UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9861
FIRST EMPIRE STATE 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 14240
Buffalo, New York (Zip Code)
(Address of principal
executive offices)
(716) 842-5445
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Number of shares of the registrant's Common Stock, $5 par value, outstanding as
of the close of business on May 8, 1998: 8,040,849 shares.
FIRST EMPIRE STATE CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 31, 1998
Table of Contents of Information Required in Report Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEET -
March 31, 1998 and December 31, 1997 3
CONSOLIDATED STATEMENT OF INCOME -
Three months ended March 31, 1998 and 1997 4
CONSOLIDATED STATEMENT OF CASH FLOWS -
Three months ended March 31, 1998 and 1997 5
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY - Three months ended
March 31, 1998 and 1997 6
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE
CREDIT LOSSES - Three months ended March 31, 1998 and 1997 6
NOTES TO FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 22
Part II. OTHER INFORMATION 22
Item 1. Legal Proceedings. 22
Item 2. Changes in Securities and Use of Proceeds. 22
Item 3. Defaults Upon Senior Securities. 22
Item 4. Submission of Matters to a Vote of Security
Holders. 22
Item 5. Other Information. 22
Item 6. Exhibits and Reports on Form 8-K. 23
SIGNATURES 24
EXHIBIT INDEX 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET (Unaudited)
March 31, December 31,
Dollars in thousands, except per share 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 436,545 333,805
Money-market assets
Interest-bearing deposits at banks 963 668
Federal funds sold and agreements to resell securities 203,231 53,087
Trading account 47,600 57,291
-------------------------------------------------------------------------------------------------
Total money-market assets 251,794 111,046
-------------------------------------------------------------------------------------------------
Investment securities
Available for sale (cost: $1,385,121 at March 31, 1998;
$1,563,055 at December 31, 1997) 1,393,276 1,583,273
Held to maturity (market value: $78,915 at March 31, 1998;
$84,176 at December 31, 1997) 78,152 83,665
Other (market value: $58,280 at March 31, 1998;
$58,280 at December 31, 1997) 58,280 58,280
-------------------------------------------------------------------------------------------------
Total investment securities 1,529,708 1,725,218
-------------------------------------------------------------------------------------------------
Loans and leases 12,275,080 11,765,533
Unearned discount (241,658) (268,965)
Allowance for possible credit losses (278,727) (274,656)
-------------------------------------------------------------------------------------------------
Loans and leases, net 11,754,695 11,221,912
-------------------------------------------------------------------------------------------------
Premises and equipment 119,834 121,984
Accrued interest and other assets 477,714 488,970
-------------------------------------------------------------------------------------------------
Total assets $ 14,570,290 14,002,935
============================================================================================================================
Liabilities Noninterest-bearing deposits $ 1,420,598 1,458,241
NOW accounts 334,623 346,795
Savings deposits 3,429,252 3,344,697
Time deposits 5,656,328 5,762,497
Deposits at foreign office 244,034 250,928
-------------------------------------------------------------------------------------------------
Total deposits 11,084,835 11,163,158
-------------------------------------------------------------------------------------------------
Federal funds purchased and agreements
to repurchase securities 1,629,630 930,775
Other short-term borrowings 94,729 120,143
Accrued interest and other liabilities 264,850 330,774
Long-term borrowings 427,397 427,819
-------------------------------------------------------------------------------------------------
Total liabilities 13,501,441 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, 8,097,472 shares issued 40,487 40,487
Common stock issuable, 8,300 shares in 1998 3,876 --
Additional paid-in capital 107,318 103,233
Retained earnings 1,135,722 1,092,106
Accumulated other comprehensive income 4,827 12,016
Treasury stock - common, at cost -
1,428,035 shares at March 31, 1998;
1,487,123 shares at December 31, 1997 (223,381) (217,576)
-------------------------------------------------------------------------------------------------
Total stockholders' equity 1,068,849 1,030,266
-------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 14,570,290 14,002,935
============================================================================================================================
3
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three months ended March 31
Amounts in thousands, except per share 1998 1997
- -------------------------------------------------------------------------------------------------------
Interest income Loans and leases, including fees $ 249,194 229,575
Money-market assets
Deposits at banks 6 709
Federal funds sold and agreements
to resell securities 1,722 405
Trading account 138 221
Investment securities
Fully taxable 23,630 23,798
Exempt from federal taxes 1,572 1,058
---------------------------------------------------------------------------------
Total interest income 276,262 255,766
- -------------------------------------------------------------------------------------------------------
Interest expense NOW accounts 955 920
Savings deposits 22,607 22,248
Time deposits 80,634 73,757
Deposits at foreign office 3,239 3,239
Short-term borrowings 18,597 13,700
Long-term borrowings 8,553 5,457
---------------------------------------------------------------------------------
Total interest expense 134,585 119,321
---------------------------------------------------------------------------------
Net interest income 141,677 136,445
Provision for possible credit losses 12,000 11,000
---------------------------------------------------------------------------------
Net interest income after provision
for possible credit losses 129,677 125,445
- -------------------------------------------------------------------------------------------------------
Other income Mortgage banking revenues 13,870 12,075
Service charges on deposit accounts 11,234 10,385
Trust income 9,485 6,903
Merchant discount and other credit card fees 4,238 5,231
Trading account and foreign exchange gains 1,779 1,349
Gain (loss) on sales of bank investment securities -- (45)
Other revenues from operations 29,790 10,025
---------------------------------------------------------------------------------
Total other income 70,396 45,923
- -------------------------------------------------------------------------------------------------------
Other expense Salaries and employee benefits 58,333 55,559
Equipment and net occupancy 13,479 13,233
Printing, postage and supplies 3,570 3,351
Other costs of operations 58,491 32,141
---------------------------------------------------------------------------------
Total other expense 133,873 104,284
---------------------------------------------------------------------------------
Income before income taxes 66,200 67,084
Income taxes 17,245 25,825
---------------------------------------------------------------------------------
Net income $ 48,955 41,259
=======================================================================================================
Net income per common share
Basic $7.34 6.17
Diluted 7.01 5.81
Cash dividends per common share .80 .80
Average common shares outstanding
Basic 6,666 6,685
Diluted 6,981 7,100
4
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three months ended March 31
Dollars In thousands 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from Net income $ 48,955 41,259
operating activities Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 12,000 11,000
Depreciation and amortization of premises and equipment 5,369 5,123
Amortization of capitalized servicing rights 4,264 3,230
Amortization of goodwill 1,825 1,783
Provision for deferred income taxes (4,050) (1,017)
Asset write-downs 173 216
Net gain on sales of assets 63 (1,470)
Net change in accrued interest receivable, payable 11,079 11,749
Net change in other accrued income and expense (36,604) 13,767
Net change in loans held for sale (120,046) 74,695
Net change in trading account assets and liabilities (5,815) (5,061)
------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (82,787) 155,274
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from Proceeds from sales of investment securities
investing activities Available for sale -- 120,429
Proceeds from maturities of investment securities
Available for sale 168,317 54,098
Held to maturity 10,070 29,345
Purchases of investment securities
Available for sale (44) (329,941)
Held to maturity (4,572) (4,956)
Other -- (882)
Net increase in interest-bearing
deposits at banks (295) (388)
Additions to capitalized servicing rights (3,038) (12,179)
Net increase in loans and leases (423,205) (163,308)
Capital expenditures, net (3,225) (1,961)
Acquisitions, net of cash acquired -- 123,043
Other, net 6,782 (3,326)
------------------------------------------------------------------------------------------
Net cash used by investing activities (249,210) (190,026)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from Net decrease in deposits (78,543) (112,376)
financing activities Net increase (decrease) in short-term borrowings 674,446 (23,770)
Proceeds from issuance of trust
preferred securities -- 150,000
Payments on long-term borrowings (423) (68)
Purchases of treasury stock (16,585) (29,529)
Dividends paid - common (5,332) (5,353)
Other, net 11,318 3,530
------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 584,881 (17,566)
------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 252,884 (52,318)
Cash and cash equivalents at beginning of period 386,892 449,985
Cash and cash equivalents at end of period $ 639,776 397,667
=============================================================================================================================
Supplemental Interest received during the period $ 277,376 262,527
disclosure of cash Interest paid during the period 126,508 115,090
flow information Income taxes paid during the period 56,566 2,500
=============================================================================================================================
Supplemental schedule of
noncash investing and Real estate acquired in settlement of loans $ 1,303 1,766
financing activities
=============================================================================================================================
5
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
=================================================================================================================================
Accumulated
Common Additional other
Preferred Common stock paid-in Retained comprehensive Treasury
Dollars in thousands, except per share stock stock issuable capital earnings income stock
- ---------------------------------------------------------------------------------------------------------------------------------
1997
Balance-- January 1, 1997 $ -- 40,487 -- 96,597 937,072 (2,485) (166,012)
Comprehensive income:
Net income -- -- -- -- 41,259 -- --
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment -- -- -- -- -- (6,001) --
Exercise of stock options -- -- -- 1,553 -- -- 4,595
Purchases of treasury stock -- -- -- -- -- -- (29,529)
Common stock cash dividends--
$.80 per share -- -- -- -- (5,353) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance-- March 31, 1997 $ -- 40,487 -- 98,150 972,978 (8,486) (190,946)
=================================================================================================================================
1998
Balance-- January 1, 1998 $ -- 40,487 -- 103,233 1,092,106 12,016 (217,576)
Comprehensive income:
Net income -- -- -- -- 48,955 -- --
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment -- -- -- -- -- (7,189) --
Exercise of stock options -- -- -- 4,080 -- -- 10,778
Purchases of treasury stock -- -- -- -- -- -- (16,585)
Deferred bonus plan:
Deferred stock awards, net -- -- 3,869 5 -- -- 2
Dividend equivalents -- -- 7 -- (7) -- --
Common stock cash dividends--
$.80 per share -- -- -- -- (5,332) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance-- March 31,1998 $ -- 40,487 3,876 107,318 1,135,722 4,827 (223,381)
=================================================================================================================================
=========================================================
Dollars in thousands, except per share Total
- ---------------------------------------------------------
1997
Balance-- January 1, 1997 $ 905,659
Comprehensive income:
Net income 41,259
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment (6,001)
-----------
35,258
Exercise of stock options 6,148
Purchases of treasury stock (29,529)
Common stock cash dividends--
$.80 per share (5,353)
- ---------------------------------------------------------
Balance-- March 31, 1997 $ 912,183
=========================================================
1998
Balance-- January 1, 1998 $ 1,030,266
Comprehensive income:
Net income 48,955
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment (7,189)
-----------
41,766
Exercise of stock options 14,858
Purchases of treasury stock (16,585)
Deferred bonus plan:
Deferred stock awards, net 3,876
Dividend equivalents --
Common stock cash dividends--
$.80 per share (5,332)
- ---------------------------------------------------------
Balance-- March 31,1998 $ 1,068,849
=========================================================
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES
(Unaudited)
- ----------------------------------------------------------------------
Three months ended March 31
Dollars in thousands 1998 1997
- ----------------------------------------------------------------------
Beginning balance 274,656 270,466
Provision for possible credit losses 12,000 11,000
Net charge-offs
Charge-offs (12,286) (13,653)
Recoveries 4,357 5,760
- ----------------------------------------------------------------------
Total net charge-offs (7,929) (7,893)
======================================================================
Ending balance 278,727 273,573
======================================================================
6
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
The consolidated financial statements of First Empire State Corporation and
subsidiaries ("the Company") were compiled in accordance with the accounting
policies set forth in Note 1 of the Notes to Financial Statements on pages 39
through 41 of the Company's 1997 Annual Report to stockholders, except as
described below. In the opinion of management, all adjustments necessary for a
fair presentation have been made and were all of a normal recurring nature.
2. Earnings per share
The computations of basic earnings per share follow:
Three months ended March 31
1998 1997
---- ----
(in thousands, except per share)
Income available to common stockholders:
Net income $48,955 41,259
Weighted-average shares
outstanding (including common
stock issuable) 6,666 6,685
Basic earnings per share $ 7.34 6.17
The computations of diluted earnings per share follow:
Three months ended March 31
1998 1997
---- ----
(in thousands, except per share)
Income available to common
stockholders $48,955 41,259
Weighted-average shares
outstanding (including common
stock issuable) 6,666 6,685
Plus: incremental shares from
assumed conversions of
stock options 315 415
------- -------
Adjusted weighted-average shares
outstanding 6,981 7,100
Diluted earnings per share $ 7.01 5.81
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:
Three months ended March 31, 1998
---------------------------------
Before-tax Income
amount taxes Net
------ ----- ---
Unrealized losses on investment securities:
Unrealized holding
losses during period (a) $(12,063) 4,874 (7,189)
Less: reclassification
adjustment for losses
realized in net income -- -- --
-------- -------- --------
Net unrealized losses $(12,063) 4,874 (7,189)
======== ======== ========
(a) Including the effect of the contribution of appreciated investment
securities described in note 4.
Three months ended March 31, 1997
---------------------------------
Before-tax Income
amount taxes Net
------ ----- ---
Unrealized losses on investment securities:
Unrealized holding
losses during period $(10,130) 4,103 (6,027)
Less: reclassification
adjustment for losses
realized in net income (45) 19 (26)
-------- -------- --------
Net unrealized losses $(10,085) 4,084 (6,001)
======== ======== ========
4. Contribution of appreciated investment securities
In January 1998, First Empire State Corporation ("First Empire") 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. Subsequent event
On April 1, 1998, First Empire consummated the merger ("Merger") of ONBANCorp,
Inc. ("ONBANCorp") with and into Olympia Financial Corp., a wholly owned
subsidiary of First Empire. 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"), First Empire's principal banking
subsidiary. Acquired assets, loans and deposits of ONBANCorp as of April 1, 1998
totaled approximately $5.5 billion, $3.0 billion and $3.8 billion, respectively.
First Empire 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 the
acquisition. The transaction has been accounted for as a purchase and,
accordingly, operations acquired from ONBANCorp will be included in First
Empire's financial results beginning with the second quarter of 1998.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Net income of First Empire State Corporation ("First Empire") was $49.0 million
or $7.01 of diluted earnings per common share in the first quarter of 1998,
increases of 19% and 21%, respectively, from the first quarter of 1997 when net
income was $41.3 million or $5.81 of diluted earnings per common share. Net
income was $46.3 million or $6.66 of diluted earnings per common share in the
fourth quarter of 1997. Basic earnings per common share rose 19% to $7.34 in the
recent quarter from $6.17 in the first quarter of 1997 and 5% from $7.01 earned
in 1997's fourth quarter. The annualized rate of return on average total assets
for First Empire and its consolidated subsidiaries ("the Company") in the first
quarter of 1998 was 1.41%, compared with 1.30% in the year-earlier quarter and
1.33% in 1997's last quarter. The annualized return on average common
stockholders' equity was 18.86% in the initial 1998 quarter, compared with
18.24% and 18.25% in the first and fourth quarters of 1997, respectively.
On April 1, 1998, First Empire acquired ONBANCorp, Inc. ("ONBANCorp"), a
bank holding company headquartered in Syracuse, New York. As a result of 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 First Empire's principal
banking subsidiary, Manufacturers and Traders Trust Company ("M&T Bank"). The
acquisition has been accounted for as a purchase, and, accordingly, the
operations acquired from ONBANCorp will be included in First Empire's financial
results beginning with the second quarter of 1998. ONBANCorp's stockholders
received $266.3 million in cash and 1,429,998 shares of First Empire common
stock in exchange for the ONBANCorp shares outstanding at the time of the
acquisition. Acquired assets, loans and deposits totaled $5.5 billion, $3.0
billion and $3.8 billion, respectively, on April 1.
Taxable-equivalent Net Interest Income
Net interest income expressed on a taxable-equivalent basis was $143.2 million
in the first quarter of 1998, up $5.5 million or 4% from $137.7 million in the
year-earlier quarter, but slightly lower than the $143.9 million earned in the
final 1997 quarter. Growth in average loans and leases was the most significant
factor contributing to the improvement in net interest income from the initial
quarter of 1997. Average loans and leases increased $887 million, or 8%, to
$11.6 billion in the recent quarter from $10.7 billion in the year-earlier
quarter. Average loans and leases were $11.3 billion in the fourth quarter of
1997. The accompanying table summarizes quarterly changes in the major
components of the loan and lease portfolio.
9
AVERAGE LOANS AND LEASES
(net of unearned discount)
Dollars in millions
Percent increase
(decrease) from
1st Qtr. 1st Qtr. 4th Qtr.
1998 1997 1997
------- ------- -------
Commercial, financial, etc. $ 2,393 9% 2%
Real estate - commercial 4,502 12 3
Real estate - consumer 2,510 18 5
Consumer
Automobile 917 (18) (1)
Home equity 652 3 --
Credit cards 246 (18) (6)
Other 382 14 1
------- ------- -------
Total consumer 2,197 (8) (1)
------- ------- -------
Total $11,602 8% 2%
======= ======= =======
Investment securities averaged $1.6 billion in the first quarter of 1998,
equal to the year-earlier period but down from $1.7 billion in 1997's fourth
quarter. Money-market assets averaged $141 million in 1998's initial quarter,
compared with $94 million and $100 million in the first and fourth quarters of
1997, respectively. In general, the size of the investment securities and
money-market assets portfolios is influenced by such factors as demand for
loans, which generally yield more than investment securities and money-market
assets, ongoing repayments, the levels of deposits, and management of balance
sheet size and resulting capital ratios.
As a result of the changes described above, average earning assets totaled
$13.4 billion in the first 1998 quarter, an increase of $937 million, or 8%,
from $12.4 billion in the first quarter of 1997. Average earning assets in the
recent quarter were up 2% from $13.1 billion in the fourth quarter of 1997.
Core deposits represent a significant source of funding to the Company and
generally carry lower interest rates than wholesale funds of comparable
maturities. Core deposits include noninterest-bearing demand deposits,
interest-bearing transaction accounts, savings deposits and nonbrokered domestic
time deposits under $100,000. The Company's branch network is the principal
source of core deposits. Core deposits 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 First Empire. Average core
deposits increased to $8.4 billion in the first quarter of 1998 from $8.1
billion in the year-earlier quarter, but decreased slightly from $8.5 billion in
the final quarter of 1997. Average core deposits of M&T Bank, N.A. were $433
million in the recently completed quarter, compared with $388 million in the
first quarter of 1997 and $432 million in the fourth quarter of 1997. The
accompanying table provides an analysis of quarterly changes in the components
of average core deposits.
AVERAGE CORE DEPOSITS
Dollars in millions
Percent increase
(decrease) from
1st Qtr. 1st Qtr. 4th Qtr.
1998 1997 1997
------- ------- -------
NOW accounts $ 270 (4)% 5%
Savings deposits 3,446 3 (1)
Time deposits less than $100,000 3,408 2 (1)
Noninterest-bearing deposits 1,272 9 (3)
------ ------ ------
Total $8,396 3% (1)%
====== ====== ======
10
The Company also 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 $1.3 billion during the
recent quarter and totaled $1.2 billion at March 31, 1998, compared with an
average balance of $1.1 billion during the comparable 1997 period and a total
balance of $1.1 billion at March 31, 1997. Brokered deposits averaged $1.5
billion in the fourth quarter of 1997. The weighted average remaining term to
maturity of brokered deposits at March 31, 1998 was 2.4 years. However, certain
of the deposits have provisions that allow early redemption. Additional amounts
of brokered deposits may be solicited in the future depending on market
conditions and the cost of funds available from alternative sources at the time.
In addition to deposits, the Company uses short-term borrowings from
banks, securities dealers, the Federal Home Loan Bank of New York ("FHLB") and
others as sources of funding. Short-term borrowings averaged $1.4 billion in the
initial 1998 quarter, compared with $1.0 billion and $829 million in the first
and fourth quarters of 1997, respectively. Long-term borrowings averaged $428
million in the first quarter of 1998 and the fourth quarter of 1997, and $278
million in the first quarter of 1997. Long-term borrowings include $250 million
of trust preferred securities issued during the first and second quarters of
1997 and $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 3.68% in the first quarter of 1998, compared
with 3.83% in the year-earlier quarter. The rate paid on interest-bearing
liabilities increased 19 basis points (hundredths of one percent) to 4.75% in
the first quarter of 1998 from 4.56% in the corresponding 1997 quarter, largely
the result of the previously noted issuances of $250 million of trust preferred
securities. Such increase was partially offset by a 4 basis point increase in
the yield on earning assets to 8.43% in the recently completed quarter from
8.39% in the first quarter of 1997. The net interest spread was 3.64% in the
fourth quarter of 1997 when the yield on earning assets was 8.36% and the rate
paid on interest-bearing liabilities was 4.72%.
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 .67% in the first quarter of 1998, equal to the
comparable quarter of 1997 but down from .70% in 1997's final quarter. Average
interest-free funds, which include noninterest-bearing deposits and
stockholders' equity, totaled $1.9 billion in the first quarter of 1998, up $43
million from a year earlier, but down $86 million from the fourth quarter of
1997.
As part of the management of interest rate risk, the Company utilizes
interest rate swap agreements to modify the repricing characteristics of certain
portions of the loan and deposit portfolios. Revenue and expense arising from
these agreements are reflected in either the yields earned on loans or, as
appropriate, the rates paid on interest-bearing deposits. The notional amount of
interest rate swap agreements used as part of the Company's management of
interest rate risk in effect at March 31, 1998 and 1997 was $2.5 billion and
$2.3 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 March 31, 1998, the weighted average rates to be
received and paid under interest rate swap agreements were 6.36% and 5.63%,
respectively. As of March 31, 1998, the Company had also entered into a
forward-starting swap with an aggregate notional amount of $76 million in which
the Company will pay a fixed rate of interest and receive a variable rate. Such
forward-starting swap had no
11
effect on the Company's net interest income through March 31, 1998. The average
notional amounts of interest rate swaps entered into for interest rate risk
management purposes and the related effect on net interest income and margin are
presented in the accompanying table.
INTEREST RATE SWAPS
Dollars in thousands
Three months ended March 31
-----------------------------------------------
1998 1997
------------------- --------------------
Amount Rate* Amount Rate*
------ ----- --------- -----
Increase (decrease) in:
Interest income $ 282 .01% $ 177 .01%
Interest expense (3,205) (.11) (3,208) (.12)
---------- -----------
Net interest
income/margin $ 3,487 .11% $ 3,385 .11%
========== ===== =========== ====
Average notional
amount ** $2,596,119 $ 2,287,090
========== ===========
* Computed as an annualized percentage of average earning assets or
interest-bearing liabilities.
** Excludes forward-starting interest rate swaps.
The Company estimates that as of March 31, 1998 it would have received
approximately $18.4 million if all interest rate swap agreements entered into
for interest rate risk management purposes had been terminated. This estimated
fair value of the interest rate swap portfolio results from the effects of
changing interest rates and should be considered in the context of the entire
balance sheet and the Company's overall interest rate risk profile. Changes in
the estimated fair value of interest rate swaps entered into for interest rate
risk management purposes are not reflected in the consolidated financial
statements.
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 fees collected for services, provide the Company with
sources of liquidity. Through membership in the FHLB, as well as other available
borrowing facilities, First Empire's banking subsidiaries have access to
additional funding sources. In addition to the proceeds of the $250 million of
junior subordinated debt issued to two special purpose subsidiaries in 1997,
First Empire 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. First Empire also
maintains a $25 million line of credit with an unaffiliated commercial bank, all
of which was available for borrowing at March 31, 1998. The Company had access
to sufficient liquid assets to fund the cash portion of the ONBANCorp
acquisition. Management does not anticipate engaging in any activities, either
currently or in the long-term, which would cause a significant strain on
liquidity at either First Empire or its subsidiary banks. Furthermore,
management closely monitors the Company's liquidity position for compliance with
internal policies and believes that available sources of liquidity are adequate
to meet anticipated funding needs.
Market risk is the risk of loss from adverse changes in market prices
and/or interest rates of the Company's financial instruments. The core banking
activities of lending and deposit-taking expose the Company to interest rate
risk. As a result of interest rate risk, net interest income earned by the
Company is subject to the effects of changing interest rates. The Company
measures interest rate risk by calculating the variability of net interest
income under various interest rate scenarios using projected
12
balances for earning assets, interest-bearing liabilities and off-balance sheet
financial instruments. Management's philosophy toward positioning the Company
for interest rate movements is to attempt to limit such variability. The
balances of both on- and off-balance sheet financial instruments used in the
projections are based on expected growth from forecasted business opportunities,
anticipated prepayments of mortgage-related assets and expected maturities of
investment securities, loans and deposits. Management supplements the modeling
technique described above with analyses of the Company's sensitivity to changes
in the market values of financial instruments resulting from changing interest
rates.
The Asset-Liability Committee, which includes members of senior
management, monitors the Company's interest rate sensitivity with the aid of a
computer model which considers the impact of ongoing lending and deposit
gathering activities, as well as statistically derived interrelationships in the
magnitude and timing of the repricing of financial instruments, including the
effect of changing interest rates on expected prepayments and maturities. When
deemed prudent, management has taken actions, and intends to do so in the
future, to mitigate exposure to interest rate risk through the use of on-or
off-balance sheet financial instruments. Possible actions include, but are not
limited to, changes in the pricing of loan and deposit products, modifying the
composition of earning assets and interest-bearing liabilities, and entering
into or modifying existing interest rate swap agreements.
The accompanying table displays the estimated impact on net interest
income from financial instruments held for non-trading purposes resulting from
changes in interest rates during the first modeling year.
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
(dollars in thousands) Calculated
increase (decrease)
in projected net
Changes in Interest Rates interest income
- ------------------------- ---------------
+200 basis points $ (4,260)
+100 basis points 422
- -100 basis points 3,021
- -200 basis points 6,550
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 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 March 31, 1998
was not considered material.
13
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
March 31, 1998 was adequate to absorb credit losses inherent in the portfolio of
loans and leases.
The provision for possible credit losses in the initial quarter of 1998
was $12.0 million, up from $11.0 million in the first quarter of 1997, but equal
to 1997's fourth quarter. Net loan charge-offs in the first three months of 1998
totaled $7.9 million, equal to 1997's first quarter, but down from $9.7 million
in last year's fourth quarter. Net charge-offs as an annualized percentage of
average loans and leases were .28% in the recently completed quarter, compared
with .30% in the corresponding 1997 quarter and .34% in the fourth quarter of
1997. Net charge-offs of consumer loans in the first quarter of 1998 were $7.8
million, compared with $8.8 million in the year-earlier quarter and $9.2 million
in the fourth quarter of 1997. Net consumer loan charge-offs as an annualized
percentage of average consumer loans and leases were 1.45% in the initial 1998
quarter, compared with 1.50% in the first quarter of 1997 and 1.64% in 1997's
final quarter.
Nonperforming loans totaled $70.0 million or .58% of total loans and
leases outstanding at March 31, 1998, compared with $97.0 million or .90% at
March 31, 1997 and $80.7 million or .70% at December 31, 1997. Nonperforming
commercial real estate loans totaled $10.7 million at March 31, 1998, $25.6
million at March 31, 1997 and $17.4 million at December 31, 1997. Nonperforming
commercial real estate loans include loans secured by properties located in the
New York City metropolitan area of $206 thousand at March 31, 1998, $8.2 million
at March 31, 1997 and $7.0 million at December 31, 1997. Nonperforming consumer
loans totaled $19.5 million at March 31, 1998, compared with $17.4 million at
March 31, 1997 and $21.9 million at December 31, 1997. The increase in
nonperforming consumer loans from March 31, 1997 is generally consistent with
current industry trends and also reflects growth in the Company's consumer loan
portfolio, particularly automobile loans. As a percentage of consumer loan
balances outstanding, nonperforming consumer loans and leases were .90% at March
31, 1998, compared with .74% and .99% at March 31 and December 31, 1997,
respectively. Assets taken in foreclosure of defaulted loans were $7.8 million
at March 31, 1998, $8.7 million at March 31, 1997 and $8.4 million at December
31, 1997.
A comparative summary of nonperforming assets and certain credit quality
ratios is presented in the accompanying table.
14
NONPERFORMING ASSETS
Dollars in thousands
1998 1997 Quarters
First Quarter Fourth Third Second First
------------- ------ ----- ------ -----
Nonaccrual loans $ 40,737 38,588 50,369 62,525 57,366
Loans past due
90 days or more 24,449 30,402 29,979 31,810 36,857
Renegotiated loans 4,819 11,660 5,413 2,741 2,741
-------- ------ ------ ------- -------
Total nonperforming loans 70,005 80,650 85,761 97,076 96,964
Other real estate owned 7,828 8,413 8,239 9,698 8,694
-------- ------ ------ ------- -------
Total nonperforming assets $ 77,833 89,063 94,000 106,774 105,658
======== ====== ====== ======= =======
Government guaranteed
nonperforming loans* $ 14,787 17,712 17,853 20,656 22,753
======== ====== ======= ====== ======
Nonperforming loans
to total loans and leases,
net of unearned discount .58% .70% .76% .88% .90%
Nonperforming assets
to total net loans and
other real estate owned .65% .77% .83% .97% .98%
======== ====== ======= ====== ======
* Included in total nonperforming loans.
The allowance for possible credit losses at March 31, 1998 was $278.7
million, or 2.32% of total loans and leases, compared with $273.6 million or
2.53% a year earlier and $274.7 million or 2.39% at December 31, 1997. The ratio
of the allowance for possible credit losses to nonperforming loans was 398% at
the recent quarter-end, compared with 282% at March 31, 1997 and 341% at
December 31, 1997.
Other Income
In January 1998, First Empire 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 incurred charitable
contributions expense of $24.6 million and recognized tax-exempt other income of
$15.3 million. 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, or $.10 per share. Excluding the effect of the transfer, other
income totaled $55.1 million in the first quarter of 1998, compared with $45.9
million in the year-earlier quarter and $53.0 million in the fourth quarter of
1997.
Mortgage banking revenues totaled $13.9 million in the first quarter of
1998, compared with $12.1 million in the year-earlier quarter and $14.6 million
in the final quarter of 1997. Residential mortgage loan servicing fees were $7.2
million in the recently completed quarter, up from $5.8 million in the first
quarter of 1997, but slightly lower than the $7.4 million earned in the fourth
quarter of 1997. Gains from sales of residential mortgage loans and loan
servicing rights were $5.9 million in the initial quarter of 1998, compared with
$5.6 million in the year-earlier quarter and $6.3 million in 1997's final
quarter. Residential mortgage loans serviced for others totaled $7.3 billion and
$6.5 billion at March 31, 1998 and 1997, respectively, and $7.5 billion at
December 31, 1997. Capitalized servicing assets were $59 million and $51 million
at March 31, 1998 and 1997, respectively, and $61 million at December 31, 1997.
Service charges on deposit accounts totaled $11.2 million in the recent
quarter, an increase of 8% from $10.4 million in the corresponding quarter of
1997, but slightly lower than $11.4 million in the fourth quarter of 1997. Trust
income was $9.5 million in the first quarter of 1998, compared with $6.9 million
in last year's first quarter and $8.9 million in the fourth quarter of 1997.
Merchant discount and other credit card fees were $4.2
15
million in the initial 1998 quarter, down from $5.2 million and $5.4 million in
the first and fourth quarters of 1997, respectively. Due to poorer than expected
results, during 1997 and the first quarter of 1998 the Company completed the
termination of all but one of its co-branded credit card programs. These
programs were initiated during 1995 and 1996. Included in merchant discount and
other credit card fees are amounts earned in connection with the terminated
programs were approximately $1.1 million during the first quarter of 1998,
compared with $2.6 million in the year-earlier period and $1.5 million in the
fourth quarter of 1997. Outstanding credit card balances related to these
programs at March 31, 1998 were $44 million, compared with $96 million at March
31, 1997 and $61 million at December 31, 1997. Trading account and foreign
exchange activity resulted in gains of $1.8 million in the first quarter of
1998, compared with gains of $1.3 million and $318 thousand in the first and
fourth quarters of 1997, respectively.
Excluding the $15.3 million of tax-exempt income related to the transfer
of securities to the Company's affiliated foundation, other revenue from
operations totaled $14.5 million in the recent quarter, compared with $10.0
million in the first quarter of 1997 and $12.4 million in the fourth quarter of
1997. Tax-exempt income earned from the Company's ownership of bank- owned life
insurance contributed to each increase.
Other Expense
Excluding the effect of the previously discussed contribution of investment
securities to the affiliated foundation, other expense totaled $109.3 million in
the first quarter of 1998, compared with $104.3 million in the first quarter of
1997 and $110.7 million in the fourth quarter of 1997.
Salaries and employee benefits expense was $58.3 million in the recent
quarter, 5% higher than the $55.6 million in the initial 1997 quarter and 7%
above the $54.6 million in the fourth quarter of 1997. Factors contributing to
the higher expenses were merit salary increases and higher costs associated with
incentive-based compensation arrangements and employee benefits.
Excluding the $24.6 million of contributions expense discussed above,
nonpersonnel expense totaled $51.0 million in the recently completed quarter,
compared with $48.7 million in the year-earlier quarter and $56.1 million in the
fourth quarter of 1997. The decrease in expenses from the fourth quarter of 1997
was largely the result of lower advertising and professional services expenses.
Customer rebates and other expenses based on card usage directly attributable to
the previously noted terminated co-branded credit card programs were
approximately $1.1 million in the first quarter of 1998, compared with $3.6
million in the corresponding 1997 quarter and $1.6 million in the fourth quarter
of 1997.
Capital
Stockholders' equity at March 31, 1998 was $1.1 billion, equal to 7.34% of total
assets, compared with $912 million or 6.95% a year earlier and $1.0 billion or
7.36% at December 31, 1997. On a per share basis, stockholders' equity was
$160.06 at March 31, 1998, up from $137.33 and $155.86 at March 31 and December
31, 1997, respectively.
Stockholders' equity at March 31, 1998 was increased by $4.8 million, or
$.72 per common share, for the net after-tax impact of unrealized gains on
investment securities classified as available for sale, compared with unrealized
losses of $8.5 million or $1.28 per common share at March 31, 1997 and
unrealized gains of $12.0 million or $1.82 per common share at December 31,
1997. The unrealized gains and losses represent the amount by which the fair
value of investment securities classified as available for sale differs from
amortized cost, net of applicable income taxes. The market valuation of
investment securities should be considered in the context of the entire balance
sheet of the Company. With the exception of investment securities classified as
available for sale, trading account assets and liabilities,
16
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, core
capital includes $250 million of trust preferred securities issued by two
special-purpose subsidiaries of First Empire in the first and second quarters of
1997. As of March 31, 1998, total capital also included $160 million of the
subordinated notes issued by M&T Bank in prior years. Unrealized gains or losses
on investment securities classified as available for sale 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., are presented in the
accompanying table as of March 31, 1998.
REGULATORY CAPITAL RATIOS
March 31, 1998
First Empire M&T M&T
(Consolidated) Bank Bank, N.A.
-------------- --------- ----------
Core capital 10.72% 8.91% 16.16%
Total capital 13.31% 11.53% 17.41%
Leverage 9.25% 7.82% 7.71%
The Company has historically maintained capital ratios in excess of
regulatory guidelines largely through a high rate of internal capital
generation. The rate of internal capital generation, or net income less
dividends expressed as an annualized percentage of average total stockholders'
equity, was 16.80% during the first quarter of 1998, compared with 15.88% and
16.17% in the first and fourth quarters of 1997, respectively. The April 1, 1998
acquisition of ONBANCorp reduced the capital ratios of the Company and M&T Bank.
However, following the acquisition, such capital ratios still exceed the
regulatory guidelines for a well-capitalized institution.
In February 1997, First Empire announced a plan to repurchase up to
303,317 shares of its common stock in connection with the possible future
exercise of outstanding stock options. As of March 31, 1998, First Empire had
repurchased 214,879 common shares pursuant to such plan at an average cost of
$352.04 per share. During the first quarter of 1998, First Empire repurchased
36,868 common shares at a total cost of $16.6 million.
Year 2000 Initiatives
The Company is currently working to resolve the potential impact of "Year 2000"
issues on the processing of date-sensitive information by the Company's computer
systems. The Year 2000 problem relates to the ability of computer systems to be
able to distinguish date data between the twentieth and twenty-first centuries.
Management anticipates that the Company's computer systems will be Year 2000
compliant by the end of 1998 and has a planned program to test for such
compliance. The Company could also be adversely affected if its customers rely
on data processing systems that are not Year 2000 compliant prior to the end of
1999. The Company, therefore, is taking a proactive role to work with its data
processing vendors and to provide information to its commercial customers
regarding Year 2000 issues. The costs that have been incurred by the Company in
addressing its potential Year 2000 problems have not had a material adverse
impact on the Company's financial position, results of operations or cash flows.
However, the inability of the Company or its customers to resolve Year 2000
issues in a timely manner could result in a material financial risk.
Accordingly, the Company is devoting appropriate resources to resolve its Year
2000 issues in
17
a timely manner and does not currently expect that doing so will have a material
adverse impact on the Company's financial position, results of operations or
cash flows in the future.
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. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. First Empire
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Future Factors include changes in interest rates, spreads on earning
assets and interest-bearing liabilities, and interest rate sensitivity; credit
losses; sources of liquidity; regulatory supervision and oversight, including
required capital levels; increasing price and product/service competition by
competitors, including new entrants; rapid technological developments and
changes; the ability to continue to introduce competitive new products and
services on a timely, cost-effective basis; the mix of products/services;
containing costs and expenses; governmental and public policy changes, including
environmental regulations; protection and validity of intellectual property
rights; reliance on large customers; technological, implementation and
cost/financial risks in large, multi-year contracts; the outcome of pending and
future litigation and governmental proceedings; continued availability of
financing; and financial resources in the amounts, at the times and on the terms
required to support the Company's future businesses. These are representative of
the Future Factors that could affect the outcome of the forward-looking
statements. In addition, such statements could be affected by general industry
and market conditions and growth rates, general economic conditions, including
interest rate and currency exchange rate fluctuations, and other Future Factors.
18
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
QUARTERLY TRENDS
1998 1997 Quarters
=================================================================================================================================
Taxable-equivalent basis First quarter Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings and dividends
Amounts in thousands, except per share
Interest income 277,803 277,166 271,305 265,301 257,029
Interest expense 134,585 133,270 129,768 125,734 119,321
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 143,218 143,896 141,537 139,567 137,708
Less: provision for possible credit losses 12,000 12,000 12,000 11,000 11,000
Other income 70,396 52,979 50,182 43,983 45,923
Less: other expense 133,873 110,716 104,706 102,070 104,284
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 67,741 74,159 75,013 70,480 68,347
Applicable income taxes 17,245 26,246 27,518 26,329 25,825
Taxable-equivalent adjustment 1,541 1,613 1,604 1,360 1,263
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 48,955 46,300 45,891 42,791 41,259
- ---------------------------------------------------------------------------------------------------------------------------------
Per common share data
Net income
Basic $7.34 7.01 6.96 6.46 6.17
Diluted 7.01 6.66 6.62 6.17 5.81
Net income, excluding securities transactions
Basic 7.34 7.01 6.97 6.47 6.18
Diluted 7.01 6.66 6.63 6.19 5.81
Cash dividends $ .80 .80 .80 .80 .80
Average common shares outstanding
Basic 6,666 6,599 6,592 6,627 6,685
Diluted 6,981 6,955 6,927 6,928 7,100
=================================================================================================================================
Balance sheet data
Dollars in millions, except per share
Average balances
Total assets $14,055 13,785 13,424 13,148 12,866
Earning assets 13,357 13,148 12,905 12,700 12,420
Investment securities 1,614 1,721 1,747 1,715 1,611
Loans and leases, net of unearned discount 11,602 11,327 11,002 10,842 10,715
Deposits 10,988 11,262 11,170 10,914 10,454
Stockholders' equity 1,053 1,007 962 925 917
- ---------------------------------------------------------------------------------------------------------------------------------
At end of quarter
Total assets $14,570 14,003 13,675 13,441 13,122
Earning assets 13,778 13,333 13,100 12,903 12,621
Investment securities 1,530 1,725 1,752 1,708 1,693
Loans and leases, net of unearned discount 12,033 11,497 11,271 10,980 10,803
Deposits 11,085 11,163 11,205 11,186 10,533
Stockholders' equity 1,069 1,030 982 951 912
Equity per common share 160.06 155.86 149.31 143.64 137.33
=================================================================================================================================
Performance ratios, annualized
Return on
Average assets 1.41% 1.33% 1.36% 1.31% 1.30%
Average common stockholders' equity 18.86% 18.25% 18.92% 18.55% 18.24%
Net interest margin on average earning assets 4.35% 4.34% 4.35% 4.41% 4.50%
Nonperforming assets to total assets,
at end of quarter .53% .64% .69% .79% .81%
=================================================================================================================================
Market price per common share
High $504 468 415 343 1/2 336
Low 429 401 335 303 281
Closing 499 7/8 465 415 337 320
=================================================================================================================================
19
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
1998 First quarter 1997 Fourth quarter
Average Average Average Average
Average balance in millions; interest in thousands balance Interest rate balance Interest rate
- --------------------------------------------------------------------------------------------------------------------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc. $ 2,393 $ 49,755 8.43% 2,353 49,625 8.37%
Real estate 7,012 148,744 8.49 6,752 145,960 8.65
Consumer 2,197 51,194 9.45 2,222 52,259 9.33
- --------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 11,602 249,693 8.73 11,327 247,844 8.68
- --------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 1 6 2.91 1 6 2.80
Federal funds sold and agreements
to resell securities 127 1,722 5.51 56 772 5.50
Trading account 13 169 5.13 43 825 7.55
- --------------------------------------------------------------------------------------------------------------------
Total money-market assets 141 1,897 5.45 100 1,603 6.36
- --------------------------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,013 15,861 6.35 1,098 17,328 6.26
Obligations of states and political subdivisions 37 628 6.83 40 672 6.60
Other 564 9,724 7.00 583 9,719 6.62
- --------------------------------------------------------------------------------------------------------------------
Total investment securities 1,614 26,213 6.59 1,721 27,719 6.39
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 13,357 277,803 8.43 13,148 277,166 8.36
- --------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (279) (273)
Cash and due from banks 321 322
Other assets 656 588
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 14,055 13,785
====================================================================================================================
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 270 955 1.44 257 897 1.39
Savings deposits 3,446 22,607 2.66 3,483 23,418 2.67
Time deposits 5,753 80,634 5.68 5,978 85,711 5.69
Deposits at foreign office 247 3,239 5.31 227 3,079 5.37
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,716 107,435 4.48 9,945 113,105 4.51
- --------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,353 18,597 5.57 829 11,610 5.56
Long-term borrowings 428 8,553 8.11 428 8,555 7.93
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 11,497 134,585 4.75 11,202 133,270 4.72
- --------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,272 1,316
Other liabilities 233 260
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 13,002 12,778
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity 1,053 1,007
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 14,055 13,785
====================================================================================================================
Net interest spread 3.68 3.64
Contribution of interest-free funds .67 .70
- --------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $ 143,218 4.35% 143,896 4.34%
====================================================================================================================
1997 Third quarter
Average Average
Average balance in millions; interest in thousands balance Interest rate
- ---------------------------------------------------------------------------------------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc. 2,226 47,527 8.47%
Real estate 6,468 139,184 8.61
Consumer 2,308 54,025 9.28
- ---------------------------------------------------------------------------------------
Total loans and leases, net 11,002 240,736 8.68
- ---------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 63 944 5.91
Federal funds sold and agreements
to resell securities 69 952 5.47
Trading account 24 414 6.96
- ---------------------------------------------------------------------------------------
Total money-market assets 156 2,310 5.88
- ---------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,132 17,959 6.29
Obligations of states and political subdivisions 45 755 6.61
Other 570 9,545 6.64
- ---------------------------------------------------------------------------------------
Total investment securities 1,747 28,259 6.42
- ---------------------------------------------------------------------------------------
Total earning assets 12,905 271,305 8.34
- ---------------------------------------------------------------------------------------
Allowance for possible credit losses (273)
Cash and due from banks 303
Other assets 489
- ---------------------------------------------------------------------------------------
Total assets 13,424
=======================================================================================
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts 234 803 1.36
Savings deposits 3,443 22,746 2.62
Time deposits 6,021 85,889 5.66
Deposits at foreign office 221 2,969 5.32
- ---------------------------------------------------------------------------------------
Total interest-bearing deposits 9,919 112,407 4.50
- ---------------------------------------------------------------------------------------
Short-term borrowings 641 8,801 5.45
Long-term borrowings 428 8,560 7.94
- ---------------------------------------------------------------------------------------
Total interest-bearing liabilities 10,988 129,768 4.69
- ---------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,251
Other liabilities 223
- ---------------------------------------------------------------------------------------
Total liabilities 12,462
- ---------------------------------------------------------------------------------------
Stockholders' equity 962
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 13,424
=======================================================================================
Net interest spread 3.65
Contribution of interest-free funds .70
- ---------------------------------------------------------------------------------------
Net interest income/margin on earning assets 141,537 4.35%
=======================================================================================
(continued)
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
20
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
1997 Second quarter 1997 First quarter
Average Average Average Average
Average balance in millions; interest in thousands balance Interest rate balance Interest rate
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc. $ 2,260 $ 47,680 8.46% 2,187 44,623 8.27%
Real estate 6,265 134,710 8.60 6,139 131,135 8.54
Consumer 2,317 53,347 9.23 2,389 54,311 9.22
- -----------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 10,842 235,737 8.72 10,715 230,069 8.71
- -----------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks 54 816 6.01 48 709 6.01
Federal funds sold and agreements
to resell securities 64 860 5.40 32 405 5.22
Trading account 25 443 7.10 14 255 7.22
- -----------------------------------------------------------------------------------------------------------------------------
Total money-market assets 143 2,119 5.93 94 1,369 5.93
- -----------------------------------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies 1,192 19,002 6.39 1,064 16,679 6.36
Obligations of states and political subdivisions 44 728 6.59 41 677 6.66
Other 479 7,715 6.46 506 8,235 6.61
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,715 27,445 6.42 1,611 25,591 6.44
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 12,700 265,301 8.38 12,420 257,029 8.39
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses (272) (272)
Cash and due from banks 307 298
Other assets 413 420
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 13,148 12,866
=============================================================================================================================
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 259 835 1.30 281 920 1.33
Savings deposits 3,406 22,495 2.65 3,346 22,248 2.70
Time deposits 5,852 82,254 5.64 5,410 73,757 5.53
Deposits at foreign office 216 2,873 5.33 255 3,239 5.16
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 9,733 108,457 4.47 9,292 100,164 4.37
- -----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 749 10,230 5.48 1,033 13,700 5.38
Long-term borrowings 355 7,047 7.93 278 5,457 7.96
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 10,837 125,734 4.65 10,603 119,321 4.56
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,181 1,162
Other liabilities 205 184
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 12,223 11,949
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 925 917
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 13,148 12,866
=============================================================================================================================
Net interest spread 3.73 3.83
Contribution of interest-free funds .68 .67
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $ 139,567 4.41% 137,708 4.50%
=============================================================================================================================
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
21
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.
First Empire and its subsidiaries are subject in the normal course of
business to various pending and threatened legal proceedings in which claims for
monetary damages are asserted. Management, after consultation with legal
counsel, does not anticipate that the aggregate ultimate liability, if any,
arising out of litigation pending against First Empire or its subsidiaries will
be material to First Empire's consolidated financial position, but at the
present time is not in a position to determine whether such litigation will have
a material adverse effect on First Empire's consolidated results of operations
in any future reporting period.
Item 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.
A Special Meeting of Stockholders of First Empire was held on March 17,
1998. At the meeting, stockholders approved the merger ("Merger") of ONBANCorp
with and into Olympia Financial Corp. ("Olympia"), a wholly owned subsidiary of
First Empire, and the issuance of up to 1,510,000 shares of First Empire common
stock in connection with the Merger. The following table presents the tabulation
of the votes with respect to the Merger at that meeting of stockholders:
Number of Votes
---------------------------------------------------
For Against Abstain
--------- ------- -------
5,607,327 7,833 19,541
Item 5. Other Information.
Barbara L. Laughlin, an Executive Vice President of First Empire, M&T Bank
and M&T Bank, N.A., resigned as an employee of the Company effective February
17, 1998. Prior to her resignation, Ms. Laughlin was responsible for the
management of the Company's Technology and Banking Operations Division.
22
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report:
Exhibit
No.
-------
27.1 Financial Data Schedule. Filed herewith.
27.2 Financial Data Schedule (Restated). Filed herewith.
27.3 Financial Data Schedule (Restated). Filed herewith.
(b) Reports on Form 8-K. First Empire filed a Current Report on Form 8-K
dated January 9, 1998 reporting under Item 5 that First Empire had issued a
press release disclosing its earnings for the fiscal quarter and year ended
December 31, 1997, together with related financial information about First
Empire. Such Current Report also included, as Item 7 exhibits, copies of the
foregoing press release and the Agreement and Plan of Merger dated as of October
28, 1997 by and between ONBANCorp, Olympia and First Empire. Such Current Report
was filed on February 5, 1998.
First Empire also 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, a wholly owned subsidiary of First Empire, 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.
23
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.
FIRST EMPIRE STATE CORPORATION
Date: May 15, 1998 By: /s/ Michael P. Pinto
-----------------------------
Michael P. Pinto
Executive Vice President
and Chief Financial Officer
24
EXHIBIT INDEX
Exhibit
No.
- -------
27.1 Financial Data Schedule. Filed herewith.
27.2 Financial Data Schedule (Restated). Filed herewith.
27.3 Financial Data Schedule (Restated). Filed herewith.
9
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
436,545
963
203,231
47,600
1,393,276
136,432
137,195
12,275,080
278,727
14,570,290
11,084,835
1,724,359
264,850
427,397
0
0
40,487
1,028,362
14,570,290
249,194
25,202
1,866
276,262
107,435
134,585
141,677
12,000
0
133,873
66,200
48,955
0
0
48,955
7.34
7.01
4.35
40,737
24,449
4,819
0
274,656
12,286
4,357
278,727
169,877
0
108,850
9
12-MOS 3-MOS 6-MOS 9-MOS
DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997
DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
324,659 376,741 399,094 349,571
47,325 47,713 96,116 796
125,326 20,926 46,309 31,765
37,317 56,040 72,464 43,805
1,396,672 1,543,855 1,561,442 1,603,717
175,026 149,450 146,930 148,528
175,726 149,862 147,422 149,034
11,120,221 11,177,030 11,313,318 11,570,275
270,466 273,573 271,933 272,308
12,943,915 13,122,232 13,440,995 13,675,133
10,514,489 10,533,365 11,186,195 11,204,964
1,150,187 1,140,079 658,966 808,445
195,578 208,645 216,878 252,279
178,002 327,960 427,919 427,887
0 0 0 0
0 0 0 0
40,487 40,487 40,487 40,487
865,172 871,696 910,550 941,071
12,943,915 13,122,232 13,440,995 13,675,133
881,002 229,575 464,801 705,055
110,052 24,856 51,485 78,654
6,378 1,335 3,421 5,699
997,432 255,766 519,707 789,408
392,739 100,164 208,621 321,028
466,408 119,321 245,055 374,823
531,024 136,445 274,652 414,585
43,325 11,000 22,000 34,000
(37) (45) (233) (280)
408,978 104,284 206,354 311,060
248,969 67,084 136,204 209,613
151,103 41,259 84,050 129,941
0 0 0 0
0 0 0 0
151,103 41,259 84,050 129,941
22.54 6.17 12.63 19.59
21.08 5.81 11.98 18.60
4.45 4.48 4.44 4.40
58,232 57,366 62,525 50,369
39,652 36,857 31,810 29,979
0 2,741 2,741 5,413
0 0 0 0
262,344 270,466 270,466 270,466
49,546 13,653 29,883 44,332
14,343 5,760 9,350 12,174
270,466 273,573 271,933 272,308
147,659 144,574 144,240 168,337
0 0 0 0
122,807 128,999 127,693 103,971
9
12-MOS 3-MOS 6-MOS 9-MOS
DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996
363,119 415,689 376,309 411,097
125,500 58,309 14,451 59,417
1,000 10,087 23,136 11,106
9,709 40,550 31,481 20,521
1,531,893 1,865,181 1,565,853 1,542,964
237,402 242,337 251,198 210,149
239,044 243,381 251,758 210,839
9,873,723 10,245,064 10,487,452 10,836,359
262,344 266,915 269,951 270,463
11,955,902 12,670,983 12,542,357 12,820,611
9,469,575 9,718,684 10,192,683 10,554,011
1,273,206 1,740,520 1,134,291 1,018,209
174,077 174,184 164,138 182,529
192,791 190,444 190,222 188,205
0 0 0 0
40,000 0 0 0
40,487 40,487 40,487 40,487
765,766 806,664 820,536 837,170
11,955,902 12,670,983 12,542,357 12,820,611
794,181 213,206 430,248 652,033
121,551 27,864 57,148 84,567
12,422 2,707 3,984 4,865
928,154 243,777 491,380 741,465
346,348 90,879 186,648 288,674
441,730 114,185 229,181 347,065
486,424 129,592 262,199 394,400
40,350 9,675 21,375 31,850
4,479 318 427 412
374,439 96,317 194,238 301,896
221,173 59,851 124,300 183,261
131,036 36,153 74,812 110,683
0 0 0 0
0 0 0 0
131,036 36,153 74,812 110,683
19.61 5.51 11.17 16.51
17.98 4.97 10.33 15.38
4.43 4.49 4.48 4.44
75,224 67,098 57,603 59,517
17,842 15,513 27,406 36,958
0 0 0 0
0 0 0 0
243,332 262,344 262,344 262,344
31,207 8,162 20,486 34,510
9,869 3,058 6,718 10,779
262,344 266,915 269,951 270,463
136,072 137,828 135,653 134,166
0 0 0 0
126,272 129,087 134,298 136,297
