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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 September 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9861 M&T BANK CORPORATION (Exact name of registrant as specified in its charter) New York 16-0968385 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One M & T Plaza 14203 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 November 5, 1999: 7,794,263 shares.
M&T BANK CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE Part I. FINANCIAL INFORMATION Item 1. Financial Statements. CONSOLIDATED BALANCE SHEET - September 30, 1999 and December 31, 1998 3 CONSOLIDATED STATEMENT OF INCOME - Three and nine months ended September 30, 1999 and 1998 4 CONSOLIDATED STATEMENT OF CASH FLOWS - Nine months ended September 30, 1999 and 1998 5 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - Nine months ended September 30, 1999 and 1998 6 CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES - Nine months ended September 30, 1999 and 1998 6 NOTES TO FINANCIAL STATEMENTS 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 33 Part II. OTHER INFORMATION 33 Item 1. Legal Proceedings. 33 Item 2. Changes in Securities and Use of Proceeds. 33 Item 3. Defaults Upon Senior Securities. 33 Item 4. Submission of Matters to a Vote of Security Holders. 33 Item 5. Other Information. 33 Item 6. Exhibits and Reports on Form 8-K. 33 SIGNATURES 34 EXHIBIT INDEX 35 -2-
PART I. FINANCIAL INFORMATION Item 1. Financial Statements - -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (Unaudited) September 30, December 31, DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 517,461 493,792 Money-market assets Interest-bearing deposits at banks 747 674 Federal funds sold and agreements to resell securities 517,381 229,066 Trading account 555,007 173,122 ---------------------------------------------------------------------------------------------------- Total money-market assets 1,073,135 402,862 ---------------------------------------------------------------------------------------------------- Investment securities Available for sale (cost: $1,779,804 at September 30, 1999; $2,578,940 at December 31, 1998) 1,742,508 2,583,740 Held to maturity (market value: $94,732 at September 30, 1999; $87,365 at December 31, 1998) 95,750 87,282 Other (market value: $115,193 at September 30, 1999; $114,542 at December 31, 1998) 115,193 114,542 ---------------------------------------------------------------------------------------------------- Total investment securities 1,953,451 2,785,564 ---------------------------------------------------------------------------------------------------- Loans and leases 17,155,460 16,005,701 Unearned discount (171,837) (214,171) Allowance for possible credit losses (314,965) (306,347) ---------------------------------------------------------------------------------------------------- Loans and leases, net 16,668,658 15,485,183 ---------------------------------------------------------------------------------------------------- Premises and equipment 169,709 162,842 Goodwill and core deposit intangible 662,580 546,036 Accrued interest and other assets 714,307 707,612 ---------------------------------------------------------------------------------------------------- Total assets $ 21,759,301 20,583,891 - ----------------------------------------------------------------------------------------------------------------------------- Liabilities Noninterest-bearing deposits $ 2,176,130 2,066,814 NOW accounts 538,328 509,307 Savings deposits 5,345,378 4,830,678 Time deposits 7,107,121 7,027,083 Deposits at foreign office 249,559 303,270 ---------------------------------------------------------------------------------------------------- Total deposits 15,416,516 14,737,152 ---------------------------------------------------------------------------------------------------- Federal funds purchased and agreements to repurchase securities 1,370,044 1,746,078 Other short-term borrowings 459,987 483,898 Accrued interest and other liabilities 920,689 446,854 Long-term borrowings 1,774,897 1,567,543 ---------------------------------------------------------------------------------------------------- Total liabilities 19,942,133 18,981,525 - ----------------------------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $1 par, 1,000,000 shares authorized, none outstanding -- -- Common stock, $5 par, 15,000,000 shares authorized, 8,101,539 shares issued 40,508 40,508 Common stock issuable - 8,584 shares at September 30, 1999; 4,025 3,752 8,028 shares at December 31, 1998 Additional paid-in capital 460,246 480,014 Retained earnings 1,445,114 1,271,071 Accumulated other comprehensive income, net (22,078) 2,869 Treasury stock - common, at cost - 226,804 shares at September 30, 1999; 403,769 shares at December 31, 1998 (110,647) (195,848) ---------------------------------------------------------------------------------------------------- Total stockholders' equity 1,817,168 1,602,366 ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 21,759,301 20,583,891 - ----------------------------------------------------------------------------------------------------------------------------- -3-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three months ended Nine months ended September 30 September 30 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income Loans and leases, including fees $ 336,186 317,568 $ 973,002 884,907 Money-market assets Deposits at banks 25 16 80 386 Federal funds sold and agreements to resell securities 5,732 1,634 14,936 4,603 Trading account 355 1,763 2,980 2,368 Investment securities Fully taxable 28,539 36,959 91,425 102,827 Exempt from federal taxes 2,220 2,084 6,499 5,757 --------------------------------------------------------------------------------------------------------------- Total interest income 373,057 360,024 1,088,922 1,000,848 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense NOW accounts 1,055 1,328 3,460 3,472 Savings deposits 30,708 31,395 88,632 84,638 Time deposits 90,955 103,525 271,029 289,659 Deposits at foreign office 2,720 3,964 8,906 10,765 Short-term borrowings 26,886 29,376 75,389 78,942 Long-term borrowings 27,637 15,262 79,052 36,603 --------------------------------------------------------------------------------------------------------------- Total interest expense 179,961 184,850 526,468 504,079 --------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 193,096 175,174 562,454 496,769 Provision for possible credit losses 13,500 10,500 30,500 35,700 --------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible credit losses 179,596 164,674 531,954 461,069 - ------------------------------------------------------------------------------------------------------------------------------------ Other income Mortgage banking revenues 16,893 16,405 56,980 48,741 Service charges on deposit accounts 20,268 15,940 52,851 41,354 Trust income 10,227 9,355 30,828 28,778 Merchant discount and other credit card fees 1,906 2,321 5,409 10,889 Trading account and foreign exchange gains (losses) 742 (148) (1,331) 2,137 Gain on sales of bank investment securities 1,355 376 1,575 698 Other revenues from operations 21,108 19,737 65,709 65,357 --------------------------------------------------------------------------------------------------------------- Total other income 72,499 63,986 212,021 197,954 - ------------------------------------------------------------------------------------------------------------------------------------ Other expense Salaries and employee benefits 71,570 63,520 211,385 191,783 Equipment and net occupancy 18,617 18,876 54,121 50,233 Printing, postage and supplies 4,877 4,743 13,335 13,342 Amortization of goodwill and core deposit intangible 12,538 10,879 34,568 23,579 Other costs of operations 37,296 40,472 116,502 148,430 --------------------------------------------------------------------------------------------------------------- Total other expense 144,898 138,490 429,911 427,367 --------------------------------------------------------------------------------------------------------------- Income before income taxes 107,197 90,170 314,064 231,656 Income taxes 39,633 33,693 114,556 81,525 --------------------------------------------------------------------------------------------------------------- NET INCOME $ 67,564 56,477 $ 199,508 150,131 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per common share Basic $ 8.57 7.09 $ 25.57 19.84 Diluted 8.29 6.81 24.63 19.01 Cash dividends per common share 1.25 1.00 3.25 2.80 Average common shares outstanding Basic 7,880 7,966 7,802 7,566 Diluted 8,147 8,288 8,101 7,897 -4-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine months ended September 30 DOLLARS IN THOUSANDS 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Cash flows from Net income $ 199,508 150,131 operating activities Adjustments to reconcile net income to net cash provided by operating activities Provision for possible credit losses 30,500 35,700 Depreciation and amortization of premises and equipment 20,918 18,936 Amortization of capitalized servicing rights 14,840 14,733 Amortization of goodwill and core deposit intangible 34,568 23,579 Provision for deferred income taxes (1,708) (2,225) Asset write-downs 1,342 3,304 Net gain on sales of assets (1,416) (4,257) Net change in accrued interest receivable, payable (13,208) 12,451 Net change in other accrued income and expense (4,354) 32,927 Net change in loans held for sale 171,853 (141,177) Net change in trading account assets and liabilities 113,068 (141,036) ------------------------------------------------------------------------------------------ Net cash provided by operating activities 565,911 3,066 - ------------------------------------------------------------------------------------------------------------------- Cash flows from Proceeds from sales of investment securities investing activities Available for sale 89,509 124,553 Other 7,223 3,976 Proceeds from maturities of investment securities Available for sale 981,968 821,178 Held to maturity 39,620 74,536 Other -- 7,930 Purchases of investment securities Available for sale (137,940) (141,230) Held to maturity (39,791) (34,405) Other (5,206) (21,873) Net increase in interest-bearing deposits at banks (73) (241) Additions to capitalized servicing rights (13,373) (9,516) Net increase in loans and leases (955,840) (771,606) Proceeds from sale of retail credit card business -- 189,818 Capital expenditures, net (11,191) (17,207) Acquisitions, net of cash acquired: Banks and bank holding companies (51,423) 20,790 Deposits and banking offices 529,754 -- Purchases of bank owned life insurance -- (150,000) Other, net 19,099 (13,204) ------------------------------------------------------------------------------------------ Net cash provided by investing activities 452,336 83,499 - ------------------------------------------------------------------------------------------------------------------- Cash flows from Net decrease in deposits (465,505) (533,682) financing activities Net increase (decrease) in short-term borrowings (399,837) 250,960 Proceeds from long-term borrowings 353,152 500,000 Payments on long-term borrowings (165,050) (2,479) Purchases of treasury stock (6,244) (135,528) Dividends paid - common (25,437) (21,279) Other, net 2,658 11,168 ------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (706,263) 69,160 ------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents $ 311,984 155,725 Cash and cash equivalents at beginning of period 722,858 386,892 Cash and cash equivalents at end of period $ 1,034,842 542,617 - ------------------------------------------------------------------------------------------------------------------- Supplemental Interest received during the period $ 1,086,518 1,004,594 disclosure of cash Interest paid during the period 537,677 500,793 flow information Income taxes paid during the period 113,365 48,162 - ------------------------------------------------------------------------------------------------------------------- Supplemental schedule of Real estate acquired in settlement of loans $ 7,422 5,754 noncash investing and Acquisition of banks and bank holding companies: financing activities Common stock issued 58,746 587,819 Fair value of: Assets acquired (noncash) 650,841 5,206,168 Liabilities assumed 540,672 4,619,715 Stock options -- 19,424 - ------------------------------------------------------------------------------------------------------------------- -5-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Common Additional other Preferred Common stock paid-in Retained comprehensive Treasury DOLLARS IN THOUSANDS, EXCEPT PER SHARE stock stock issuable capital earnings income, net stock - ------------------------------------------------------------------------------------------------------------------------------------ 1998 Balance - January 1, 1998 $ -- 40,487 -- 103,233 1,092,106 12,016 (217,576) Comprehensive income: Net income -- -- -- -- 150,131 -- -- Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment -- -- -- -- -- (5,234) -- Purchases of treasury stock -- -- -- -- -- -- (135,528) Acquisition of ONBANCorp: Common stock issued -- 10 -- 364,427 -- -- 223,382 Fair value of stock options -- -- -- 19,424 -- -- -- Stock-based compensation plans: Exercise of stock options -- 11 -- (2,303) -- -- 21,768 Directors' stock plan -- -- -- 49 -- -- 177 Deferred bonus plan, net, including dividend equivalents -- -- 3,834 (1) (16) -- 59 Common stock cash dividends - $2.80 per share -- -- -- -- (21,279) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance - September 30, 1998 $ -- 40,508 3,834 484,829 1,220,942 6,782 (107,718) - ----------------------------------------------------------------------------------------------------------------------------------- 1999 Balance - January 1, 1999 $ -- 40,508 3,752 480,014 1,271,071 2,869 (195,848) Comprehensive income: Net income -- -- -- -- 199,508 -- -- Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment -- -- -- -- -- (24,947) -- Purchases of treasury stock -- -- -- -- -- -- (6,244) Acquisition of FNB Rochester Corp.: Common stock issued -- -- -- (718) -- -- 59,464 Stock-based compensation plans: Exercise of stock options -- -- -- (19,050) -- -- 31,398 Directors' stock plan -- -- -- 13 -- -- 219 Deferred bonus plan, net, including dividend equivalents -- -- 273 (13) (28) -- 364 Common stock cash dividends - $3.25 per share -- -- -- -- (25,437) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance - September 30, 1999 $ -- 40,508 4,025 460,246 1,445,114 (22,078) (110,647) - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------- DOLLARS IN THOUSANDS, EXCEPT PER SHARE Total - ------------------------------------------------------------- 1998 Balance - January 1, 1998 $ 1,030,266 Comprehensive income: Net income 150,131 Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment (5,234) ---------- 144,897 Purchases of treasury stock (135,528) Acquisition of ONBANCorp: Common stock issued 587,819 Fair value of stock options 19,424 Stock-based compensation plans: Exercise of stock options 19,476 Directors' stock plan 226 Deferred bonus plan, net, including dividend equivalents 3,876 Common stock cash dividends - $2.80 per share (21,279) - ------------------------------------------------------------- Balance - September 30, 1998 $ 1,649,177 - ------------------------------------------------------------- 1999 Balance - January 1, 1999 $ 1,602,366 Comprehensive income: Net income 199,508 Other comprehensive income, net of tax: Unrealized losses on investment securities, net of reclassification adjustment (24,947) ---------- 174,561 Purchases of treasury stock (6,244) Acquisition of FNB Rochester Corp.: Common stock issued 58,746 Stock-based compensation plans: Exercise of stock options 12,348 Directors' stock plan 232 Deferred bonus plan, net, including dividend equivalents 596 Common stock cash dividends - $3.25 per share (25,437) - ------------------------------------------------------------- Balance - September 30, 1999 $ 1,817,168 - ------------------------------------------------------------- CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES (Unaudited) - -------------------------------------------------------------------- Nine months ended September 30 DOLLARS IN THOUSANDS 1999 1998 - -------------------------------------------------------------------- Beginning balance $ 306,347 274,656 Provision for possible credit losses 30,500 35,700 Allowance obtained through acquisition 5,636 27,905 Net charge-offs Charge-offs (41,044) (41,088) Recoveries 13,526 12,362 - -------------------------------------------------------------------- Total net charge-offs (27,518) (28,726) - -------------------------------------------------------------------- Ending balance $ 314,965 309,535 - -------------------------------------------------------------------- -6-
NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of M&T Bank Corporation ("M&T") and subsidiaries (referred to collectively as "the Company") were compiled in accordance with the accounting policies set forth in note 1 of Notes to Financial Statements included in the Company's 1998 Annual Report, except as described below. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature. Certain reclassifications have been made to the 1998 financial statements to conform with the current year presentation. 2. EARNINGS PER SHARE The computations of basic earnings per share follow: Three months ended Nine months ended September 30 September 30 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands, except per share) Income available to common stockholders: Net income $67,564 56,477 199,508 150,131 Weighted-average shares outstanding (including common stock issuable) 7,880 7,966 7,802 7,566 Basic earnings per share $ 8.57 7.09 25.57 19.84 The computations of diluted earnings per share follow: Three months ended Nine months ended September 30 September 30 1999 1998 1999 1998 ---- ---- ---- ---- (in thousands, except per share) Income available to common stockholders $67,564 56,477 199,508 150,131 Weighted-average shares outstanding (including common stock issuable) 7,880 7,966 7,802 7,566 Plus: incremental shares from assumed conversions of stock options 267 322 299 331 ------- ------ ------- ------- Adjusted weighted-average shares outstanding 8,147 8,288 8,101 7,897 Diluted earnings per share $ 8.29 6.81 24.63 19.01 3. COMPREHENSIVE INCOME The following table displays the components of other comprehensive income: NINE MONTHS ENDED SEPTEMBER 30, 1999 Before-tax Income amount taxes Net ------- ------- ------- (in thousands) Unrealized losses on investment securities: Unrealized holding losses during period $(40,521) (16,510) (24,011) Less: reclassification adjustment for gains realized in net income 1,575 639 936 ------- ------- ------- Net unrealized losses $(42,096) (17,149) (24,947) ======== ======= ======= -7-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 3. COMPREHENSIVE INCOME, CONTINUED NINE MONTHS ENDED SEPTEMBER 30, 1998 Before-tax Income Amount Taxes Net ------- ------- ------- (in thousands) Unrealized losses on investment securities: Unrealized holding losses during period(a) $(8,112) (3,291) (4,821) Less: reclassification adjustment for gains realized in net income 698 285 413 ------- ------- ------- Net unrealized losses $(8,810) (3,576) (5,234) ======= ====== ====== (a) Including the effect of the contribution of appreciated investment securities described in note 4. 4. CONTRIBUTION OF APPRECIATED INVESTMENT SECURITIES In January 1998, M&T contributed appreciated investment securities with a fair value of $24.6 million to an affiliated, tax-exempt private charitable foundation. As a result of this transfer, the Company recognized tax-exempt other income of $15.3 million and incurred charitable contributions expense of $24.6 million that are included in the Consolidated Statement of Income in "Other revenues from operations" and "Other costs of operations," respectively. The transfer provided an income tax benefit of approximately $10.0 million and, accordingly, resulted in an after-tax increase in net income of $0.7 million. 5. ACQUISITIONS On September 24, 1999, Manufacturers and Traders Trust Company ("M&T Bank"), M&T's principal banking subsidiary, acquired 29 upstate New York branches from The Chase Manhattan Bank ("Chase"). Acquired loans and deposits totaled approximately $44 million and $634 million, respectively, on September 24, 1999. In addition, on September 30, 1999 M&T Bank acquired from Chase investment management and custody accounts associated with the branches having assets of approximately $286 million. Chase has also agreed to transfer up to approximately $195 million of other trust and fiduciary account assets to M&T Bank following the receipt of required regulatory and court approvals. It is expected that this transfer will be completed at or about the end of March 2000. In connection with the acquisition, the Company recorded approximately $55 million of goodwill and core deposit intangible. The goodwill is being amortized on a straight-line basis over five years and the core deposit intangible is being amortized on an accelerated basis over seven years. On June 1, 1999, M&T consummated the merger of FNB Rochester Corp.("FNB"), a bank holding company headquartered in Rochester, New York, with and into Olympia Financial Corp. ("Olympia"), a wholly owned subsidiary of M&T. Following the merger with FNB, First National Bank of Rochester, a wholly owned subsidiary of FNB, was merged into M&T Bank. In accordance with the terms of the merger agreements with FNB, M&T paid $76.3 million in cash and issued 122,516 shares of M&T common stock in exchange for FNB shares outstanding at the time of the acquisition. The purchase price of the transaction was approximately $135.0 million based on the cash paid to FNB stockholders and the market price of M&T common shares on December 8, 1998 before the terms of the merger were agreed to and announced by M&T and FNB. Acquired assets, loans and deposits of FNB on June 1, 1999 totaled approximately $676 million, $393 million and $511 million, respectively. The transaction was accounted for as a purchase and, accordingly, operations acquired from FNB have been included in the Company's financial results since the acquisition date. In connection with the acquisition, the Company recorded approximately $98 million of goodwill and 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 eight years. -8-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 5. ACQUISITIONS, CONTINUED In connection with the transactions described in the two preceding paragraphs, 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 $2.2 million ($1.3 million net of applicable income taxes) and $4.7 million ($3.0 million net of applicable income taxes) during the three-month and nine-month periods ended September 30, 1999, respectively. On April 1, 1998, M&T consummated the merger of ONBANCorp, Inc. ("ONBANCorp") with and into Olympia. Following the merger with ONBANCorp, OnBank & Trust Co., Syracuse, New York, and Franklin First Savings Bank, Wilkes-Barre, Pennsylvania, both wholly owned subsidiaries of ONBANCorp, were merged with and into M&T Bank. After application of the election, allocation and proration procedures contained in the merger agreement with ONBANCorp, M&T paid $266.3 million in cash and issued 1,429,998 shares of common stock in exchange for the ONBANCorp common shares outstanding at the time of acquisition. In addition, based on the merger agreement and the exchange ratio provided for therein, M&T converted outstanding and unexercised stock options granted by ONBANCorp into options to purchase 61,772 shares of M&T common stock. The purchase price of the transaction was approximately $873.6 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 value of ONBANCorp stock options converted into M&T stock options. Acquired assets, loans and deposits of ONBANCorp on April 1, 1998 totaled approximately $5.5 billion, $3.0 billion and $3.8 billion, respectively. The transaction was accounted for as a purchase and, accordingly, operations acquired from ONBANCorp have been included in the Company's financial results since the acquisition date. In connection with the acquisition, the Company recorded approximately $501 million of goodwill and $61 million of core deposit intangible. The goodwill is being amortized on a straight-line basis over twenty years and the core deposit intangible is being amortized on an accelerated basis over ten years. The Company incurred expenses related to systems conversions and other costs of integrating and conforming the acquired operations with and into the Company of approximately $21.3 million ($14.0 million net of applicable income taxes) during 1998. The expenses were incurred during the first nine months of 1998 including approximately $3.0 million ($1.8 million net of applicable income taxes) during the three-month period ended September 30, 1998. 6. BORROWINGS In January 1997, First Empire Capital Trust I ("Trust I"), a Delaware business trust organized by the Company on January 17, 1997, issued $150 million of 8.234% preferred capital securities. In June 1997, First Empire Capital Trust II ("Trust II"), a Delaware business trust organized by the Company on May 30, 1997, issued $100 million of 8.277% preferred capital securities. As a result of the ONBANCorp acquisition, the Company assumed responsibility for similar preferred capital securities previously issued by a special-purpose entity formed by ONBANCorp. In February 1997, OnBank Capital Trust I ("OnBank Trust I" and, together with Trust I and Trust II, the "Trusts"), a Delaware business trust organized by ONBANCorp on January 24, 1997, issued $60 million of 9.25% preferred capital securities. Including the unamortized portion of a purchase accounting adjustment to reflect estimated fair value at the April 1, 1998 acquisition of ONBANCorp, the preferred capital securities of OnBank Trust I had a financial statement carrying value of approximately $69 million at September 30, 1999 and December 31, 1998. -9-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. BORROWINGS, CONTINUED Other than the following payment terms (and the redemption terms described below), the preferred capital securities issued by the Trusts ("Capital Securities") are similar in all material respects: DISTRIBUTION DISTRIBUTION TRUST RATE DATES ----- ---- ----- Trust I 8.234% February 1 and August 1 Trust II 8.277% June 1 and December 1 OnBank Trust I 9.25% February 1 and August 1 The common securities of Trust I and Trust II are wholly owned by M&T and the common securities of OnBank Trust I are wholly owned by Olympia. The common securities of each trust ("Common Securities") are the only class of each Trust's securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding Trust and are classified in the Company's consolidated balance sheet as long-term borrowings, with accumulated distributions on such securities included in interest expense. Under the Federal Reserve Board's current risk-based capital guidelines, the Capital Securities are includable in the Company's Tier 1 capital. The proceeds from the issuances of the Capital Securities and Common Securities were used by the Trusts to purchase the following amounts of junior subordinated deferrable interest debentures ("Junior Subordinated Debentures") issued by M&T in the case of Trust I and Trust II and Olympia in the case of OnBank Trust I: CAPITAL COMMON JUNIOR SUBORDINATED TRUST SECURITIES SECURITIES DEBENTURES ----- ---------- ---------- ---------- Trust I $150 million $4.64 million $154.64 million aggregate liquidation amount of 8.234% Junior Subordinated Debentures due February 1, 2027. Trust II $100 million $3.09 million $103.09 million aggregate liquidation amount of 8.277% Junior Subordinated Debentures due June 1, 2027. OnBank Trust I $60 million $1.856 million $61.856 million aggregate liquidation amount of 9.25% Junior Subordinated Debentures due February 1, 2027. The Junior Subordinated Debentures represent the sole assets of each Trust and payments under the Junior Subordinated Debentures are the sole source of cash flow for each Trust. Holders of the Capital Securities receive preferential cumulative cash distributions semi-annually on each distribution date at the stated distribution rate unless M&T, in the case of Trust I and Trust II, or Olympia, in the case of OnBank Trust I, exercise the right to extend the payment of interest on the Junior Subordinated Debentures for up to ten semi-annual periods, in which case payment of distributions on the respective Capital Securities will be deferred for a comparable period. During an extended interest period, M&T and/or Olympia may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of the respective company's capital stock. The agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T in the case of Trust I and Trust II and Olympia in the case of OnBank Trust I of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The -10-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. BORROWINGS, CONTINUED obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T and Olympia. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events ("Events") set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after the stated optional redemption dates (February 1, 2007 in the case of Trust I and OnBank Trust I, and June 1, 2007 in the case of Trust II) contemporaneously with the Company's optional redemption of the related Junior Subordinated Debentures in whole or in part. The Junior Subordinated Debentures are redeemable prior to their stated maturity dates at M&T's option in the case of Trust I and Trust II and Olympia's option in the case of OnBank Trust I (i) on or after the stated optional redemption dates, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of one or more of the Events, in each case subject to possible regulatory approval. The redemption price of the Capital Securities upon their early redemption will be expressed as a percentage of the liquidation amount plus accumulated but unpaid distributions. In the case of Trust I, such percentage adjusts annually and ranges from 104.117% at February 1, 2007 to 100.412% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007. In the case of Trust II, such percentage adjusts annually and ranges from 104.139% at June 1, 2007 to 100.414% for the annual period ending May 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to June 1, 2007. In the case of OnBank Trust I, such percentage adjusts annually and ranges from 104.625% at February 1, 2007 to 100.463% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007. 7. SEGMENT INFORMATION In accordance with the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," reportable segments have been determined based upon the Company's internal profitability reporting system, which is organized by strategic business units. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking. The financial information of the Company's segments was compiled utilizing the accounting policies described in note 21 to the Company's consolidated financial statements as of and for the year ended December 31, 1998. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, the financial information of the reported segments is not necessarily comparable with similar information reported by other financial institutions. Information about the Company's segments is presented in the following tables. -11-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 7. SEGMENT INFORMATION, CONTINUED THREE MONTHS ENDED SEPTEMBER 30 1999 1998 INTER- NET INTER- NET TOTAL SEGMENT INCOME TOTAL SEGMENT INCOME REVENUES(a) REVENUES (LOSS) REVENUES(a) REVENUES (LOSS) -------- -------- ------ -------- -------- ------ (in thousands) Commercial Banking $ 47,561 102 17,406 41,473 178 17,818 Commercial Real Estate 32,103 293 16,258 29,351 324 14,296 Discretionary Portfolio 19,204 (167) 10,351 15,156 (570) 8,706 Residential Mortgage Banking 31,594 7,272 4,599 34,941 12,069 4,576 Retail Banking 119,255 1,984 29,554 113,775 1,466 30,427 All Other 15,878 (9,484) (10,604) 4,464 (13,467) (19,346) -------- ------ ------- ------- ------- ------- Total $265,595 -- 67,564 239,160 -- 56,477 ======== ====== ======= ======= ======= ======= NINE MONTHS ENDED SEPTEMBER 30 1999 1998 INTER- NET INTER- NET TOTAL SEGMENT INCOME TOTAL SEGMENT INCOME REVENUES(a) REVENUES (LOSS) REVENUES(a) REVENUES (LOSS) -------- -------- ------ -------- -------- ------ (in thousands) Commercial Banking $138,285 326 58,068 116,349 448 50,314 Commercial Real Estate 92,548 971 47,147 87,048 968 44,698 Discretionary Portfolio 51,256 (979) 27,862 43,519 (1,406) 22,283 Residential Mortgage Banking 103,360 26,205 17,551 99,652 33,191 14,826 Retail Banking 335,118 6,497 80,715 310,242 4,860 74,746 All Other 53,908 (33,020) (31,835) 37,913 (38,061) (56,736) -------- ------ ------- ------- ------- ------- Total $774,475 -- 199,508 694,723 -- 150,131 ======== ====== ======= ======= ======= ======= (a) Total revenues are comprised of net interest income and other income. Net interest income is the difference between taxable-equivalent interest earned on assets and interest paid on liabilities owned by a segment and a funding charge (credit) based on the Company's internal funds transfer pricing methodology. Segments are charged a cost to fund any assets (e.g., loans) and are paid a funding credit for any funds provided (e.g., deposits). The taxable-equivalent adjustment aggregated $1,964,000 and $1,897,000 for the three-month periods ended September 30, 1999 and 1998, respectively, and $5,627,000 and $5,217,000 for the nine-month periods ended September 30, 1999 and 1998, respectively, and is eliminated in "All Other" total revenues. Total revenues in "All Other" for the nine months ended September 30, 1998 include the impact of the contribution of appreciated investment securities described in note 4. Intersegment revenues are included in total revenues of the reportable segments. The elimination of intersegment revenues is included in the determination of "All Other" total revenues. -12-
NOTES TO FINANCIAL STATEMENTS, CONTINUED 7. SEGMENT INFORMATION, CONTINUED AVERAGE TOTAL ASSETS NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1999 1998 1998 ---- ---- ---- (in millions) Commercial Banking $ 4,189 3,473 3,653 Commercial Real Estate 4,028 3,559 3,527 Discretionary Portfolio 6,763 5,731 6,025 Residential Mortgage Banking 642 551 581 Retail Banking 4,166 3,702 3,781 All Other 902 690 742 ------- ----- ----- Total $20,690 17,706 18,309 ======= ====== ====== -13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW M&T Bank Corporation ("M&T") earned $67.6 million or $8.29 of diluted earnings per common share in the third quarter of 1999, increases of 20% and 22%, respectively, from the year-earlier quarter when net income was $56.5 million or $6.81 of diluted earnings per common share. Net income was $65.0 million or $8.00 of diluted earnings per common share in the second quarter of 1999. Basic earnings per common share rose 21% to $8.57 in the recent quarter from $7.09 in the third quarter of 1998 and were up 3% from $8.35 earned in the second quarter of 1999. The after-tax impact of nonrecurring acquisition-related expenses associated with the merger and acquisition activity described below was $1.3 million ($2.2 million pre-tax) or $.15 of diluted earnings per share and $.16 of basic earnings per share in the third quarter of 1999, compared with $1.8 million ($3.0 million pre-tax) or $.21 of diluted earnings per share and $.22 of basic earnings per share in the year-earlier quarter and $1.7 million ($2.5 million pre-tax) or $.21 of diluted earnings per share and $.22 of basic earnings per share in the second quarter of 1999. For the nine months ended September 30, 1999, net income was $199.5 million or $24.63 per diluted share, up 33% and 30%, respectively, from $150.1 million or $19.01 per diluted share during the first nine months of 1998. Basic earnings per share rose to $25.57 in the first nine months of 1999 from $19.84 in the similar 1998 period. Nonrecurring merger-related expenses lowered net income during the first three quarters of 1999 by $3.0 million and diluted and basic earnings per share by $.37 and $.38, respectively. Similar expenses in the first nine months of 1998 lowered net income by $14.0 million and reduced diluted and basic earnings per share by $1.77 and $1.85, respectively. The annualized rate of return on average total assets for M&T and its consolidated subsidiaries ("the Company") in the third quarter of 1999 was 1.27%, up from 1.15% in the year-earlier quarter and equal to 1999's second quarter. The annualized return on average common stockholders' equity was 14.97% in the recent quarter, compared with 13.48% in the third quarter of 1998 and 15.23% in the second quarter of 1999. During the first nine months of 1999, the annualized rates of return on average assets and average common stockholders' equity were 1.29% and 15.56%, respectively, compared with 1.13% and 13.73%, respectively, in the corresponding 1998 period. Excluding the impact of merger-related expenses, the annualized returns on average assets and average common equity were 1.29% and 15.25%, respectively, during the recent quarter, compared with 1.19% and 13.91%, respectively, during the third quarter of 1998. On the same basis, the annualized returns on average assets and average common equity during the first nine months of 1999 were 1.31% and 15.79%, respectively, compared with 1.24% and 15.01%, respectively, during the comparable period in 1998. On September 24, 1999, Manufacturers and Traders Trust Company ("M&T Bank"), the principal commercial bank subsidiary of M&T, completed the acquisition of 29 upstate New York branches from The Chase Manhattan Bank ("Chase"). The branches had approximately $634 million of deposits and approximately $44 million of retail installment and small business loans at the closing. In addition, on September 30, 1999 M&T Bank acquired investment management and custody accounts having assets of approximately $286 million. Chase has also agreed to transfer up to approximately $195 million of other trust and fiduciary account assets to M&T Bank following the receipt of required regulatory and court approvals. It is expected that this transaction will be completed at or about the end of March 2000. The impact of this acquisition on the Company's financial results for the third quarter of 1999 was not significant. On June 1, 1999, M&T completed the acquisition of FNB Rochester Corp. ("FNB"), a bank holding company headquartered in Rochester, New York. -14-
Immediately after the acquisition, FNB's banking subsidiary, First National Bank of Rochester, which had 17 banking offices in western and central New York State, was merged with and into M&T Bank. The acquisition was accounted for using the purchase method of accounting, and, accordingly, the operations of FNB have been included in the financial results of the Company since the acquisition date. FNB's stockholders received $76.3 million in cash and 122,516 shares of M&T common stock in exchange for FNB shares outstanding at the time of acquisition. Assets acquired totaled approximately $676 million and included loans and leases of $393 million and approximately $98 million of goodwill and core deposit intangible. Liabilities assumed on June 1 were approximately $541 million and included $511 million of deposits. Nonrecurring expenses related to systems conversions and other costs of integrating and conforming the acquired operations described in the two preceding paragraphs with and into M&T Bank totaled $2.2 million ($1.3 million after-tax) and $4.7 million ($3.0 million after-tax) during the three-month and nine-month periods ended September 30, 1999, respectively. Merger-related expenses incurred in 1998 related to the April 1, 1998 merger with ONBANCorp, Inc. ("ONBANCorp") totaled $3.0 million ($1.8 million after-tax) and $21.3 million ($14.0 million after-tax) during the three-month and nine-month periods ended September 30, 1998, respectively. CASH OPERATING RESULTS As a result of the acquisitions of the Chase branches, FNB and ONBANCorp and, to a significantly lesser extent, acquisitions of other entities in prior years, M&T had recorded as assets at September 30, 1999 goodwill and core deposit intangible totaling $663 million. Since the amortization of goodwill and core deposit intangible does not result in a cash expense, M&T believes that supplemental reporting of its operating results on a "cash" (or "tangible") basis (which excludes the after-tax effect of amortization of goodwill and core deposit intangible and the related asset balances) represents a relevant measure of financial performance. The supplemental cash basis data presented herein do not exclude the effect of other non-cash operating expenses such as depreciation, provision for possible credit losses, or deferred income taxes associated with the results of operations. Unless noted otherwise, cash basis data does, however, exclude the after-tax impact of nonrecurring merger-related expenses associated with the acquisitions of the Chase branches, FNB and ONBANCorp. Cash net income rose 18% to $79.7 million in the third quarter of 1999 from $67.7 million in the year-earlier quarter. Diluted cash earnings per share for the recent quarter were $9.78, up 20% from $8.17 in the third quarter of 1998. Cash net income and diluted cash earnings per share were $76.5 million and $9.41, respectively, in the second 1999 quarter. For the first nine months of 1999, cash net income and diluted cash earnings per share were $232.6 million and $28.71, respectively, up 26% and 23%, respectively, from $184.6 million and $23.37 in the corresponding 1998 period. On an annualized basis, cash return on average tangible assets was 1.54% in the recent quarter, compared with 1.42% in the third quarter of 1998 and 1.53% in the second quarter of 1999. Cash return on average tangible common equity was an annualized 26.43% in the third quarter of 1999, compared with 23.90% in the year-earlier quarter and 26.13% in the second 1999 quarter. For the first nine months of 1999, the annualized cash return on average tangible assets and average tangible common stockholders' equity was 1.54% and 26.72%, respectively, compared with 1.42% and 22.59%, respectively, in the corresponding 1998 period. Including the effect of merger-related expenses, the annualized cash return on average tangible assets for the third quarter of 1999 and 1998 was 1.51% and 1.38%, respectively, and the annualized cash return on average tangible common stockholders' equity was 26.00% and 23.28%, respectively. -15-
TAXABLE-EQUIVALENT NET INTEREST INCOME Net interest income expressed on a taxable-equivalent basis was $195.1 million in the third quarter of 1999, up 10% from $177.1 million in the year-earlier quarter and 3% above the $189.9 million earned in the second quarter of 1999. Growth in average loans and leases was the most significant factor contributing to the improvement in net interest income. Average loans and leases rose $1.6 billion, or 10%, to $16.7 billion in the third quarter of 1999 from $15.1 billion in the year-earlier quarter. Average loans and leases in the recent quarter were $622 million, or 4%, higher than the second quarter of 1999, due in part to the impact of the FNB transaction. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio. AVERAGE LOANS AND LEASES (net of unearned discount) Dollars in millions Percent increase (decrease) from 3rd Qtr. 3rd Qtr. 2nd Qtr. 1999 1998 1999 -------- -------- ------ Commercial, financial, etc. $ 3,374 15 % 5 % Real estate - commercial 6,039 16 5 Real estate - consumer 4,224 4 1 Consumer Automobile 1,445 1 - Home equity 830 12 7 Credit cards 10 (86) (5) Other 756 12 7 -------- -------- ------ Total consumer 3,041 4 4 -------- -------- ------ Total $16,678 10 % 4 % -------- -------- ------ -------- -------- ------ For the first nine months of 1999, taxable-equivalent net interest income rose 13% to $568.1 million from $502.0 million in the corresponding 1998 period. An increase in average loans and leases of $2.3 billion, including the full nine-month effect in 1999 of loans acquired in the April 1, 1998 ONBANCorp transaction, was the leading factor contributing to this improvement. Investment securities averaged $2.0 billion in 1999's third quarter, down from $2.5 billion in the third quarter of 1998 and $2.1 billion in the second quarter of 1999. The investment securities portfolio is largely comprised of mortgage-backed securities, collateralized mortgage obligations, and shorter-term U.S. Treasury notes. When purchasing investment securities, the Company considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to prepayment and other risks assumed. The Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, or credit risk associated with a particular security. Money-market assets averaged $458 million in the recent quarter, compared with $224 million in the third quarter of 1998 and $516 million in the second quarter of 1999. 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 the management of balance sheet size and resulting capital ratios. As a result of the changes described herein, average earning assets rose to $19.2 billion in the third quarter of 1999, up 7% from $17.9 billion in the third quarter of 1998. Average earning assets were $18.6 billion in the second quarter of 1999 and aggregated $18.8 billion and $16.4 billion for the nine months ended September 30, 1999 and 1998, respectively. -16-
Core deposits represent the most significant source of funding to the Company and generally carry lower interest rates than wholesale funds of comparable maturities. Such deposits consist of noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and nonbrokered domestic time deposits under $100,000. The Company's branch network is the principal source of core deposits, which also include certificates of deposit under $100,000 generated on a nationwide basis by M&T Bank, National Association ("M&T Bank, N.A."), a wholly owned bank subsidiary of M&T. Core deposits averaged $11.9 billion in the third quarter of 1999, compared with $11.4 billion in the year-earlier quarter and $11.6 billion in the second quarter of 1999. Core deposits obtained on June 1 in the acquisition of FNB were approximately $480 million. Core deposits obtained in the acquisition of the former Chase branches were approximately $550 million on September 24. However, these latter deposits had little impact on average core deposits in the recent quarter. The accompanying table provides an analysis of quarterly changes in the components of average core deposits. For the nine months ended September 30, 1999 and 1998, core deposits averaged $11.6 billion and $10.5 billion, respectively. AVERAGE CORE DEPOSITS Dollars in millions Percent increase (decrease) from 3rd Qtr. 3rd Qtr. 2nd Qtr. 1999 1998 1999 -------- -------- ------ NOW accounts $ 368 7 % (1)% Savings deposits 5,244 11 4 Time deposits less than $100,000 4,345 (6) 2 Noninterest-bearing deposits 1,982 11 5 -------- -------- ------ Total $11,939 4 % 3 % -------- -------- ------ -------- -------- ------ Supplementing 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 have been used as an alternative to short-term borrowings to lengthen the average maturity of interest-bearing liabilities. Brokered deposits averaged $1.1 billion during the third quarter of 1999 and totaled $1.1 billion at September 30, 1999, compared with an average balance of $1.4 billion during the comparable 1998 period and a total balance of $1.4 billion at September 30, 1998. Brokered deposits averaged $1.2 billion in the second quarter of 1999. The weighted average remaining term to maturity of brokered deposits at September 30, 1999 was 1.4 years. However, certain of the deposits have provisions that allow early redemption. In connection with the Company's management of interest rate risk, interest rate swaps have been entered into under which the Company receives a fixed rate of interest and pays a variable rate and that have notional amounts and terms similar to the amounts and terms of the brokered deposits. Additional amounts of brokered deposits may be solicited in the future depending on market conditions and the cost of funds available from alternative sources at the time. The Company also uses borrowings from banks, securities dealers, Federal Home Loan Banks ("FHLB") and others as sources of funding. Short-term borrowings averaged $2.1 billion in the third quarter of 1999, unchanged from the comparable 1998 quarter, but up from $1.9 billion in the second quarter of 1999. Long-term borrowings averaged $1.8 billion in the second and third quarters of 1999 and $861 million in the third quarter of 1998. Included in long-term borrowings during the second and third quarters of 1999 were $1.3 billion of FHLB borrowings, compared with $348 million in the third quarter of 1998. Long-term borrowings also include $319 million of trust preferred securities and $175 million of subordinated capital notes. Further information regarding the trust preferred securities is provided in note 6 of Notes to Financial Statements. -17-
Net interest income is impacted by changes in the composition of the Company's earning assets and interest-bearing liabilities, as well as changes in interest rates and spreads. The yield on earning assets decreased 27 basis points (hundredths of one percent) to 7.76% in the third quarter of 1999 from 8.03% in the corresponding quarter of 1998. The rate paid on interest-bearing liabilities in the recent quarter was 4.27%, down 40 basis points from 4.67% in the third quarter of 1998. The declines in the recent quarter's yields on earning assets and rates paid on interest-bearing liabilities were due to generally lower interest rates when compared with the corresponding 1998 quarter. As a result of the changes described above, net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities, was 3.49% in the third quarter of 1999, up 13 basis points from 3.36% in the year-earlier quarter. The net interest spread was 3.56% in the second quarter of 1999 when the yield on earning assets was 7.77% and the rate paid on interest-bearing liabilities was 4.21%. Increases in interest rates as a result of action taken by the Federal Reserve during the third quarter of 1999 contributed to the 6 basis point increase in the cost of interest-bearing liabilities and the resultant narrowing of the net interest spread. Net interest-free funds consist largely of noninterest-bearing demand deposits and stockholders' equity, partially offset by goodwill and core deposit intangible, bank-owned life insurance, and other non-earning assets. Net interest-free funds contributed .54% to net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets, in the third quarter of 1999, compared with .57% in the corresponding 1998 quarter and .53% in the second quarter of 1999. Average net interest-free funds totaled $2.5 billion in the third quarter of 1999, up from $2.2 billion a year earlier and $2.3 billion in the second 1999 quarter. As a result of the changes described above, the Company's net interest margin was 4.03% in the recent quarter, up from 3.93% in the third quarter of 1998, but down from 4.09% in the second quarter of 1999. During the first nine months of 1999 and 1998, the net interest margin was 4.03% and 4.09%, respectively. Interest rate swap agreements are utilized by the Company as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the portfolios of earning assets and interest-bearing liabilities. Revenue and expense arising from these agreements are reflected in either the yields earned on assets or, as appropriate, the rates paid on interest-bearing liabilities. The notional amount of interest rate swap agreements used as part of the Company's management of interest rate risk in effect at September 30, 1999 and 1998 was $1.7 billion and $2.5 billion, respectively. Under the terms of these swaps, the Company generally receives payments based on the outstanding notional amount of the swaps at fixed rates of interest and makes payments at variable rates. However, under the terms of $82 million of swaps, the Company pays a fixed rate of interest and receives a variable rate. At September 30, 1999, the weighted average rates to be received and paid under interest rate swap agreements were 6.38% and 5.40%, respectively. The Company had also entered into forward-starting swaps as of September 30, 1999, with an aggregate notional amount of $391 million in which the Company will pay a fixed rate of interest and receive a variable rate. The forward-starting swaps had no effect on the Company's net interest income through September 30, 1999. The average notional amounts of interest rate swaps and the related effect on net interest income and margin are presented in the accompanying table. -18-
INTEREST RATE SWAPS Dollars in thousands THREE MONTHS ENDED SEPTEMBER 30 ---------------------------------------------- 1999 1998 ------------------- ------------------ AMOUNT RATE * AMOUNT RATE * --------- -------- -------- -------- Increase (decrease) in: Interest income $ 2,786 .06 % $ 688 .02 % Interest expense (3,148) (.07) (2,859) (.07) --------- -------- Net interest income/margin $ 5,934 .12 % $ 3,547 .08 % ========= === ======== === Average notional amount ** $1,712,328 $2,538,794 ========== ========== NINE MONTHS ENDED SEPTEMBER 30 ---------------------------------------------- 1999 1998 ------------------- ------------------ AMOUNT RATE * AMOUNT RATE * --------- -------- -------- -------- Increase (decrease) in: Interest income $ 10,869 .08 % $ 1,378 .01 % Interest expense (11,796) (.10) (9,193) (.09) --------- -------- Net interest income/margin $ 22,665 .16 % $ 10,571 .09 % ========= === ======== === Average notional amount ** $2,032,302 $2,530,748 ========== ========== * 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 September 30, 1999 it would have received approximately $24 million if all interest rate swap agreements entered into for interest rate risk management purposes had been terminated, compared with $31 million a year earlier and $23 million at December 31, 1998. The estimated fair value of the interest rate swap portfolio results from the effects of changing interest rates and should be considered in the context of the entire balance sheet and the Company's overall interest rate risk profile. 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. The Company is exposed to various risks as a financial intermediary, 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 investment securities and 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. M&T's banking subsidiaries have access to additional funding sources through membership in the FHLB, as well as other available borrowing facilities. M&T has historically utilized dividend payments from its banking subsidiaries, which are subject to various regulatory limitations, to pay for operating expenses, shareholder dividends and treasury stock repurchases. These historical sources of cash flows were augmented, in 1997, by the proceeds from issuance of $250 million of trust preferred securities. M&T also maintains a $25 million line of credit with an unaffiliated commercial bank, all of which was available for borrowing at September 30, 1999. 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 funding needs anticipated in the normal course of business. The Company has also completed a liquidity contingency plan in anticipation -19-
of the Year 2000, which is discussed under the heading "Year 2000 Initiatives." Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Company's financial instruments. The primary market risk the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Company to interest rate risk, which occurs when assets and liabilities reprice at different times as interest rates change. As a result, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and off-balance sheet financial instruments. Management's philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of both on- and off-balance sheet financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of mortgage-related assets and expected maturities of investment securities, loans and deposits. Management supplements the modeling technique described above with analyses of market values of the Company's financial instruments. The Asset-Liability Committee, which includes members of senior management, monitors the Company's interest rate sensitivity with the aid of a computer model 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 as of September 30, 1999 and December 31, 1998 displays the estimated impact on net interest income from non-trading financial instruments resulting from changes in interest rates during the first modeling year. SENSITIVITY OF NET INTEREST INCOME TO CHANGES IN INTEREST RATES (dollars in thousands) Calculated increase (decrease) in projected net interest income CHANGES IN INTEREST RATES September 30, 1999 December 31, 1998 - ------------------------- ------------------ ----------------- +200 basis points $ (2,257) (7,668) +100 basis points (2,453) 335 - -100 basis points (1,077) 5,161 - -200 basis points (3,624) 4,498 Many assumptions are utilized in calculating the impact of changes in interest rates on net interest income, including prepayments of mortgage-related assets, cash flows from derivative and other financial instruments held for non-trading purposes and loan and deposit volumes, pricing and 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 -20-
activities are conducted utilizing financial instruments that include forward and futures contracts related to foreign currencies and mortgage-backed securities, U.S. Treasury and other government securities, and interest rate contracts, such as swaps. The Company generally mitigates the foreign currency and interest rate risk associated with trading activities by entering into offsetting trading positions. The amounts of gross and net trading positions as well as the type of trading activities conducted by the Company are subject to a well-defined series of potential loss exposure limits established by the Asset-Liability Committee. The notional amounts of interest rate contracts and foreign exchange and other option and futures contracts totaled $1.5 billion and $.6 billion, respectively, at September 30, 1999, $1.5 billion and $2.2 billion, respectively, at September 30, 1998, and $.4 billion and $2.0 billion, respectively, at December 31, 1998. The notional amounts of these trading contracts are not recorded in the consolidated balance sheet. However, the fair values of all financial instruments used for trading activities are recorded in the consolidated balance sheet. Given the Company's policies, limits and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading activities was not material as of September 30, 1999 and December 31, 1998. PROVISION FOR POSSIBLE CREDIT LOSSES The purpose of the provision for possible credit losses is to adjust the Company's allowance for possible credit losses to a level that is adequate to absorb losses inherent in the loan and lease portfolio. The provision for possible credit losses in the third quarter of 1999 was $13.5 million, up from $10.5 million in the corresponding 1998 quarter and $8.5 million in 1999's second quarter. Net loan charge-offs totaled $12.9 million in the recent quarter, compared with $11.8 million in the year-earlier quarter and $6.5 million in 1999's second quarter. The increase in charge-offs from the second quarter of 1999 was due to a $6.2 million partial charge-off of a commercial loan in the recent quarter. Net charge-offs as an annualized percentage of average loans and leases were .31% in the third quarter of 1999, equal to the corresponding 1998 quarter, but up from .16% in the second quarter of 1999. Net charge-offs of consumer loans in the recent quarter were $5.1 million, equal to 1999's second quarter, but down from $8.5 million in the third quarter of 1998. Net consumer loan charge-offs as an annualized percentage of average consumer loans and leases were .66% in the recent quarter, compared with 1.16% in the third quarter of 1998 and .69% in 1999's second quarter. Net charge-offs of credit card balances included in net consumer loan charge-offs were $141 thousand and $4.6 million in the third quarter of 1999 and 1998, respectively, and $89 thousand in the second quarter of 1999. The Company sold its retail credit card business in July 1998. For the nine months ended September 30, 1999 and 1998, the provision for possible credit losses was $30.5 million and $35.7 million, respectively. Through September 30, net charge-offs were $27.5 million in 1999 and $28.7 million in 1998, representing .23% and .28%, respectively, of average loans and leases. Consumer loan net charge-offs totaled $15.5 million and $25.6 million during the nine months ended September 30, 1999 and 1998, respectively. Net credit card charge-offs were $493 thousand during the first three quarters of 1999 and $13.8 million during the corresponding 1998 period. Nonperforming loans totaled $116.3 million or .68% of total loans and leases outstanding at September 30, 1999, compared with $119.2 million or .79% at September 30, 1998, $117.0 million or .74% at December 31, 1998, and $108.4 million or .66% at June 30, 1999. The increase in nonperforming loans from June 30, 1999 was largely the result of the inclusion of the remaining $10 million carrying value of the partially charged off commercial loan discussed in the preceding paragraph. Nonperforming commercial real estate loans were $16.9 million at September 30, 1999, $18.7 million at September 30, 1998, $17.8 million at December 31, 1998, and $18.9 million at June 30, 1999. Nonperforming consumer loans and leases totaled $24.0 million at September 30, 1999, compared with $27.6 million at September 30, 1998, $25.8 -21-
million at December 31, 1998, and $17.8 million at June 30, 1999. As a percentage of consumer loan balances outstanding, nonperforming consumer loans and leases were .78% at September 30, 1999, .96% at September 30, 1998, .89% at December 31, 1998 and .59% at June 30, 1999. The remaining nonperforming loans consisted largely of residential mortgage loans and, to a lesser extent, commercial loans. Assets acquired in settlement of defaulted loans were $10.2 million at September 30, 1999, $11.1 million at both September 30 and December 31, 1998 and $10.1 million at June 30, 1999. A comparative summary of nonperforming assets and certain credit quality ratios is presented in the accompanying table. NONPERFORMING ASSETS Dollars in thousands 1999 Quarters 1998 Quarters Third Second First Fourth Third ----- ------ ----- ------ ----- Nonaccrual loans $ 77,716 68,285 69,393 70,999 73,778 Loans past due 90 days or more 29,618 31,988 37,988 37,784 37,746 Renegotiated loans 8,958 8,146 8,014 8,262 7,656 ------- ------- ------- ------- ------- Total nonperforming loans 116,292 108,419 115,395 117,045 119,180 Real estate and other assets owned 10,237 10,108 11,052 11,129 11,106 -------- ------- ------- ------- ------- Total nonperforming assets $126,529 118,527 126,447 128,174 130,286 ======== ======= ======= ======= ======= Government guaranteed nonperforming loans* $ 16,137 14,618 13,368 14,316 13,776 ======== ======= ======= ======= ======= Nonperforming loans to total loans and leases, net of unearned discount .68% .66% .73% .74% .79% Nonperforming assets to total net loans and leases and real estate and other assets owned .74% .72% .80% .81% .86% === === === === === * INCLUDED IN TOTAL NONPERFORMING LOANS. The allowance for possible credit losses was $315.0 million, or 1.85% of total loans and leases at September 30, 1999, compared with $309.5 million or 2.04% a year earlier, $306.3 million or 1.94% at December 31, 1998 and $314.4 million or 1.90% at June 30, 1999. The ratio of the allowance for possible credit losses to nonperforming loans was 271% at the most recent quarter-end, compared with 260% a year earlier, 262% at December 31, 1998 and 290% at June 30, 1999. The decline in the allowance as a percentage of total loans at September 30, 1999 reflects management's evaluation of the loan and lease portfolio, the July 1998 sale of the retail credit card business, the relatively favorable economic environment for many commercial borrowers, and other factors. Management regularly assesses the adequacy of the allowance by performing an ongoing evaluation of the loan and lease portfolio, including such factors as the differing economic risks associated with each loan category, the current financial condition of specific borrowers, the economic environment in which borrowers operate, the level of delinquent loans and the value of any collateral. Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. Given the concentration of commercial real estate loans in the Company's loan portfolio, particularly the large concentration of loans secured by properties in New York State, in general, and in the New York City metropolitan area, in particular, coupled with the amount of commercial and industrial loans to businesses in New York State outside of the New York City metropolitan area and significant growth in recent years in loans to individual consumers, management cautiously evaluated the impact of interest rates and overall economic conditions on the ability of borrowers to meet repayment obligations when assessing the adequacy of the Company's allowance -22-
for possible credit losses as of September 30, 1999. Based upon the results of such review, management believes that the allowance for possible credit losses at September 30, 1999 was adequate to absorb credit losses from existing loans and leases. OTHER INCOME Other income totaled $72.5 million in the third quarter of 1999, compared with $64.0 million in the year-earlier quarter and $66.8 million in the second quarter of 1999. Growth in fees earned from deposit services was a significant factor contributing to the increases. Higher profits from trading account and foreign exchange activities also contributed to the increase from the second to the third quarter of 1999. Mortgage banking revenues totaled $16.9 million in the recent quarter, compared with $16.4 million in the year-earlier quarter and $18.6 million in the second quarter of 1999. The decline from the second 1999 quarter reflects a decrease in gains from sales of loans and loan servicing rights which totaled $9.0 million in the third quarter of 1999, $8.1 million in the corresponding 1998 quarter and $10.7 million in 1999's second quarter. Residential mortgage loans originated for sale to other investors during the third quarter of 1999 were $691 million, compared with $710 million in 1998's third quarter and $663 million in the second quarter of 1999. Residential mortgage loans held for sale totaled $273 million at September 30, 1999, $331 million at September 30, 1998, $445 million at December 31, 1998, and $292 million at June 30, 1999. Residential mortgage loan servicing fees were $6.5 million in the third quarter of 1999, compared with $7.3 million in the third quarter of 1998 and $6.6 million in the second quarter of 1999. Residential mortgage loans serviced for others totaled $7.1 billion at September 30, 1999, compared with $7.5 billion at September 30, 1998 and $7.3 billion at December 31, 1998. Capitalized servicing assets were $60 million and $64 million at September 30, 1999 and 1998, respectively, and $62 million at December 31, 1998. Reflecting a third quarter 1999 increase in fees, service charges on deposit accounts rose to $20.3 million in the recent quarter from $15.9 million in the corresponding quarter of 1998 and $16.7 million in the second quarter of 1999. Trust income was $10.2 million in the third quarter of 1999, up from $9.4 million a year earlier, but little changed from the previous quarter. Merchant discount and credit card fees were $1.9 million in the recent quarter, compared with $2.3 million in the similar period of 1998 and $1.8 million in the second quarter of 1999. Trading account and foreign exchange activity resulted in gains of $742 thousand in the third quarter of 1999, compared with losses of $148 thousand in the corresponding 1998 quarter and $3.2 million in the second quarter of 1999. The second quarter results were largely due to a $3 million loss incurred when a counterparty defaulted on the settlement of outstanding foreign exchange contracts. During the third quarter of 1999, the Company sold $63 million of fixed rate mortgage-backed securities resulting in a gain of $1.4 million. Gains on the sale of bank investment securities totaled $376 thousand in the third quarter of 1998, while there were no similar sales in the second quarter of 1999. Other revenue from operations totaled $21.1 million in the recent quarter, compared with $19.7 million in the corresponding quarter of 1998 and $22.6 million in the second quarter of 1999. The improvement from the year- earlier period resulted from increased revenues from the sale of mutual funds and annuities and higher letter of credit and other credit-related fees, partially offset by the $3.2 million gain on the sale of the Company's retail credit card business in July 1998. The decrease from the second quarter of 1999 was predominately the result of lower income from the Company's ownership of bank-owned life insurance. Excluding $15.3 million of tax-exempt other income the Company recognized in 1998's first quarter in connection with the contribution of appreciated investment securities with a fair value of $24.6 million to an -23-
affiliated, tax-exempt, private charitable foundation, other income of $212.0 million in the first nine months of 1999 was up 16% from $182.6 million in the year-earlier period. Growth in mortgage banking revenues, service charges on deposit accounts and fees for trust, investment and credit-related services, and a full nine months of revenues associated with operations obtained in the ONBANCorp acquisition, were factors contributing to the increase. As a result of the charitable contribution described in this paragraph, the Company also incurred $24.6 million of charitable contributions expense and realized income tax benefits of $10.0 million in 1998. For the nine-month period ended September 30, 1999, mortgage banking revenues rose 17% to $57.0 million from $48.7 million in the corresponding 1998 period. Reflecting a generally favorable interest rate environment for borrowers in late 1998 and early 1999, gains from sales of loans and loan servicing rights in 1999 increased by $8.8 million compared with the first nine months of 1998. Including the impact of the ONBANCorp acquisition, when compared with the same period in 1998, service charges on deposit accounts increased 28% to $52.9 million during the first nine months of 1999, while trust income increased 7% to $30.8 million. Merchant discount and credit card fees decreased 50% to $5.4 million in 1999 from $10.9 million in the similar period of 1998, predominately the result of the July 1998 sale of the Company's retail credit card business. Trading account and foreign exchange activity resulted in losses of $1.3 million for the first nine months of 1999, compared with gains of $2.1 million during the similar period of 1998. The losses in 1999 were largely the result of the previously mentioned counterparty default on settling foreign exchange contracts. Gains on the sale of bank investment securities totaled $1.6 million and $.7 million for the nine months ended September 30, 1999 and 1998, respectively. Excluding the effect of the previously noted transfer of securities to the affiliated charitable foundation, other revenues from operations increased 31% to $65.7 million in the first nine months of 1999 from $50.0 million in the comparable 1998 period. The rise from 1998 resulted largely from increases in tax-exempt income earned from bank-owned life insurance of $4.7 million, letter of credit and other credit-related fees of $5.2 million and fees earned from the sales of mutual funds and annuities of $5.2 million. These latter fees totaled $18.6 million during the first nine months of 1999, while income from bank-owned life insurance was $17.2 million and letter of credit and other credit-related fees were $11.2 million. OTHER EXPENSE Excluding amortization of goodwill and core deposit intangible and nonrecurring merger-related expenses, other expense totaled $130.2 million in the third quarter of 1999, compared with $124.6 million in the third quarter of 1998 and $131.8 million in the second quarter of 1999. On the same basis, through the first nine months of 1999, other expense totaled $390.7 million, an increase of 9% from $357.9 million in the comparable 1998 period, after excluding from 1998 the $24.6 million non-cash charitable contribution expense previously noted. Goodwill and core deposit intangible amortization was $12.5 million in the third quarter of 1999, up from $10.9 million in the third quarter of 1998 and $11.2 million in the second quarter of 1999. The increases resulted from amortization related to the June 1, 1999 acquisition of FNB. Amortization of goodwill and core deposit intangible totaled $34.6 million in the first nine months of 1999, up from $23.6 million in the corresponding 1998 period, due largely to the impact of the ONBANCorp and FNB acquisitions. Nonrecurring merger-related expenses were $2.2 million and $2.5 million in the third and second quarters of 1999, respectively, and $4.7 million in the first nine months of 1999. Such costs were $3.0 million during the third quarter of 1998 and $21.3 million during the first nine months of 1998. Salaries and employee benefits expense was $71.6 million in the recent quarter, 13% higher than the $63.5 million in the corresponding 1998 quarter, but little changed from $71.4 million in the second quarter of 1999. For the first nine months of 1999, salaries and employee benefits expense increased -24-
10% to $211.4 million from $191.8 million in the corresponding 1998 period. Salaries and benefits related to acquired operations, merit salary increases, higher expenses for incentive compensation arrangements (including the impact of stock appreciation rights) and higher medical benefit costs were contributing factors for the increases from 1998. Reflecting lower advertising, promotion and mortgage banking-related expenses, nonpersonnel expense, excluding one-time merger-related expenses and amortization of goodwill and core deposit intangible, totaled $58.7 million in the third quarter of 1999, down from $61.9 million in the third quarter of 1998. Similar expenses in the second quarter of 1999 were $60.5 million. On the same basis, and after excluding the $24.6 million non-cash charitable contribution expense from 1998, such expenses were $179.3 million during the first nine months of 1999, an increase of 7% from $168.2 million during the corresponding 1998 period. The increase from the first nine months of 1998 was due, in part, to expenses related to acquired operations and higher expenses for advertising and professional services, partially offset by lower co-branded credit card rebate expenses resulting from the Company's decision to terminate all of its co-branded credit card programs in 1997 and 1998. CAPITAL Stockholders' equity at September 30, 1999 was $1.8 billion or 8.35% of total assets, compared with $1.6 billion or 8.47% of total assets a year earlier and $1.6 billion or 7.78% at December 31, 1998. Stockholders' equity per share rose to $230.51 at September 30, 1999 from $209.03 and $207.94 at September 30 and December 31, 1998, respectively. Excluding goodwill and core deposit intangible, net of applicable tax effect, tangible equity per share was $149.37 at September 30, 1999, up from $141.43 at September 30, 1998 and $139.89 at December 31, 1998. To complete the acquisition of FNB on June 1, 1999, M&T issued 122,516 shares of common stock to former holders of FNB common stock resulting in an addition to stockholders' equity of $58.7 million. Stockholders' equity at September 30, 1999 reflected a loss of $22.1 million, or $2.80 per share, for the net after-tax impact of unrealized losses on investment securities classified as available for sale, compared with unrealized gains of $6.8 million or $.86 per share at September 30, 1998 and $2.9 million or $.37 per share at December 31, 1998. Such unrealized gains and losses are generally due to changes in interest rates and represent the difference, net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available for sale. The market valuation of investment securities should be considered in the context of the entire balance sheet of the Company. With the exception of investment securities classified as available for sale, trading account assets and liabilities, and residential mortgage loans held for sale, the carrying values of financial instruments in the balance sheet are generally not adjusted for appreciation or depreciation in market value resulting from changes in interest rates. 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 $319 million carrying value of trust preferred securities. As of September 30, 1999, total capital also included $145 million of subordinated notes issued by M&T Bank in prior years. The capital ratios of the Company and its banking subsidiaries, M&T Bank and M&T Bank, N.A., as of September 30, 1999 are presented in the accompanying table. -25-
REGULATORY CAPITAL RATIOS September 30, 1999 M&T M&T M&T (CONSOLIDATED) BANK BANK, N.A. -------------- --------- ---------- Core capital 8.56% 8.06% 15.55% Total capital 10.64% 10.17% 16.98% Leverage 7.28% 6.95% 7.51% The rate of internal capital generation, or net income less dividends paid expressed as an annualized percentage of average total stockholders' equity, was 12.79% and 13.57% during the three and nine-month periods ended September 30, 1999, compared with 11.59% and 11.79% during the comparable periods of 1998 and 13.39% in 1999's second quarter. In February 1999, M&T's board of directors authorized a plan to repurchase up to 134,342 shares of M&T's common stock for reissuance upon the possible future exercise of outstanding stock options. During the three-month and nine-month periods ended September 30, 1999, 10,000 shares were repurchased under the plan at a total cost of $5.5 million. M&T completed a previously authorized plan by repurchasing 1,581 common shares during January 1999 at a cost of $789 thousand. YEAR 2000 INITIATIVES The "Year 2000" problem relates to the ability of computer systems, including those in non-information technology equipment and systems ("Computer Systems"), to distinguish date data between the twentieth and twenty-first centuries. Addressing the Year 2000 problem has required that the Company identify, remediate and test its Computer Systems that have date sensitive functions. As part of this process, the Company identified those of its Computer Systems which, if uncorrected, would have a material adverse impact on the Company's customers, the Company's compliance with applicable regulations, or the Company's financial statements ("Mission Critical Systems"). Based on the remediation efforts completed and test work performed (either by the Company or through proxy testing) and, where appropriate, documentation provided by vendors, management believes that 100% of the Company's Mission Critical Systems should be able to accurately process date data before and after January 1, 2000. Moreover, management further believes that the Company's non-Mission Critical Computer Systems are also Year 2000 compliant. The Company could also be adversely affected if its customers and other parties that rely on data processing systems are not Year 2000 compliant prior to the end of 1999. 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. In this regard, the Company's second survey of commercial customers (which was completed in the second quarter of 1999) indicated that a large majority of the Company's commercial customers were well along in their preparation for potential Year 2000 issues. Nevertheless, the Company continues to monitor the Year 2000 status of customers considered to have a potentially high Year 2000 business risk. Furthermore, lending officers have received training to address Year 2000 issues with customers, including assessing customer needs for Year 2000 compliance. The Company has addressed the Year 2000 risks posed by other parties such as its funds providers and capital market/asset management counterparties. Lack of corrective measures by government agencies or service providers which the Company either receives data from or provides data to could also have a negative impact on the Company's operations. To be adequately prepared in the event its customers place higher than normal demands for cash or funding during the period surrounding January 1, 2000, the Company developed cash and liquidity contingency plans that include arrangements with the Federal Reserve and others to ensure the availability -26-
of funding sources and the supply of currency. The Company also continues to evaluate information regarding Year 2000 activities received from significant vendors. Based on information provided to date by these vendors, management believes that such parties are taking steps to address Year 2000 issues on a timely basis. Notwithstanding the Company's efforts, a risk remains that all aspects of Year 2000 issues will not be adequately resolved by each of the parties referred to above before January 1, 2000. If that were to be the case, the Company's future business operations, financial position and results of operations could be adversely impacted. Management is closely monitoring the Company's progress regarding Year 2000 issues. The Company has established a Year 2000 Steering Committee consisting of senior members of management to oversee all Year 2000 activities. In conjunction with its assessment of the Company's Year 2000 remediation plans, and the remediation efforts of other parties such as those described in the preceding paragraph, management has developed contingency plans to mitigate risks associated with critical Year 2000 issues that could arise during the period leading up to and after January 1, 2000. All significant Year 2000 activities of the Company have been reviewed by the Company's Internal Audit department. Through September 30, 1999, the Company has spent approximately $8.0 million (including approximately $.5 million and $2.6 million during the third quarter and first nine months of 1999, respectively,) in addressing its potential Year 2000 problems. Management believes that the Company is continuing to devote appropriate financial and human resources to monitor and resolve Year 2000 issues in a timely manner. The Company estimates that additional costs to finalize and monitor implementation of its Year 2000 program will not be material. A majority of the Company's Year 2000 costs relate to internal costs and constitute resources that would otherwise have been reallocated within the Company. The utilization of these resources has not had a material adverse impact on the Company's financial condition or results of operations, nor is it expected to have a material adverse impact in future periods. Costs associated with Year 2000 issues are recognized in expense as incurred. The preceding discussion of Year 2000 initiatives contains forward- looking statements as to Year 2000 issues. See also the discussion of Future Factors under the caption "Forward-Looking Statements," which are incorporated by reference into the preceding discussion. SEGMENT INFORMATION The Company's reportable segments have been determined based upon its internal profitability reporting system, which is organized by strategic business unit. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer, and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking. The financial information of the Company's segments was compiled utilizing the accounting policies described in note 21 to the Company's consolidated financial statements as of and for the year ended December 31, 1998. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, reported segments and the financial results of such segments are not necessarily comparable with similar information reported by other financial institutions. The Commercial Banking segment's earnings were $17.4 million in the third quarter of 1999, $17.8 million in the comparable 1998 quarter and $19.9 million in the second quarter of 1999. The decrease from the second quarter was due to a $6.2 million partial charge-off of a commercial loan in the -27-
recent quarter. This partial charge-off also was the major factor for the decrease from the third quarter of 1998, but was largely offset by higher revenues generated from loan growth. For the nine months ended September 30, 1999 and 1998, earnings were $58.1 million and $50.3 million, respectively. Commercial loans obtained from ONBANCorp and loan growth in most of the markets already served by the Company were the leading factors contributing to the increase from the first nine months of 1998. In the third quarter of 1999, the Commercial Real Estate segment contributed net income of $16.3 million, compared with $14.3 million in the year-earlier period and $16.5 million in the second quarter of 1999. The major factor in the improvement in earnings over the third quarter of 1998 was higher loan balances. Earnings in the first nine months of 1999 and 1998 were $47.1 million and $44.7 million, respectively. The increase in net income was due in part to commercial real estate loans acquired from ONBANCorp and loan growth in the markets already served by the Company. Net income contributed by the Discretionary Portfolio segment in the third quarter of 1999 totaled $10.4 million, compared with $8.7 million in both the third quarter of 1998 and the second quarter of 1999. Higher income from trading account and foreign exchange activity and gains on the sale of bank investment securities contributed to the increases. In the first three quarters, net income from this segment was $27.9 million in 1999 and $22.3 million in 1998. The increase over 1998 was largely the result of a $4.7 million increase in tax-exempt income earned from bank-owned life insurance and higher net interest income from holdings of residential mortgage loans. Partially offsetting these increases was the previously mentioned $3 million settlement loss on foreign exchange contracts. The Residential Mortgage Banking segment had net income of $4.6 million in the third 1999 quarter, unchanged from the corresponding 1998 quarter but down from $6.0 million in the second 1999 quarter. The decrease from the previous quarter was predominately the result of a $1.7 million decrease in gains from sales of loans and loan servicing rights. Reflecting the impact on gains from sales of loans and loan servicing rights resulting from a generally favorable interest rate environment for borrowers in late 1998 and early 1999, net income in this segment for the first nine months of the year increased to $17.6 million in 1999 from $14.8 million in 1998. As of September 30, 1999, loans serviced by the Residential Mortgage Banking segment totaled $10.7 billion, including $3.6 billion of loans serviced for the Company, compared with $11.0 billion a year earlier. Retail Banking earned $29.6 million in 1999's third quarter, down from $30.4 million in the year-earlier period (which included the $3.2 million gain on the sale of the Company's retail credit card business) but up from $26.6 million in the second quarter of 1999. Higher loan and deposit balances and service charges on deposit accounts were the major factors contributing to the improvement in net income, after factoring in the sale of the retail credit card business. For the first nine months of the year, Retail Banking net income totaled $80.7 million in 1999 and $74.7 million in 1998. The acquisitions of ONBANCorp on April 1, 1998 and FNB on June 1, 1999, increased service charges on deposit accounts and higher earnings from indirect consumer lending were the leading factors contributing to the increase. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized -28-
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 was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the Financial Accounting Standards Board amended SFAS No. 133, deferring the effective date by one year. Initial application of SFAS No. 133 must be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of the statement. Early application of all of the provisions of SFAS No. 133 is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of the statement. SFAS No. 133 may not be applied retroactively to financial statements of prior periods. The method of adoption expected to be utilized by the Company has yet to be determined and the estimated impact that adopting the provisions of SFAS No. 133 will have on the Company's financial statements has not been quantified. 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; legislation affecting the financial services industry as a whole, and the Company individually; regulatory supervision and oversight, including required capital levels; increasing price and product/service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products/services; containing costs and expenses; governmental and public policy changes, including environmental regulations; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; technological, implementation and financial risks associated with Year 2000 issues; the outcome of pending and future litigation and governmental proceedings; continued availability of financing; and financial resources in the amounts, at the times and on the terms required to support the Company's future businesses. These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic conditions, including interest rate and currency exchange rate fluctuations, and other Future Factors. -29-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- QUARTERLY TRENDS 1999 Quarters 1998 Quarters - ------------------------------------------------------------------------------------------------------------------------------------ Third Second First Fourth Third Second First - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS AND DIVIDENDS AMOUNTS IN THOUSANDS, EXCEPT PER SHARE Interest income (taxable-equivalent basis) $375,021 361,158 358,370 360,571 361,921 364,838 279,306 Interest expense 179,961 171,269 175,238 183,424 184,850 184,644 134,585 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 195,060 189,889 183,132 177,147 177,071 180,194 144,721 Less: provision for possible credit losses 13,500 8,500 8,500 7,500 10,500 13,200 12,000 Other income 72,499 66,806 72,716 64,985 63,986 65,075 68,893 Less: other expense 144,898 145,547 139,466 138,756 138,490 155,004 133,873 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 109,161 102,648 107,882 95,876 92,067 77,065 67,741 Applicable income taxes 39,633 35,772 39,151 36,064 33,693 30,587 17,245 Taxable-equivalent adjustment 1,964 1,838 1,825 1,969 1,897 1,779 1,541 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 67,564 65,038 66,906 57,843 56,477 44,699 48,955 - ------------------------------------------------------------------------------------------------------------------------------------ Per common share data Net income Basic $ 8.57 8.35 8.65 7.44 7.09 5.55 7.34 Diluted 8.29 8.00 8.34 7.14 6.81 5.32 7.01 Cash dividends $ 1.25 1.00 1.00 1.00 1.00 1.00 .80 Average common shares outstanding Basic 7,880 7,793 7,731 7,778 7,966 8,051 6,666 Diluted 8,147 8,132 8,023 8,105 8,288 8,409 6,981 - ------------------------------------------------------------------------------------------------------------------------------------ PERFORMANCE RATIOS, ANNUALIZED Return on Average assets 1.27 % 1.27 % 1.34 % 1.14 % 1.15 % .92 % 1.41 % Average common stockholders' equity 14.97 % 15.23 % 16.56 % 14.20 % 13.48 % 10.77 % 18.86 % Net interest margin on average earning assets (taxable-equivalent basis) 4.03 % 4.09 % 3.98 % 3.82 % 3.93 % 4.02 % 4.39 % Nonperforming assets to total assets, at end of quarter .58 % .56 % .62 % .62 % .67 % .69 % .53 % Efficiency ratio (1) 53.62 % 55.72 % 54.56 % 57.56 % 56.30 % 56.45 % 54.29 % - ------------------------------------------------------------------------------------------------------------------------------------ CASH (TANGIBLE) OPERATING RESULTS (2) Net income (in thousands) $ 79,714 76,511 76,333 67,326 67,703 65,445 51,448 Diluted net income per common share 9.78 9.41 9.51 8.31 8.17 7.78 7.37 Annualized return on Average tangible assets 1.54 % 1.53 % 1.57 % 1.36 % 1.42 % 1.38 % 1.49 % Average tangible common stockholders' equity 26.43 % 26.13 % 27.66 % 24.57 % 23.90 % 23.50 % 20.13 % Efficiency ratio (1) 48.91 % 51.36 % 50.31 % 53.03 % 51.78 % 52.01 % 53.37 % - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA DOLLARS IN MILLIONS, EXCEPT PER SHARE Average balances Total assets $ 21,183 20,579 20,298 20,101 19,455 19,547 14,055 Earning assets 19,184 18,636 18,664 18,401 17,881 17,992 13,357 Investment securities 2,048 2,064 2,497 2,617 2,533 2,858 1,614 Loans and leases, net of unearned discount 16,678 16,056 15,761 15,389 15,124 14,978 11,602 Deposits 14,821 14,578 14,497 14,617 14,552 14,726 10,988 Stockholders' equity 1,791 1,713 1,638 1,616 1,662 1,664 1,053 - ------------------------------------------------------------------------------------------------------------------------------------ At end of quarter Total assets $ 21,759 21,205 20,285 20,584 19,478 20,138 14,570 Earning assets 19,467 19,050 18,382 18,926 17,905 18,419 13,778 Investment securities 1,953 2,078 2,088 2,786 2,446 2,707 1,530 Loans and leases, net of unearned discount 16,984 16,513 15,813 15,792 15,163 15,245 12,033 Deposits 15,417 14,909 14,476 14,737 14,394 14,813 11,085 Stockholders' equity 1,817 1,773 1,667 1,602 1,649 1,659 1,069 Equity per common share 230.51 224.81 215.34 207.94 209.03 207.18 160.06 Tangible equity per common share 149.37 149.14 148.95 139.89 141.43 139.37 157.75 - ------------------------------------------------------------------------------------------------------------------------------------ MARKET PRICE PER COMMON SHARE High $ 575 582 1/2 518 3/4 539 1/2 582 554 504 Low 412 1/2 462 1/2 464 400 410 480 429 Closing 459 550 479 518 15/16 461 554 499 7/8 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------- (1)Excludes impact of nonrecurring merger-related expenses, net securities transactions and contribution of appreciated investment securities to affiliated, tax-exempt charitable foundation during the quarter ended March 31, 1998. (2)Excludes amortization and balances related to goodwill and core deposit intangible and nonrecurring merger-related expenses, net of applicable income tax effects. -30-
- ------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES 1999 Third quarter 1999 Second quarter Average Average Average Average AVERAGE BALANCE IN MILLIONS; INTEREST IN THOUSANDS balance Interest rate balance Interest rate - ------------------------------------------------------------------------------------------------------------------ ASSETS Earning assets Loans and leases, net of unearned discount* Commercial, financial, etc $ 3,374 $ 68,452 8.05% 3,201 62,928 7.88% Real estate 10,263 205,772 8.02 9,928 198,370 7.99 Consumer 3,041 62,626 8.17 2,927 61,114 8.37 - ------------------------------------------------------------------------------------------------------------------ Total loans and leases, net 16,678 336,850 8.01 16,056 322,412 8.05 - ------------------------------------------------------------------------------------------------------------------ Money-market assets Interest-bearing deposits at banks 2 25 3.93 5 49 4.08 Federal funds sold and agreements to resell securities 430 5,732 5.29 430 5,381 5.02 Trading account 26 374 5.77 81 1,398 6.89 - ------------------------------------------------------------------------------------------------------------------ Total money-market assets 458 6,131 5.31 516 6,828 5.30 - ------------------------------------------------------------------------------------------------------------------ Investment securities** U.S. Treasury and federal agencies 880 12,800 5.77 902 13,063 5.81 Obligations of states and political subdivisions 76 1,176 6.20 71 1,121 6.30 Other 1,092 18,064 6.56 1,091 17,734 6.52 - ------------------------------------------------------------------------------------------------------------------ Total investment securities 2,048 32,040 6.21 2,064 31,918 6.20 - ------------------------------------------------------------------------------------------------------------------ TOTAL EARNING ASSETS 19,184 375,021 7.76 18,636 361,158 7.77 - ------------------------------------------------------------------------------------------------------------------ Allowance for possible credit losses (316) (310) Cash and due from banks 438 439 Other assets 1,877 1,814 - ------------------------------------------------------------------------------------------------------------------ Total assets $ 21,183 20,579 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 368 1,055 1.14 370 1,125 1.22 Savings deposits 5,244 30,708 2.32 5,038 29,114 2.32 Time deposits 7,000 90,955 5.15 7,041 89,182 5.08 Deposits at foreign office 227 2,720 4.75 243 2,757 4.56 - ------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 12,839 125,438 3.88 12,692 122,178 3.86 - ------------------------------------------------------------------------------------------------------------------ Short-term borrowings 2,058 26,886 5.18 1,876 22,768 4.87 Long-term borrowings 1,806 27,637 6.07 1,763 26,323 5.99 - ------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST-BEARING LIABILITIES 16,703 179,961 4.27 16,331 171,269 4.21 - ------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 1,982 1,886 Other liabilities 707 649 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 19,392 18,866 - ------------------------------------------------------------------------------------------------------------------ Stockholders' equity 1,791 1,713 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 21,183 20,579 - ------------------------------------------------------------------------------------------------------------------ Net interest spread 3.49 3.56 Contribution of interest-free funds 0.54 0.53 - ------------------------------------------------------------------------------------------------------------------ Net interest income/margin on earning assets $195,060 4.03% 189,889 4.09% - ------------------------------------------------------------------------------------------------------------------ 1999 First 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 3,179 64,028 8.17% Real estate 9,691 191,482 7.90 Consumer 2,891 60,003 8.42 - ------------------------------------------------------------------------------------ Total loans and leases, net 15,761 315,513 8.12 - ------------------------------------------------------------------------------------ Money-market assets Interest-bearing deposits at banks 1 7 2.68 Federal funds sold and agreements to resell securities 331 3,823 4.68 Trading account 74 1,256 6.91 - ------------------------------------------------------------------------------------ Total money-market assets 406 5,086 5.08 - ------------------------------------------------------------------------------------ Investment securities** U.S. Treasury and federal agencies 1,112 15,832 5.77 Obligations of states and political subdivisions 72 1,116 6.30 Other 1,313 20,823 6.43 - ------------------------------------------------------------------------------------ Total investment securities 2,497 37,771 6.13 - ------------------------------------------------------------------------------------ TOTAL EARNING ASSETS 18,664 358,370 7.79 - ------------------------------------------------------------------------------------ Allowance for possible credit losses (308) Cash and due from banks 442 Other assets 1,500 - ------------------------------------------------------------------------------------ Total assets 20,298 - ------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits NOW accounts 399 1,280 1.30 Savings deposits 4,881 28,810 2.39 Time deposits 7,049 90,892 5.23 Deposits at foreign office 303 3,429 4.59 - ------------------------------------------------------------------------------------ Total interest-bearing deposits 12,632 124,411 3.99 - ------------------------------------------------------------------------------------ Short-term borrowings 2,138 25,735 4.88 Long-term borrowings 1,647 25,092 6.18 - ------------------------------------------------------------------------------------ TOTAL INTEREST-BEARING LIABILITIES 16,417 175,238 4.33 - ------------------------------------------------------------------------------------ Noninterest-bearing deposits 1,865 Other liabilities 378 - ------------------------------------------------------------------------------------ Total liabilities 18,660 - ------------------------------------------------------------------------------------ Stockholders' equity 1,638 - ------------------------------------------------------------------------------------ Total liabilities and stockholders' equity 20,298 - ------------------------------------------------------------------------------------ Net interest spread 3.46 Contribution of interest-free funds 0.52 - ------------------------------------------------------------------------------------ Net interest income/margin on earning assets 183,132 3.98% - ------------------------------------------------------------------------------------ *INCLUDES NONACCRUAL LOANS. **INCLUDES AVAILABLE FOR SALE SECURITIES AT AMORTIZED COST. (continued) -31-
- -------------------------------------------------------------------------------- M&T BANK CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued) 1998 Fourth quarter 1998 Third 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. $ 3,034 $ 61,936 8.10 2,935 61,711 8.34% Real estate 9,458 189,222 8.00 9,273 191,102 8.24 Consumer 2,897 63,154 8.65 2,916 65,389 8.90 - ----------------------------------------------------------------------------------------------------------------- Total loans and leases, net 15,389 314,312 8.10 15,124 318,202 8.35 - ----------------------------------------------------------------------------------------------------------------- Money-market assets Interest-bearing deposits at banks 2 14 3.80 2 16 3.07 Federal funds sold and agreements to resell securities 276 3,690 5.30 119 1,634 5.44 Trading account 117 2,066 6.99 103 1,797 6.93 - ----------------------------------------------------------------------------------------------------------------- Total money-market assets 395 5,770 5.80 224 3,447 6.11 - ----------------------------------------------------------------------------------------------------------------- Investment securities** U.S. Treasury and federal agencies 1,398 20,905 5.93 1,561 23,644 6.01 Obligations of states and political subdivisions 78 1,217 6.19 85 1,321 6.18 Other 1,141 18,367 6.39 887 15,307 6.84 - ----------------------------------------------------------------------------------------------------------------- Total investment securities 2,617 40,489 6.14 2,533 40,272 6.31 - ----------------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 18,401 360,571 7.77 17,881 361,921 8.03 - ----------------------------------------------------------------------------------------------------------------- Allowance for possible credit losses (310) (311) Cash and due from banks 425 413 Other assets 1,585 1,472 - ----------------------------------------------------------------------------------------------------------------- Total assets $ 20,101 19,455 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits NOW accounts $ 390 1,379 1.40 344 1,328 1.53 Savings deposits 4,828 30,707 2.52 4,709 31,395 2.65 Time deposits 7,216 98,526 5.42 7,414 103,525 5.54 Deposits at foreign office 341 4,208 4.89 293 3,964 5.36 - ----------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 12,775 134,820 4.19 12,760 140,212 4.36 - ----------------------------------------------------------------------------------------------------------------- Short-term borrowings 2,055 26,640 5.14 2,069 29,376 5.63 Long-term borrowings 1,344 21,964 6.48 861 15,262 7.03 - ----------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 16,174 183,424 4.50 15,690 184,850 4.67 - ----------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 1,842 1,792 Other liabilities 469 311 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 18,485 17,793 - ----------------------------------------------------------------------------------------------------------------- Stockholders' equity 1,616 1,662 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 20,101 19,455 - ----------------------------------------------------------------------------------------------------------------- Net interest spread 3.27 3.36 Contribution of interest-free funds 0.55 0.57 - ----------------------------------------------------------------------------------------------------------------- Net interest income/margin on earning assets $177,147 3.82% 177,071 3.93% - ----------------------------------------------------------------------------------------------------------------- *INCLUDES NONACCRUAL LOANS. **INCLUDES AVAILABLE FOR SALE SECURITIES AT AMORTIZED COST. -32-
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. (Not applicable.) Item 5. Other Information. (None.) Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as a part of this report: Exhibit NO. 27.1 Financial Data Schedule. Filed herewith. (b) Reports on Form 8-K. The following Current Report on Form 8-K was filed with the Securities and Exchange Commission: On September 30, 1999, a Current Report on Form 8-K dated September 24, 1999 was filed to announce the consummation of M&T Bank's acquisition of 32 branches (29 sites) from The Chase Manhattan Bank ("Chase"). The branches are located in the Binghamton, Corning, Buffalo, Jamestown and Albany areas of upstate New York. The Current Report on Form 8-K also reported Chase's agreement to transfer up to $533 million of trust and fiduciary account assets to M&T Bank following receipt of required approvals and the satisfaction of necessary closing conditions, to be completed in two phases commencing at the end of September 1999 and concluding at or about the end of March 2000. -33-
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: November 10, 1999 By: /S/ MICHAEL P. PINTO ------------------------------ Michael P. Pinto Executive Vice President and Chief Financial Officer -34-
EXHIBIT INDEX Exhibit NO. 27.1 Financial Data Schedule. Filed herewith. -35-
9 9-MOS DEC-31-1999 SEP-30-1999 517,461 747 517,381 555,007 1,742,508 210,943 209,925 17,155,460 314,965 21,759,301 15,416,516 1,830,031 920,689 1,774,897 0 0 40,508 1,776,660 21,759,301 973,002 97,924 17,996 1,088,922 372,027 526,468 562,454 30,500 1,575 429,911 314,064 199,508 0 0 199,508 25.57 24.63 4.03 77,716 29,618 8,958 0 306,347 41,044 13,526 314,965 216,452 0 98,513