438 shares of its common stock pursuant to, and thereby completing, the repurchase program announced in February 1997. A total of 303,317 shares were repurchased at an average cost of $398.27 per share. In May 1998, M&T announced another plan to repurchase up to 155,133 additional shares for reissuance upon the possible future exercise of outstanding stock options. As of June 30, 1998, M&T had repurchased 25,155 common shares pursuant to the latest plan at an average cost of $515.56 per share. M&T repurchased 150,461 common shares during the first six months of 1998 at a total cost of $74.7 million. Year 2000 Initiatives The "Year 2000" problem relates to the ability of computer and computer-dependent systems to distinguish date data between the twentieth and twenty-first centuries. The Company is currently working to resolve the potential impact of the Year 2000 problem. The risk for the Company is that all of the corrections and testing will not be made in time for its own computer, data processing or other computer-dependent systems, and for those third parties doing business with or providing services to the Company. Addressing the Year 2000 problem requires that the Company identify, remediate and test its centalized and distributed computer, data processing -23-
and other computer-dependent systems that have date sensitive functions. Management anticipates that the Company's "mission critical" computer systems, i.e., those which if uncorrected would have a material adverse impact on the Company, will be Year 2000 compliant by the end of 1998 and has a planned program to test for such compliance. As a result of completed testing, management presently believes that approximately one-third of its centralized computer systems are Year 2000 compliant. The Company is also engaged in an ongoing process of assessing, correcting and testing its distributed computer and other computer-dependent systems which may be affected by the Year 2000 problem. The Company currently expects to make mission critical distributed computer and other computer-dependent systems Year 2000 compliant or to replace such non-compliant systems before the new millenium. The Company could be adversely affected if its vendors and customers that supply or rely on data processing systems are not Year 2000 compliant prior to the end of 1999. The Company, therefore, is taking a proactive role to work with its data processing vendors and to provide information to its commercial customers regarding Year 2000 issues. Specifically, lending officers have been trained to address Year 2000 issues with customers, including providing help with assessing customer needs for Year 2000 compliance. Notwithstanding the Company's efforts, a risk remains due to the uncertainty that such third parties will not be Year 2000 compliant before the new millennium. For example, the credit quality of commercial and other loans may be adversely affected by the failure of customers' operating systems resulting from Year 2000 issues. Lack of corrective measures by government agencies or service providers which the Company either receives data from or provides data to could also have a negative impact on the Company's operations. Additionally, there is risk to the extent that other third parties that engage in business with the Company are relying on systems that are not Year 2000 compliant. As a result, it is possible that if all aspects of Year 2000 issues are not adequately resolved by each of the entities referred to above, the Company's future business operations, financial position and results of operations could be adversely impacted. The Company's management is monitoring the Company's progress regarding Year 2000 issues. Management will assess the Company's current Year 2000 remediation plans and develop appropriate contingency plans should any critical issues not be resolved prior to January 1, 2000. To date, the Company has spent approximately $2 million in addressing its potential Year 2000 problems. The Company is continuing to devote appropriate financial and human resources to resolve its Year 2000 issues in a timely manner. The Company currently estimates that it will expend an additional $3 to $5 million in order to address Year 2000 issues. A majority of the Company's past and future Year 2000 expenses relate to internal costs and constitute resources that would otherwise have been reallocated within the Company. Costs associated with Year 2000 issues are recognized as expenses are incurred. The preceding discussion of Year 2000 initiatives contains forward-looking statements as to Year 2000 issues. See also the discussion of Future Factors under the caption "Forward-Looking Statements," which are incorporated by reference into the preceding discussion. Recently issued accounting standards not yet adopted In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as -24-
(a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security, or a foreign currency denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of SFAS No. 133 should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of the statement. Early application of all of the provisions of SFAS No. 133 is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of the statement. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. The Company is currently in the process of analyzing the provisions of SFAS No. 133. The method of adoption expected to be utilized by the Company and the impact that adopting the provisions of SFAS No. 133 is expected to have on the Company's financial statements has yet to be determined. Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain forward-looking statements that are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future Factors include changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity; credit losses; sources of liquidity; regulatory supervision and oversight, including required capital levels; increasing price and product/service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products/services; containing costs and expenses; governmental and public policy changes, including environmental regulations; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; technological, implementation and financial risks associated with Year 2000 issues; the outcome of pending and future litigation and governmental proceedings; continued availability of financing; and financial resources in the amounts, at the times and on the terms required to support the Company's future businesses. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic conditions, including interest rate and currency exchange rate fluctuations, and other Future Factors. -25-
<TABLE> <CAPTION> - -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- QUARTERLY TRENDS 1998 Quarters 1997 Quarters - -------------------------------------------------------------------------------------------------------------------------- Taxable-equivalent basis Second First Fourth Third Second First - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Earnings and dividends Amounts in thousands, except per share Interest income $363,503 277,803 277,166 271,305 265,301 257,029 Interest expense 184,644 134,585 133,270 129,768 125,734 119,321 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 178,859 143,218 143,896 141,537 139,567 137,708 Less: provision for possible credit losses 13,200 12,000 12,000 12,000 11,000 11,000 Other income 66,410 70,396 52,979 50,182 43,983 45,923 Less: other expense 155,004 133,873 110,716 104,706 102,070 104,284 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 77,065 67,741 74,159 75,013 70,480 68,347 Applicable income taxes 30,587 17,245 26,246 27,518 26,329 25,825 Taxable-equivalent adjustment 1,779 1,541 1,613 1,604 1,360 1,263 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 44,699 48,955 46,300 45,891 42,791 41,259 - -------------------------------------------------------------------------------------------------------------------------- Per common share data Net income Basic $ 5.55 7.34 7.01 6.96 6.46 6.17 Diluted 5.32 7.01 6.66 6.62 6.17 5.81 Cash dividends $ 1.00 .80 .80 .80 .80 .80 Average common shares outstanding Basic 8,051 6,666 6,599 6,592 6,627 6,685 Diluted 8,409 6,981 6,955 6,927 6,928 7,100 - -------------------------------------------------------------------------------------------------------------------------- Performance ratios, annualized Return on Average assets .92% 1.41% 1.33% 1.36% 1.31% 1.30% Average common stockholders' equity 10.77% 18.86% 18.25% 18.92% 18.55% 18.24% Net interest margin on average earning assets 3.99% 4.35% 4.34% 4.35% 4.41% 4.50% Nonperforming assets to total assets, at end of quarter .69% .53% .64% .69% .79% .81% - --------------------------------------------------------------------------------------------------------------------------- Cash (tangible) operating results (1) Net income (in thousands) $ 65,445 51,448 47,837 47,428 44,350 42,773 Diluted net income per common share 7.78 7.37 6.88 6.85 6.40 6.02 Annualized return on Average tangible assets 1.38% 1.49% 1.38% 1.40% 1.36% 1.35% Average tangible common stockholders' equity 23.50% 20.13% 19.20% 19.98% 19.70% 19.39% - --------------------------------------------------------------------------------------------------------------------------- Balance sheet data Dollars in millions, except per share Average balances Total assets $ 19,547 14,055 13,785 13,424 13,148 12,866 Earning assets 17,992 13,357 13,148 12,905 12,700 12,420 Investment securities 2,858 1,614 1,721 1,747 1,715 1,611 Loans and leases, net of unearned discount 14,978 11,602 11,327 11,002 10,842 10,715 Deposits 14,726 10,988 11,262 11,170 10,914 10,454 Stockholders' equity 1,664 1,053 1,007 962 925 917 - -------------------------------------------------------------------------------------------------------------------------- At end of quarter Total assets $ 20,138 14,570 14,003 13,675 13,441 13,122 Earning assets 18,419 13,778 13,333 13,100 12,903 12,621 Investment securities 2,707 1,530 1,725 1,752 1,708 1,693 Loans and leases, net of unearned discount 15,245 12,033 11,497 11,271 10,980 10,803 Deposits 14,813 11,085 11,163 11,205 11,186 10,533 Stockholders' equity 1,659 1,069 1,030 982 951 912 Equity per common share 207.18 160.06 155.86 149.31 143.64 137.33 Tangible equity per common share 139.37 157.75 153.24 146.40 140.43 133.84 - -------------------------------------------------------------------------------------------------------------------------- Market price per common share High $ 554 504 468 415 343 1/2 336 Low 480 429 401 335 303 281 Closing 554 499 7/8 465 415 337 320 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> (1)Excludes amortization and balances related to goodwill and core deposit intangible and nonrecurring merger-related expenses, net of applicable income tax effects. -26-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <TABLE> <CAPTION> AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES 1998 Second quarter 1998 First quarter 1997 Fourth quarter Average Average Average Average Average Average Average balance in millions; interest in thousands balance Interest rate balance Interest rate balance Interest rate - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. $ 2,954 $ 62,026 8.42% 2,393 49,755 8.43% 2,353 49,625 8.37% Real estate 8,951 184,120 8.23 7,012 148,744 8.49 6,752 145,960 8.65 Consumer 3,073 69,672 9.09 2,197 51,194 9.45 2,222 52,259 9.33 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans and leases, net 14,978 315,818 8.46 11,602 249,693 8.73 11,327 247,844 8.68 - ------------------------------------------------------------------------------------------------------------------------------------ Money-market assets Interest-bearing deposits at banks 37 364 3.93 1 6 2.91 1 6 2.80 Federal funds sold and agreements to resell securities 88 1,247 5.70 127 1,722 5.51 56 772 5.50 Trading account 31 494 6.31 13 169 5.13 43 825 7.55 - ------------------------------------------------------------------------------------------------------------------------------------ Total money-market assets 156 2,105 5.40 141 1,897 5.45 100 1,603 6.36 - ------------------------------------------------------------------------------------------------------------------------------------ Investment securities** U.S. Treasury and federal agencies 1,816 27,620 6.10 1,013 15,861 6.35 1,098 17,328 6.26 Obligations of states and political subdivisions 90 1,396 6.25 37 628 6.83 40 672 6.60 Other 952 16,564 6.98 564 9,724 7.00 583 9,719 6.62 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 2,858 45,580 6.40 1,614 26,213 6.59 1,721 27,719 6.39 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 17,992 363,503 8.10 13,357 277,803 8.43 13,148 277,166 8.36 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for possible credit losses (310) (279) (273) Cash and due from banks 417 321 322 Other assets 1,448 656 588 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 19,547 14,055 13,785 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 304 1,189 1.57 270 955 1.44 257 897 1.39 Savings deposits 4,718 30,636 2.60 3,446 22,607 2.66 3,483 23,418 2.67 Time deposits 7,686 105,500 5.51 5,753 80,634 5.68 5,978 85,711 5.69 Deposits at foreign office 267 3,562 5.34 247 3,239 5.31 227 3,079 5.37 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 12,975 140,887 4.36 9,716 107,435 4.48 9,945 113,105 4.51 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings 2,207 30,969 5.63 1,353 18,597 5.57 829 11,610 5.56 Long-term borrowings 695 12,788 7.38 428 8,553 8.11 428 8,555 7.93 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 15,877 184,644 4.66 11,497 134,585 4.75 11,202 133,270 4.72 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 1,751 1,272 1,316 Other liabilities 255 233 260 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 17,883 13,002 12,778 - ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity 1,664 1,053 1,007 Total liabilities and stockholders' equity $ 19,547 14,055 13,785 Net interest spread 3.44 3.68 3.64 Contribution of interest-free funds 0.55 .67 .70 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income/margin on earning assets $ 178,859 3.99% 143,218 4.35% 143,896 4.34% - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> *Includes nonaccrual loans. **Includes available for sale securities at amortized cost. (continued) -27-
M&T BANK CORPORATION AND SUBSIDIARIES AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued) <TABLE> <CAPTION> 1997 Third quarter 1997 Second quarter Average Average Average Average Average balance in millions; interest in thousands balance Interest rate balance Interest rate - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Assets Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc. $ 2,226 $ 47,527 8.47% 2,260 47,680 8.46% Real estate 6,468 139,184 8.61 6,265 134,710 8.60 Consumer 2,308 54,025 9.28 2,317 53,347 9.23 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans and leases, net 11,002 240,736 8.68 10,842 235,737 8.72 - ------------------------------------------------------------------------------------------------------------------------------------ Money-market assets Interest-bearing deposits at banks 63 944 5.91 54 816 6.01 Federal funds sold and agreements to resell securities 69 952 5.47 64 860 5.40 Trading account 24 414 6.96 25 443 7.10 - ------------------------------------------------------------------------------------------------------------------------------------ Total money-market assets 156 2,310 5.88 143 2,119 5.93 - ------------------------------------------------------------------------------------------------------------------------------------ Investment securities** U.S. Treasury and federal agencies 1,132 17,959 6.29 1,192 19,002 6.39 Obligations of states and political subdivisions 45 755 6.61 44 728 6.59 Other 570 9,545 6.64 479 7,715 6.46 Total investment securities 1,747 28,259 6.42 1,715 27,445 6.42 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 12,905 271,305 8.34 12,700 265,301 8.38 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for possible credit losses (273) (272) Cash and due from banks 303 307 Other assets 489 413 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 13,424 13,148 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and stockholders' equity Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 234 803 1.36 259 835 1.30 Savings deposits 3,443 22,746 2.62 3,406 22,495 2.65 Time deposits 6,021 85,889 5.66 5,852 82,254 5.64 Deposits at foreign office 221 2,969 5.32 216 2,873 5.33 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 9,919 112,407 4.50 9,733 108,457 4.47 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings 641 8,801 5.45 749 10,230 5.48 Long-term borrowings 428 8,560 7.94 355 7,047 7.93 Total interest-bearing liabilities 10,988 129,768 4.69 10,837 125,734 4.65 Noninterest-bearing deposits 1,251 1,181 Other liabilities 223 205 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 12,462 12,223 - ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity 962 925 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 13,424 13,148 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest spread 3.65 3.73 Contribution of interest-free funds .70 .68 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income/margin on earning assets $ 141,537 4.35% 139,567 4.41% - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> *Includes nonaccrual loans. **Includes available for sale securities at amortized cost. -28-
Item 3. Quantitative and Qualitative Disclosures About Market Risk Incorporated by reference to the discussion contained under the caption "Taxable-equivalent Net Interest Income" in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." PART II. OTHER INFORMATION Item 1. Legal Proceedings. M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability, if any, arising out of litigation pending against M&T or its subsidiaries will be material to M&T's consolidated financial position, but at the present time is not in a position to determine whether such litigation will have a material adverse effect on M&T's consolidated results of operations in any future reporting period. Item 2. Changes in Securities and Use of Proceeds. (Not applicable.) Item 3. Defaults Upon Senior Securities. (Not applicable.) Item 4. Submission of Matters to a Vote of Security Holders. The 1998 Annual Meeting of Stockholders of M&T was held on May 19, 1998. At the 1998 Annual Meeting, stockholders elected twenty-one (21) directors, all of whom were then serving as directors of M&T, for terms of one (1) year and until their successors are elected and qualified. The following table reflects the tabulation of the votes with respect to each director who was elected at the 1998 Annual Meeting. <TABLE> <CAPTION> Number of Votes --------------------------------- Nominee For Withheld - ---------------- --------- -------- <S> <C> <C> William F. Allyn 7,120,854 51,129 Brent D. Baird 7,123,727 48,256 John H. Benisch 7,121,782 50,201 Robert J. Bennett 7,124,425 47,558 C. Angela Bontempo 7,114,112 57,871 Robert T. Brady 7,095,974 76,009 Patrick J. Callan 7,104,088 67,895 Richard E. Garman 7,124,466 47,517 James V. Glynn 7,120,644 51,339 Roy M. Goodman 7,092,296 79,687 Patrick W.E. Hodgson 7,123,487 48,496 Samuel T. Hubbard, Jr. 7,096,089 75,894 Russell A. King 7,116,322 55,661 Lambros J. Lambros 7,124,722 47,261 Wilfred J. Larson 7,120,508 51,475 Peter J. O'Donnell, Jr. 7,120,820 51,163 Jorge G. Pereira 7,124,702 47,281 John L. Vensel 7,120,863 51,120 Herbert L. Washington 7,114,898 57,085 John L. Wehle, Jr. 7,116,592 55,391 Robert G. Wilmers 7,124,623 47,360 </TABLE> At the Annual Meeting, stockholders also approved an amendment to the First Empire State Corporation Certificate of Incorporation (the "Certificate of Incorporation") changing the name of First Empire State Corporation to "M&T Bank Corporation." In addition, stockholders approved an amendment to the M&T Bank Corporation 1983 Stock Option Plan (the "Stock Option Plan") increasing from 2,000,000 to 2,500,000 the number of shares of M&T Bank Corporation common stock subject to the Stock Option Plan. The following table presents the tabulation -29-
of the votes with respect to the amendments to the Certificate of Incorporation and the Stock Option Plan. <TABLE> <CAPTION> Number of Votes ---------------------------------------------------------------- Broker For Against Abstain Non-Votes --- ------- ------- ---------- <S> <C> <C> <C> <C> Certificate of Incorporation 7,096,666 40,145 35,172 - Stock Option Plan 5,123,830 1,111,320 42,530 894,303 </TABLE> Item 5. Other Information. Subsequent Event. On July 31, 1998, M&T completed the sale of its retail credit card business that is discussed under Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Following the sale, M&T will continue to offer credit cards to consumers in the name of M&T Bank, but the cardholder accounts will be owned and serviced by the purchaser of that business. Stockholder Proposals. If M&T does not receive notice at its principal executive offices on or before December 10, 1998 of a stockholder proposal for consideration at the 1999 Annual Meeting of Stockholders, the proxies named by the M&T Board of Directors with respect to such meeting shall have discretionary voting authority with respect to such proposal. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as a part of this report: Exhibit No. 3.1 Restated Certificate of Incorporation of M&T Bank Corporation dated May 29, 1998 (File No. 1-9861). Filed herewith. 3.2 By-Laws of M&T Bank Corporation as last amended on May 19, 1998 (File No. 1-9861). Filed herewith. 10.2 M&T Bank Corporation 1983 Stock Option Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.3 M&T Bank Corporation Annual Executive Incentive Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.7 M&T Bank Corporation Supplemental Pension Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.8 M&T Bank Corporation Supplemental Retirement Savings Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.9 M&T Bank Corporation Deferred Bonus Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.10 M&T Bank Corporation Directors' Stock Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.11 Restated 1987 Stock Option and Appreciation Rights Plan of ONBANCorp, Inc. (File No. 1-9861). Filed herewith. 10.12 1992 ONBANCorp Directors' Stock Option Plan (File No. 1-9861). Filed herewith. 10.13 Amended Franklin First Financial Corp. 1988 Stock Incentive Plan (File No. 1-9861). Filed herewith. -30-
10.14 Employment Agreement, dated as of April 1, 1998, between M&T Bank Corporation, (formerly First Empire State Corporation) and Robert J. Bennett (File No. 1-9861). Filed herewith. 10.15 SERP Assumption Agreement, dated as of January 15, 1993, between Robert J. Bennett and ONBANCorp, Inc. (File No. 1-9861). Filed herewith. 27.1 Financial Data Schedule. Filed herewith. (b) Reports on Form 8-K. M&T filed a Current Report on Form 8-K dated April 1, 1998, disclosing under Item 2 that it had consummated the merger of ONBANCorp with and into Olympia Financial Corp., a wholly owned subsidiary of M&T, on April 1, 1998. Certain financial statements and other exhibits were filed with, or incorporated by reference into, such Current Report in Item 7 thereof. Such Current Report on Form 8-K was filed on April 10, 1998, and an amendment of Item 7 thereto on Form 8-K/A was filed on May 14, 1998 in order to disclose the pro forma financial information required to be filed by Item 7(b) of Form 8-K. M&T also filed a Current Report on Form 8-K dated May 29, 1998 reporting under Item 5 that at the 1998 Annual Meeting of Stockholders held on May 19, 1998, stockholders approved a proposal to amend the First Empire State Corporation Certificate of Incorporation to change the name of the company to "M&T Bank Corporation." Such Current Report also reported that on June 1, 1998, the common stock of the Company was listed and began trading on the New York State Stock Exchange under the name M&T Bank Corporation (NYSE: MTB). -31-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. M&T BANK CORPORATION Date: August 13, 1998 By: /s/ Michael P. Pinto --------------------- Michael P. Pinto Executive Vice President and Chief Financial Officer -32-
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. - ------- <S> <C> 3.1 Restated Certificate of Incorporation of M&T Bank Corporation dated May 29, 1998 (File No. 1-9861). Filed herewith. 3.2 By-Laws of M&T Bank Corporation as last amended on May 19, 1998 (File No. 1-9861). Filed herewith. 10.2 M&T Bank Corporation 1983 Stock Option Plan as amended and restated (File No. 1-9861). Filed herewith. 10.3 M&T Bank Corporation Annual Executive Incentive Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.7 M&T Bank Corporation Supplemental Pension Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.8 M&T Bank Corporation Supplemental Retirement Savings Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.9 M&T Bank Corporation Deferred Bonus Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.10 M&T Bank Corporation Directors' Stock Plan, as amended and restated (File No. 1-9861). Filed herewith. 10.11 Restated 1987 Stock Option and Appreciation Rights Plan of ONBANCorp, Inc. (File No. 1-9861). Filed herewith. 10.12 1992 ONBANCorp Directors' Stock Option Plan (File No. 1-9861). Filed herewith. 10.13 Amended Franklin First Financial Corp. 1988 Stock Incentive Plan (File No. 1-9861). Filed herewith. 10.14 Employment Agreement, dated April 1, 1998, between M&T Bank Corporation and Robert J. Bennett (File No. 1-9861). Filed herewith. 10.15 SERP Assumption Agreement, dated as of January 15, 1993, between Robert J. Bennett and ONBANCorp, Inc. (File No. 1-9861). Filed herewith. 27.1 Financial Data Schedule. Filed herewith. </TABLE> -33-