UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9861
FIRST EMPIRE STATE CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
One M & T Plaza
Buffalo, New York
(Address of principal 14240
executive offices) (Zip Code)
(716) 842-5445
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
--- ----
Number of shares of the registrant's Common Stock, $5 par value, outstanding
as of the close of business on July 30, 1997: 6,581,719 shares.
FIRST EMPIRE STATE CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 1997
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PAGE
- ------------------------------------------------------ ----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 1997 and December 31, 1996 3
Consolidated Statement of Income -
Three and six months ended June 30, 1997 and 1996 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1997 and 1996 5
Consolidated Statement of Changes in Stockholders'
Equity - Six months ended June 30, 1997 and 1996 6
Consolidated Summary of Changes in Allowance for
Possible Credit Losses - Six months ended June 30, 1997
and 1996 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information 22
Signatures 24
Exhibit Index 25
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (unaudited)
JUNE 30, DECEMBER 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE 1997 1996
- -------------------------------------------------------------------- ------------- ------------
Assets Cash and due from banks................. $ 399,094 324,659
Money-market assets
Interest-bearing deposits at banks... 96,116 47,325
Federal funds sold and agreements
to resell securities............ 46,309 125,326
Trading account...................... 72,464 37,317
----------- -----------
Total money-market assets....... 214,889 209,968
----------- -----------
Investment securities
Available for sale (cost: $1,555,727
at June 30, 1997; $1,400,976 at
December 31, 1996)................ 1,561,442 1,396,672
Held to maturity (market value:
$89,502 at June 30, 1997; $119,316
at December 31, 1996)............ 89,010 118,616
Other (market value: $57,920 at
June 30, 1997; $56,410 at
December 31,1996)................ 57,920 56,410
----------- -----------
Total investment securities... 1,708,372 1,571,698
----------- -----------
Loans and leases....................... 11,313,318 11,120,221
Unearned discount................... (333,163) (398,098)
Allowance for possible credit
losses........................... (271,933) (270,466)
----------- -----------
Loans and leases, net......... 10,708,222 10,451,657
----------- -----------
Premises and equipment................. 124,974 128,521
Accrued interest and other assets...... 285,444 257,412
----------- -----------
Total assets.................. $13,440,995 12,943,915
----------- -----------
----------- -----------
Liabilities Noninterest-bearing deposits........... $1,453,684 1,352,929
NOW accounts........................... 308,465 334,787
Savings deposits....................... 3,344,849 3,280,788
Time deposits.......................... 5,906,621 5,352,749
Deposits at foreign office............. 172,576 193,236
----------- -----------
Total deposits................ 11,186,195 10,514,489
----------- -----------
Federal funds purchased and agreements
to repurchase securities............ 339,492 1,015,408
Other short-term borrowings............ 319,474 134,779
Accrued interest and other
liabilities......................... 216,878 195,578
Long-term borrowings................... 427,919 178,002
----------- -----------
Total liabilities............. 12,489,958 12,038,256
----------- -----------
Stockholders' equity Preferred stock, $1 par, 1,000,000
shares authorized, none
outstanding........................ -- --
Common stock, $5 par, 15,000,000
shares authorized, 8,097,472
shares issued...................... 40,487 40,487
Additional paid-in-capital............. 101,318 96,597
Retained earnings...................... 1,010,470 937,072
Unrealized investment gains
(losses), net...................... 3,428 (2,485)
Treasury stock - common, at cost -
1,476,595 shares at June 30, 1997;
1,411,286 shares at
December 31, 1996.................. (204,666) (166,012)
----------- -----------
Total stockholders' equity.... 951,037 905,659
----------- -----------
Total liabilities and
stockholders' equity...... $13,440,995 12,943,915
----------- -----------
----------- -----------
-3-
- ------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- --------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE 1997 1996 1997 1996
- --------------------------------------------------------------------- ---------- --------- --------- ---------
Interest income Loans and leases, including fees.................. $ 235,226 217,042 464,801 430,248
Money-market assets
Deposits at banks............................... 816 266 1,525 1,297
Federal funds sold and agreements to
resell securities............................. 860 779 1,265 2,182
Trading account................................. 410 232 631 505
Investment securities
Fully taxable................................... 25,409 28,646 49,207 56,065
Exempt from federal taxes....................... 1,220 638 2,278 1,083
---------- --------- --------- ---------
Total interest income......................... 263,941 247,603 519,707 491,380
---------- --------- --------- ---------
Interest expense NOW accounts...................................... 835 2,642 1,755 5,415
Savings deposits.................................. 22,495 20,673 44,743 41,194
Time deposits..................................... 82,254 68,920 156,011 134,376
Deposits at foreign office........................ 2,873 3,534 6,112 5,663
Short-term borrowings............................. 10,230 15,657 23,930 35,346
Long-term borrowings.............................. 7,047 3,570 12,504 7,187
---------- --------- --------- ---------
Total interest expense........................ 125,734 114,996 245,055 229,181
---------- --------- --------- ---------
Net interest income............................... 138,207 132,607 274,652 262,199
Provision for possible credit losses.............. 11,000 11,700 22,000 21,375
---------- --------- --------- ---------
Net interest income after provision for
possible credit losses.......................... 127,207 120,907 252,652 240,824
---------- --------- --------- ---------
Other income Mortgage banking revenues......................... 12,172 11,275 24,247 21,666
Service charges on deposit accounts............... 10,726 10,128 21,111 20,033
Trust income...................................... 7,233 7,073 14,136 13,246
Merchant discount and other credit card fees...... 4,234 4,220 9,465 7,275
Trading account and foreign exchange gains........ 596 858 1,945 154
Gain (loss) on sales of bank
investment securities........................... (188) 109 (233) 427
Other revenues from operations.................... 9,210 7,800 19,235 14,913
---------- --------- --------- ---------
Total other income............................ 43,983 41,463 89,906 77,714
---------- --------- --------- ---------
Other expense Salaries and employee benefits.................... 53,561 49,133 109,120 101,261
Equipment and net occupancy....................... 13,155 12,699 26,388 26,115
Printing, postage and supplies.................... 3,472 3,863 6,823 7,682
Deposit insurance................................. 483 778 969 1,558
Other costs of operations......................... 31,399 31,448 63,054 57,622
---------- --------- --------- ---------
Total other expense........................... 102,070 97,921 206,354 194,238
---------- --------- --------- ---------
Income before income taxes........................ 69,120 64,449 136,204 124,300
Income taxes...................................... 26,329 25,790 52,154 49,488
---------- --------- --------- ---------
Net income........................................ $ 42,791 38,659 84,050 74,812
---------- --------- --------- ---------
---------- --------- --------- ---------
Net income per common share
Primary......................................... $ 6.17 5.36 11.98 10.56
Fully diluted................................... 6.15 5.36 11.95 10.32
Cash dividends per common share................... .80 .70 1.60 1.40
Average common shares outstanding
Primary......................................... 6,928 7,212 7,014 6,995
Fully diluted................................... 6,950 7,216 7,032 7,245
4
- ------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE
30
DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Cash flows from Net income.................................................... $ 84,050 74,812
operating activities Adjustments to reconcile net income to net cash provided by
operating activities
Provision for possible credit losses...................... 22,000 21,375
Depreciation and amortization of premises and equipment... 10,294 9,886
Amortization of capitalized mortgage servicing rights..... 6,804 5,065
Provision for deferred income taxes....................... (5,123) (6,216)
Asset write-downs......................................... 619 605
Net gain on sales of assets............................... (1,229) (599)
Net change in accrued interest receivable, payable........ 4,668 (7,000)
Net change in other accrued income and expense............ 25,758 2,049
Net change in loans held for sale......................... 39,835 (10,540)
Net change in trading account assets and liabilities...... 10,124 (12,018)
--------------------------------------------------------------------------------------
Net cash provided by operating activities................. 197,800 77,419
- ------------------------------------------------------------------------------------------------------------------
Cash flows from Proceeds from sales of investment securities
investing activities Available for sale.......................................... 200,942 143,235
Proceeds from maturities of investment securities
Available for sale.......................................... 118,275 269,661
Held to maturity............................................ 46,936 20,349
Purchases of investment securities
Available for sale.......................................... (472,516) (466,126)
Held to maturity............................................ (17,337) (29,213)
Other....................................................... (3,576) (2,776)
Net (increase) decrease in interest-bearing
deposits at banks........................................... (48,791) 111,049
Additions to capitalized mortgage servicing
rights...................................................... (12,917) (6,393)
Net increase in loans and leases.............................. (318,388) (577,434)
Capital expenditures, net..................................... (5,650) (6,918)
Acquisitions, net of cash acquired............................ 123,043 --
Other, net.................................................... (3,907) (6,185)
--------------------------------------------------------------------------------------
Net cash used by investing activities....................... (393,886) (550,751)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase in deposits...................................... 539,565 721,888
financing activities Net decrease in short-term borrowings......................... (536,492) (151,830)
Proceeds from issuance of trust preferred
securities.................................................. 250,000 --
Payments on long-term borrowings.............................. (86) (2,638)
Purchases of treasury stock................................... (48,702) (42,899)
Dividends paid--common........................................ (10,652) (9,227)
Dividends paid--preferred..................................... -- (900)
Other, net.................................................... (2,129) (5,736)
--------------------------------------------------------------------------------------
Net cash provided by financing activities................... 191,504 508,658
--------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents.......... $ (4,582) 35,326
Cash and cash equivalents at beginning of period.............. 449,985 364,119
Cash and cash equivalents at end of period.................... $ 445,403 399,445
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosure Interest received during the period........................... $ 511,184 482,499
of cash flow information Interest paid during the period............................... 233,728 229,783
Income taxes paid during the period........................... 37,784 54,733
- ------------------------------------------------------------------------------------------------------------------
Supplemental schedule
of noncash investing and Real estate acquired in settlement of loans................... $ 3,941 4,097
financing activities Conversion of preferred stock to common stock................. -- 40,000
- ------------------------------------------------------------------------------------------------------------------
5
- ----------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
- ------------------------------------------------------------------------------------------------------------------
UNREALIZED
DOLLARS IN ADDITIONAL INVESTMENT
THOUSANDS, EXCEPT PREFERRED COMMON PAID-IN RETAINED GAINS (LOSSES), TREASURY
PER SHARE STOCK STOCK CAPITAL EARNINGS NET STOCK TOTAL
- ------------------- ------------------- --------- ----------- ---------- ----------- ---------- ----------
1996
Balance-- January $40,000 40,487 98,657 805,486 (3,155) (135,222) $ 846,253
1, 1996
Net income -- -- -- 74,812 -- -- 74,812
Preferred stock
cash dividends -- -- -- (900) -- -- (900)
Common stock cash
dividends - $1.40
per share -- -- -- (9,227) -- -- (9,227)
Exercise of stock
options -- -- 1,009 -- -- 2,449 3,458
Purchases of
treasury stock -- -- -- -- -- (42,899) (42,899)
Conversion of
preferred stock
into 506,930
shares of
common stock (40,000) -- (6,534) -- -- 46,534 --
Unrealized losses
on investment
securities
available for
sale, net -- -- -- -- (10,474) -- (10,474)
- --------------------------------------------------------------------------------------------------------------------
Balance--June 30,
1996 $ -- 40,487 93,132 870,171 (13,629) (129,138) $ 861,023
- --------------------------------------------------------------------------------------------------------------------
1997
Balance-- January 1,
1997 $ -- 40,487 96,597 937,072 (2,485) (166,012) $ 905,659
Net income -- -- -- 84,050 -- -- 84,050
Common stock cash
dividends - $1.60 -- -- -- (10,652) -- -- (10,652)
per share
Exercise of stock
options -- -- 4,721 -- -- 10,048 14,769
Purchases of
treasury stock -- -- -- -- -- (48,702) (48,702)
Unrealized gains on
investment
securities
available for
sale, net -- -- -- -- 5,913 -- 5,913
- --------------------------------------------------------------------------------------------------------------------
Balance--June
30,1997 $ -- 40,487 101,318 1,010,470 3,428 (204,666) $ 951,037
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES (unaudited)
SIX MONTHS ENDED JUNE 30
------------------------
DOLLARS IN THOUSANDS 1997 1996
- -------------------------------------------------------------------------------------- ---------- ---------
Beginning balance $ 270,466 262,344
Provision for possible credit losses 22,000 21,375
Net charge-offs
Charge-offs (29,883) (20,486)
Recoveries 9,350 6,718
- --------------------------------------------------------------------------------------------------------------
Total net charge-offs (20,533) (13,768)
- --------------------------------------------------------------------------------------------------------------
Ending balance $ 271,933 269,951
- --------------------------------------------------------------------------------------------------------------
6
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of First Empire State Corporation and
subsidiaries ("the Company") were compiled in accordance with the accounting
policies set forth on pages 41 and 42 of the Company's 1996 Annual Report. In
the opinion of management, all adjustments necessary for a fair presentation
have been made and were all of a normal recurring nature.
2. 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" and, together with Trust I, the "Trusts"), a
Delaware business trust organized by the Company on May 30, 1997, issued $100
million of 8.277% preferred capital securities.
Other than the following payment terms (and the redemption terms described
below), the preferred capital securities issued by the Trusts ("Capital
Securities") are identical in all material respects:
DISTRIBUTION DISTRIBUTION
TRUST RATE DATES
----- --------------------- -----------------------
Trust I............... 8.234% February 1 and August 1
Trust II.............. 8.277% June 1 and December 1
The common securities of each Trust ("Common Securities") are wholly owned by
First Empire, and such 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 First Empire'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 First Empire:
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.
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 First Empire exercises its right to extend the
payment of interest on the Junior Subordinated Debentures for up to ten
semi-annual periods, in which case payment of distributions on the Capital
Securities will be deferred for a
7
comparable period. During an extended interest period, First Empire may not
pay dividends or distributions on, or repurchase, redeem or acquire any
shares of its capital stock. The agreements governing the Capital Securities,
in the aggregate, provide a full, irrevocable and unconditional guarantee by
First Empire of the payment of distributions on, the redemption of, and any
liquidation distribution with respect to the Capital Securities. The
obligations of First Empire under such guarantee and the Capital Securities
are subordinate and junior in right of payment to all senior indebtedness of
First Empire.
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 June 1, 2007 in the case of Trust II) contemporaneously with
First Empire'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 First Empire's option (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.
3. EARNINGS PER SHARE
During the first quarter of 1997, Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," was issued. SFAS No. 128 establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. SFAS No.
128 replaces the presentation of primary earnings per share required by
Accounting Principles Board Opinion No. 15, "Earnings Per Share," with a
presentation of basic earnings per share. It also requires dual presentation
of basic and diluted earnings per share on the face of the income statement
for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator in the basic earnings per
share computation to the numerator and denominator in the diluted earnings
per share computation.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in earnings.
SFAS No. 128 is effective for financial statements for periods ending after
December 15, 1997, including interim periods. Earlier application is not
permitted, however, after the effective date all prior period earnings per
share data presented shall be restated to conform with the provisions of SFAS
No. 128.
Pro forma amounts for basic and diluted earnings per share as if SFAS No. 128
was effective January 1, 1996 were $6.46 and $6.17, respectively, for the
three months ended June 30, 1997 and $5.66 and $5.36, respectively, for the
three months ended June 30, 1996. Pro forma amounts for basic and diluted
earnings per share for the six months ended June 30, 1997 were $12.63 and
$11.98, respectively, and for the six months ended June 30, 1996 were $11.17
and $10.33, respectively.
8
4. CONTINGENCIES
Information regarding legal proceedings is included in Part II, Item I,
("Legal Proceedings") of this Quarterly Report on Form 10-Q.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
Net income of First Empire State Corporation ("First Empire") was $42.8
million or $6.15 per fully diluted common share in the second quarter of
1997, increases of 11% and 15%, respectively, from $38.7 million or $5.36 per
common share on a fully diluted basis in the second quarter of 1996. Net
income was $41.3 million or $5.80 per fully diluted common share in the first
quarter of 1997. Primary earnings per share increased to $6.17 in the recent
quarter from $5.36 in the year-earlier quarter and $5.81 in the first quarter
of 1997. For the six months ended June 30, 1997, net income was $84.1 million
or $11.95 per fully diluted common share, up 12% and 16%, respectively, from
$74.8 million or $10.32 per share during the comparable 1996 period. Primary
earnings per share rose 13% to $11.98 for the first half of 1997 from $10.56
for the corresponding period in 1996. The annualized rate of return on
average assets for First Empire and its consolidated subsidiaries ("the
Company") in the second quarter of 1997 was 1.31%, up from 1.25% in the
year-earlier quarter and 1.30% in 1997's initial quarter. The annualized
return on average common stockholders' equity was 18.55% in the recent
quarter, up from 18.18% in the second quarter of 1996 and 18.24% in the first
quarter of 1997. During the first six months of 1997, the annualized rates of
return on average assets and average common stockholders' equity were 1.30%
and 18.40%, respectively, compared with 1.22% and 17.85%, respectively, in
the corresponding 1996 period.
On June 6, 1997, First Empire completed an offering of trust preferred
securities that raised $100 million of regulatory capital. The 30-year offering
of 8.277% fixed-rate cumulative preferred securities was issued through First
Empire Capital Trust II ("Trust II"), a Delaware business trust that was formed
by First Empire to facilitate the transaction. The preferred securities provide
investors with call protection for ten years. Trust II was formed solely to
issue the preferred securities and advance the proceeds to First Empire by
purchasing a like amount of First Empire's 8.277% junior subordinated
debentures. A similar offering of trust preferred securities was completed on
January 31, 1997, raising $150 million of regulatory capital. Such offering of
8.234% fixed-rate cumulative preferred securities was sold through First Empire
Capital Trust I ("Trust I"), also a Delaware business trust. The proceeds of the
two trust preferred securities issuances qualify as Tier 1 or core capital for
First Empire under the Federal Reserve Board's risk-based capital guidelines.
The trust preferred securities are classified as long-term borrowings and
accumulated distributions on the securities are included in interest expense.
Payments on the junior subordinated debt of First Empire, which are in turn
passed through Trust I and Trust II to the holders of the preferred securities,
are serviced through existing liquidity and cash flow sources of First Empire.
Under current federal income tax law, First Empire is permitted to deduct
interest payments on the junior subordinated debt in computing taxable income.
On May 24, 1997, The East New York Savings Bank ("East New York"), the
savings bank subsidiary of First Empire, was merged with and into Manufacturers
and Traders Trust Company ("M&T Bank"), the principal commercial bank subsidiary
of First Empire. East New York's branch offices and business activities now
operate as the New York City Division of M&T Bank.
TAXABLE-EQUIVALENT NET INTEREST INCOME
Taxable-equivalent net interest income increased to $139.6 million in the
second quarter of 1997, up $5.9 million or 4% from $133.7 million in the
year-earlier quarter and $1.9 million higher than the $137.7 million earned in
the first quarter of 1997. The most significant factor contributing to the
improvement in net interest income was growth in average loans and leases.
Average loans and leases increased $845 million, or 8%, to $10.8 billion in the
second quarter of 1997 from $10.0 billion in the year-earlier
10
quarter. Reflecting a decline in the rate of growth as compared with the five
preceding quarterly periods, average loans and leases in the recent quarter
were $127 million, or 1%, higher than the first quarter of 1997. Continued
growth in the Company's commercial loan and commercial real estate portfolios
was partially offset by slower consumer loan growth, including the impact of
the termination of a co-branded credit card program in March 1997. 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
2nd Qtr. 2nd Qtr. 1st Qtr.
1997 1996 1997
-------- -------- --------
Commercial, financial, etc $ 2,260 11% 3%
Real estate--commercial 4,118 11 3
Real estate--consumer 2,147 1 1
Consumer
Automobile 1,078 11 (4)
Home equity 641 6 1
Credit cards 255 6 (15)
Other 343 15 2
------- -- ---
Total consumer 2,317 9 (3)
------- -- ---
Total $10,842 8% 1%
------- -- ---
------- -- ---
For the first six months of 1997, taxable-equivalent net interest income was
$277.3 million, up from $264.2 million in the corresponding 1996 period. An
increase in average loans and leases of $944 million was the leading factor
contributing to this improvement.
Average investment securities declined to $1.7 billion in the recent quarter
from $1.9 billion in the second quarter of 1996. Holdings of investment
securities averaged $1.6 billion in the first quarter of 1997. Money-market
assets averaged $183 million in 1997's second quarter, compared with $108
million in the year-earlier quarter and $137 million in the initial quarter of
1997. In general, the size of the investment securities and money-market assets
portfolios are influenced by such factors as demand for loans, which generally
yield more than investment securities and money-market assets, ongoing
repayments, the levels of deposits, and management of balance sheet size and
resulting capital ratios.
As a result of the changes described herein, average earning assets
increased 6% to $12.7 billion in the second quarter of 1997 from $12.0 billion
in the second quarter of 1996. Average earning assets were $12.5 billion in the
first quarter of 1997 and aggregated $12.6 billion and $11.9 billion for the six
months ended June 30, 1997 and 1996, respectively.
Core deposits represent a significant source of funding to the Company
and generally carry lower interest rates than wholesale funds of comparable
maturities. Such deposits include noninterest-bearing demand deposits,
interest-bearing transaction accounts, savings deposits and nonbrokered
domestic time deposits under $100,000. The Company's New York State branch
network is the principal source of core deposits. Core deposits include
certificates of deposit under $100,000 generated on a nationwide basis by M&T
Bank, National Association ("M&T Bank, N.A."), a commercial bank subsidiary
of First Empire. Average core deposits increased to $8.3 billion in the
second quarter of 1997, up from $7.9 billion in the year-earlier quarter and
$8.1 billion in the first quarter of 1997. Average core deposits of M&T Bank,
N.A., which began operations in the fourth quarter of 1995, were $440 million
in the recently completed quarter, compared with $226 million in the second
quarter of 1996 and $388 million in the first quarter of 1997. The
accompanying table provides an analysis of quarterly changes in the
components of average core deposits. For the six months ended June 30, 1997
and 1996, core deposits averaged $8.2 billion and $7.8 billion, respectively.
11
AVERAGE CORE DEPOSITS
Dollars in millions
Percent increase
(decrease) from
2nd Qtr. 2nd Qtr. 1st Qtr.
1997 1996 1997
-------- -------- --------
NOW accounts $ 258 (66)% (8)%
Savings deposits 3,406 19 2
Time deposits less than $100,000 3,460 10 4
Demand deposits 1,181 4 2
----- --- --
Total $8,305 5% 2%
----- --- --
----- --- --
In addition to core deposits, the Company obtains funding through domestic
time deposits of $100,000 or more, deposits originated through the Company's
offshore branch office, and brokered certificates of deposit. Such deposits are
used to reduce short-term borrowings and lengthen the average maturity of
interest-bearing liabilities. Brokered deposits averaged $1.3 billion during the
recent quarter and totaled $1.5 billion at June 30, 1997, compared with an
average balance of $999 million during the comparable 1996 period and a total
balance of $1.1 billion at June 30, 1996. Brokered deposits averaged $1.1
billion in the initial quarter of 1997. The weighted average remaining term to
maturity of brokered deposits at June 30, 1997 was 2.4 years. Additional amounts
of brokered deposits may be solicited in the future depending on market
conditions and the cost of funds available from alternative sources at the time.
In addition to deposits, the Company uses short-term borrowings from banks,
securities dealers, the Federal Home Loan Bank of New York ("FHLB") and others
as sources of funding. Short-term borrowings averaged $789 million in the recent
quarter, compared with $1.2 billion in the second 1996 quarter and $1.1 billion
in the first quarter of 1997. The previously discussed issuances of $250 million
of trust preferred securities also provided funding during 1997. These
securities, along with $175 million of subordinated notes issued in prior years
by M&T Bank, are included in long-term borrowings. Long-term borrowings averaged
$355 million and $190 million in the second quarter of 1997 and 1996,
respectively, and $278 million in the first quarter of 1997.
Changes in the composition of the Company's earning assets and
interest-bearing liabilities, as well as changes in interest rates and spreads,
can impact net interest income. Net interest spread, or the difference between
the taxable-equivalent yield on earning assets and the rate paid on
interest-bearing liabilities, was 3.71% in the second quarter of 1997, compared
with 3.84% in the year-earlier quarter. The rate paid on interest-bearing
liabilities increased 18 basis points (hundredths of one percent) to 4.64% in
the second quarter of 1997 from 4.46% in the second quarter of 1996 due to
generally higher interest rates and the effect of the previously discussed
issuances of $250 million of trust preferred securities. Such increase was
partially offset by a 5 basis point increase in the yield on earning assets to
8.35% in the second quarter of 1997 from 8.30% in the corresponding 1996
quarter. The net interest spread was 3.81% in the first quarter of 1997 when the
yield on earning assets was 8.36% and the rate paid on interest-bearing
liabilities was 4.55%.
The contribution to net interest margin, or taxable equivalent net
interest income expressed as an annualized percentage of average earning
assets, of interest-free funds was .68% in the second quarter of 1997, up
from .62% in the corresponding 1996 quarter. The improvement was the result
of an 11% increase in average interest-free funds. Average interest-free
funds, consisting largely of non-interest bearing demand deposits and
stockholders' equity, totaled $1.9 billion in the second quarter of 1997, up
from $1.7 billion a year earlier. The 18 basis point increase in the rate
paid on interest-bearing liabilities used to value these funds also
contributed to the improvement. The contribution to net interest margin of
interest-free funds was .67% in the first quarter of 1997 when such funds
12
averaged $1.8 billion.
Largely due to the changes in the net interest spread described above, the
Company's net interest margin was 4.39% in 1997's second quarter, compared with
4.46% in the comparable quarter of 1996 and 4.48% in the initial 1997 quarter.
During the first six months of 1997 and 1996, the net interest margin was 4.44%
and 4.48%, respectively.
Management assesses the potential impact of future changes in interest rates
and spreads by projecting net interest income under a number of different
interest rate scenarios. The Company utilizes interest rate swap agreements as
part of the management of interest rate risk to modify the repricing
characteristics of certain portions of the loan and deposit portfolios. Revenue
and expense arising from these agreements are reflected in either the yields
earned on loans or, as appropriate, rates paid on interest-bearing deposits. The
notional amount of interest rate swap agreements used as part of the Company's
management of interest rate risk in effect at June 30, 1997 and 1996 was $2.9
billion and $2.5 billion, respectively. In general, under the terms of these
swaps, the Company receives payments based on the outstanding notional amount of
the swaps at fixed rates of interest and makes payments at variable rates.
However, under the terms of a $33 million swap, the Company pays a fixed rate of
interest and receives a variable rate. At June 30, 1997 the weighted average
rates to be received and paid under interest rate swap agreements were 6.36% and
5.77%, respectively. As of June 30, 1997, the Company had also entered into
forward-starting swaps with an aggregate notional amount of $50 million. Such
forward-starting swaps had no effect on the Company's net interest income
through June 30, 1997. The average notional amounts of interest rate swaps and
the related effect on net interest income and margin are presented in the
accompanying table.
INTEREST RATE SWAPS
Dollars in thousands
THREE MONTHS ENDED JUNE 30
-------------------------------------------
1997 1996
-------------------- ------------------
AMOUNT RATE* AMOUNT RATE*
---------- ----- --------- -----
Increase (decrease) in:
Interest income $ (129) -% $ 318 .01%
Interest expense (3,417) (.13) (3,987) (.15)
--------- ---------
Net interest
income/margin $ 3,288 .10% $ 4,305 .14%
--------- ---- --------- ----
Average notional
amount** $2,620,422 $2,413,370
--------- ---------
--------- ---------
SIX MONTHS ENDED JUNE 30
-------------------------------------------
1997 1996
-------------------- ------------------
AMOUNT RATE* AMOUNT RATE*
---------- ----- --------- -----
Increase (decrease) in:
Interest income $ 48 -% $ 279 -%
Interest expense (6,625) (.12) (7,140) (.14)
--------- ---------
Net interest
income/margin $ 6,673 .11% $ 7,419 .13%
--------- ---- --------- ----
Average notional
amount** $2,454,677 $2,323,139
--------- ---------
--------- ---------
* Computed as an annualized percentage of average earning assets or
interest-bearing liabilities.
** Excludes forward-starting interest rate swaps.
The Company estimates that as of June 30, 1997 it would have had to pay
approximately $1.0 million if all interest rate swap agreements entered into for
interest rate risk management purposes had been terminated. This estimated fair
value of the interest rate swap portfolio results from the
13
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.
Giving consideration to interest rate swaps in place at June 30, 1997 and
utilizing a computer model which aids management in assessing the potential
impact of future changes in interest rates and spreads, management estimates
that the amount of projected net interest income will be largely unaffected by
changes in interest rates in the next two years. However, additional interest
rate risk management actions may be necessary to counter any detrimental effect
which a sustained decrease in interest rates could have on net interest income
in later years.
As a financial intermediary, the Company is exposed to liquidity risk
whenever the maturities of financial instruments included in assets and
liabilities differ. Accordingly, a critical element in managing a financial
institution is ensuring that sufficient cash flow and liquid assets are
available to satisfy demands for loans and deposit withdrawals, to fund
operating expenses, and to be used for other corporate purposes. Deposits and
borrowings, maturities of money-market assets, repayments of loans and
investment securities, and cash generated from operations, such as fees
collected for services, provide the Company with other sources of liquidity.
Through membership in the FHLB, as well as other available borrowing facilities,
First Empire's banking subsidiaries have access to additional funding sources.
In addition to the proceeds of the $100 million and $150 million of junior
subordinated debt issued in June and January 1997, respectively, First Empire
utilizes dividend payments from its banking subsidiaries, which are subject to
various regulatory limitations, to pay dividends, repurchase treasury stock, and
fund debt service and other operating expenses. First Empire also maintains a
$25 million line of credit with an unaffiliated commercial bank, all of which
was available for borrowing at June 30, 1997. Management does not anticipate
engaging in any activities, either currently or in the long-term, which would
cause a significant strain on liquidity at either First Empire or its subsidiary
banks. Furthermore, management closely monitors the Company's liquidity position
for compliance with internal policies and believes that available sources of
liquidity are adequate to meet anticipated funding needs.
PROVISION FOR POSSIBLE CREDIT LOSSES
The purpose of the provision is to replenish or build the Company's
allowance for possible credit losses to a level necessary to maintain an
adequate reserve position. In assessing the adequacy of the allowance for
possible credit losses, management performs an ongoing evaluation of the loan
and lease portfolio and other credit commitments, 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. Based upon the results of such review, management believes that the
allowance for possible credit losses at June 30, 1997 was adequate to absorb
credit losses from existing loans and leases.
The provision for possible credit losses in the second quarter of 1997
was $11.0 million, equal to 1997's first quarter but below the $11.7 million
provision charged to earnings in the second quarter of 1996. Net loan
charge-offs totaled $12.6 million in the second quarter of 1997, compared
with $8.7 million in the year-earlier quarter and $7.9 million in 1997's
initial quarter. Net charge-offs as an annualized percentage of average loans
and leases were .47% in the recent quarter, compared with .35% in the
corresponding 1996 quarter and .30% in the first quarter of 1997. Consumer
loan net charge-offs in the recent quarter were $9.7 million, compared with
$6.7 million in the second quarter of 1996 and $8.8 million in 1997's initial
quarter. Higher charge-offs of credit card balances and indirect automobile
loans were the most significant factors contributing to the increased level
of consumer loan charge-offs in the second quarter of 1997 compared with
14
1996's second quarter. Net consumer loan charge-offs as an annualized
percentage of average consumer loans and leases were 1.68% in the recent
quarter, compared with 1.27% in the second quarter of 1996 and 1.50% in
1997's first quarter. For the six months ended June 30, 1997 and 1996, the
provision for possible credit losses was $22.0 million and $21.4 million,
respectively. Through June 30, net charge-offs were $20.5 million in 1997 and
$13.8 million in 1996, representing .38% and .28%, respectively, of average
loans and leases. Consumer loan net charge-offs totaled $18.5 million and
$11.6 million during the six months ended June 30, 1997 and 1996,
respectively.
Nonperforming loans were $97.1 million or .88% of total loans and leases
outstanding at June 30, 1997, compared with $85.0 million or .84% at June 30,
1996 and $97.0 million or .90% at March 31, 1997. Included in such amounts
are loans that are guaranteed by government agencies totaling $20.7 million
and $18.3 million at June 30, 1997 and 1996, respectively, and $22.8 million
at March 31, 1997. Nonperforming commercial real estate loans totaled $29.2
million at June 30, 1997, $30.5 million at June 30, 1996 and $25.6 million at
March 31, 1997. Nonperforming commercial real estate loans include loans
secured by properties located in the New York City metropolitan area of $11.9
million at June 30, 1997, $7.0 million at June 30, 1996 and $8.2 million at
March 31, 1997. Nonperforming consumer loans and leases totaled $16.4 million
at June 30, 1997, compared with $13.2 million at June 30, 1996 and $17.4
million at March 31, 1997. The increase in nonperforming consumer loans from
June 30, 1996 is generally consistent with current industry trends and also
reflects growth in the Company's consumer loan portfolio, particularly credit
card balances and automobile loans. As a percentage of consumer loan balances
outstanding, nonperforming consumer loans and leases were .71% at June 30,
1997 compared with .60% at June 30, 1996 and .74% at March 31, 1997.
Management continues to closely monitor the repayment performance of consumer
loans. Furthermore, as noted above, management believes that the allowance
for possible credit losses at June 30, 1997 was adequate to absorb credit
losses inherent in the Company's loan and lease portfolio as of that date.
Assets taken in foreclosure of defaulted loans were $9.7 million at June 30,
1997, $8.9 million at June 30, 1996 and $8.7 million at March 31, 1997.
A comparative summary of nonperforming assets and certain credit quality
ratios is presented in the accompanying table.
NONPERFORMING ASSETS
Dollars in thousands
1997 Quarters 1996 Quarters
Second First Fourth Third Second
------ ----- ------ ----- ------
Nonaccrual loans $62,525 57,366 58,232 59,517 57,603
Loans past due
90 days or more 31,810 36,857 39,652 36,958 27,406
Renegotiated loans 2,741 2,741 -- -- --
------- ------- ------- ------- ------
Total nonperforming loans 97,076 96,964 97,884 96,475 85,009
------- ------- ------- ------- ------
Other real estate owned 9,698 8,694 8,523 8,467 8,890
------- ------- ------- ------- ------
Total nonperforming assets $106,774 105,658 106,407 104,942 93,899
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Government guaranteed
nonperforming loans* $20,656 22,753 25,847 27,475 18,267
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Nonperforming loans
to total loans and
leases, net of
unearned discount .88% .90% .91% .92% .84%
Nonperforming assets
to total net loans and
other real estate owned .97% .98% .99% 1.00% .93%
------- ------- ------- ------- ------
------- ------- ------- ------- ------
* Included in total nonperforming loans.
15
The allowance for possible credit losses was $271.9 million, or 2.48% of
total loans and leases at June 30, 1997, compared with $270.0 million or 2.67% a
year earlier, $270.5 million or 2.52% at December 31, 1996 and $273.6 million or
2.53% at March 31, 1997. The ratio of the allowance for possible credit losses
to nonperforming loans was 280% at the most recent quarter-end, compared with
318% a year earlier, 276% at December 31, 1996 and 282% at March 31, 1997.
OTHER INCOME
Other income totaled $44.0 million in the second quarter of 1997, compared
with $41.5 million in the year-earlier quarter and $45.9 million in the initial
quarter of 1997. For the first six months of 1997, other income was $89.9
million, up 16% from $77.7 million in the comparable 1996 period.
Mortgage banking revenues totaled $12.2 million in the recent quarter,
compared with $11.3 million in the year-earlier quarter and $12.1 million in the
first quarter of 1997. Residential mortgage loan servicing fees were $6.2
million in the second quarter of 1997, up from $5.1 million in the second
quarter of 1996 and $5.8 million in the initial 1997 quarter. Gains from sales
of residential mortgage loans and loan servicing rights were $5.4 million in the
recently completed quarter, compared with $5.7 million in the year earlier
quarter and $5.6 million in 1997's first quarter. Residential mortgage loans
serviced for others totaled $6.5 billion and $5.6 billion at June 30, 1997 and
1996, respectively. Capitalized servicing assets were $49 million and $42
million at June 30, 1997 and 1996, respectively.
Service charges on deposit accounts increased to $10.7 million in the second
quarter of 1997, up from $10.1 million in the corresponding quarter of the
previous year and $10.4 million in the first quarter of 1997. Trust income was
$7.2 million in the second quarter of 1997, compared with $7.1 million in last
year's second quarter and $6.9 million in the first quarter of 1997. Merchant
discount and credit card fees were $4.2 million in the recent quarter, unchanged
from the year-earlier period, but down from $5.2 million in the initial 1997
quarter. The decrease from the first quarter reflects the March 28, 1997
termination of a co-branded credit card program that had been initiated in May
1996. Merchant discount and other credit card fees earned in connection with the
terminated program were $50 thousand and $1.6 million during the three and six
month periods ended June 30, 1997, respectively, and $758 thousand for the
comparable periods in 1996. Credit card balances related to this program that
remained outstanding at June 30, 1997 were $6.7 million. Trading account and
foreign exchange activity resulted in gains of $596 thousand in the second
quarter of 1997, compared with gains of $858 thousand and $1.3 million in the
second quarter of 1996 and the first quarter of 1997, respectively. Other
revenue from operations totaled $9.2 million in the recent quarter, compared
with $7.8 million in the corresponding quarter of 1996 and $10.0 million in the
first quarter of 1997, when a $1.5 million gain was realized upon termination of
a lease for one of the Company's branch offices.
For the six month period ended June 30, 1997, mortgage banking revenues
totaled $24.2 million, up 12% from $21.7 million in the corresponding 1996
period. Compared with the same period in 1996, service charges on deposit
accounts increased 5% to $21.1 million during the first six months of 1997,
while trust income increased 7% to $14.1 million. Reflecting previous expansion
of the Company's co-branded credit card business, during the first half of 1997
merchant discount and credit card fees increased 30% to $9.5 million from $7.3
million in the similar period of 1996. Trading account and foreign exchange
activity resulted in gains of $1.9 million for the initial half of 1997,
compared with gains of $154 thousand during the first six months of 1996.
Reflecting a $1.3 million increase in fees earned from the sales of mutual funds
and annuities and the previously mentioned $1.5 million gain from a lease
termination, other revenues from operations increased 31% to $19.2 million in
the first six months of 1997 from $14.9 million in the comparable 1996 period.
16
OTHER EXPENSE
Other expense totaled $102.1 million in the second quarter of 1997, up 4%
from $97.9 million in the second quarter of 1996, but down from $104.3 million
in the first quarter of 1997. Through the first half of 1997, other expense
totaled $206.4 million or 6% higher than $194.2 million in the comparable 1996
period.
Salaries and employee benefits expense was $53.6 million in the recent
quarter, 9% higher than the $49.1 million in the corresponding 1996 quarter but
4% lower than the $55.6 million in the first quarter of 1997. For the first six
months of 1997, salaries and employee benefits expense increased 8% to $109.1
million from $101.3 million in the corresponding 1996 period. Factors
contributing to the higher expenses over the prior year periods were expansion
of businesses providing mortgage banking services, credit cards and the sales of
mutual funds and annuities, as well as merit salary increases and higher costs
associated with incentive-based compensation arrangements, including stock
appreciation rights.
Nonpersonnel expense totaled $48.5 million in the second quarter of 1997,
little changed from the second quarter of 1996 or the first quarter of 1997.
Such expenses were $97.2 million during the first six months of 1997, an
increase of 5% from $93.0 million during the corresponding 1996 period. Such
increase was largely the result of expansion of the Company's credit card and
mortgage banking businesses. Rebate and other operating expenses based on card
usage directly attributable to the co-branded credit card program terminated in
March 1997 were approximately $107 thousand and $2.3 million during the three
and six month periods ended June 30, 1997, respectively, and $988 thousand for
the comparable periods in 1996.
CAPITAL
Stockholders' equity at June 30, 1997 was $951 million or 7.08% of total
assets, compared with $861 million or 6.86% of total assets a year earlier and
$906 million or 7.00% at December 31, 1996. On a per share basis, stockholders'
equity was $143.64 at June 30, 1997, up from $126.70 and $135.45 at June 30 and
December 31, 1996, respectively.
Stockholders' equity at June 30, 1997 reflected a gain of $3.4 million, or
$.52 per share, for the net after-tax impact of unrealized gains on investment
securities classified as available for sale, compared with unrealized losses of
$13.6 million or $2.01 per share at June 30, 1996 and $2.5 million or $.37 per
share at December 31, 1996. Such unrealized gains and losses represent the
difference, net of applicable income tax effect, between the amortized cost and
estimated fair value 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. As previously noted, core
capital includes the $250 million of trust preferred securities issued by First
Empire Capital Trust I and First Empire Capital Trust II in January and June of
1997, respectively. Total capital also includes $175 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 June 30, 1997 are
presented in the accompanying table.
17
REGULATORY CAPITAL RATIOS
June 30, 1997
FIRST EMPIRE M&T M&T
(CONSOLIDATED) BANK BANK, N.A.
-------------- ---- ----------
Core capital 10.81% 8.51% 16.68%
Total capital 13.68% 11.43% 17.93%
Leverage 8.96% 7.15% 7.88%
The Company has historically maintained capital ratios in excess of minimum
regulatory guidelines largely through a high rate of internal capital
generation. The rate of internal capital generation, or net income less
dividends paid expressed as a percentage of average total stockholders' equity,
was 16.25% during the second quarter of 1997, compared with 15.93% in the second
quarter of 1996 and 15.88% in the initial 1997 quarter.
In February 1997, First Empire announced a plan to repurchase and hold as
treasury stock up to 303,317 shares of its common stock for reissuance upon the
possible future exercise of outstanding stock options. As of June 30, 1997,
First Empire had repurchased 124,711 common shares pursuant to the plan at an
average cost of $320.68 per share. Including a prior repurchase plan completed
in February 1997, First Empire repurchased 153,773 common shares during the
first six months of 1997 at a total cost of $48.7 million.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this quarterly report contain forward-looking
statements that are based on current expectations, estimates and projections
about the Company's business, management's beliefs and assumptions made by
management. Words such as "anticipates," "believes," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. First Empire undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Future Factors include changes in interest rates, spreads on earning assets
and interest-bearing liabilities, and interest rate sensitivity; credit losses;
sources of liquidity; regulatory supervision and oversight, including required
capital levels; increasing price and product/service competition by competitors,
including new entrants; rapid technological developments and changes; the
ability to continue to introduce competitive new products and services on a
timely, cost-effective basis; the mix of products/ services; containing costs
and expenses; governmental and public policy changes, including environmental
regulations; protection and validity of intellectual property rights; reliance
on large customers; technological, implementation and cost/financial risks in
large, multi-year contracts; the outcome of pending and future litigation and
governmental proceedings; continued availability of financing; and financial
resources in the amounts, at the times and on the terms required to support the
Company's future businesses. These are representative of the Future Factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general economic conditions, including interest rate and currency
exchange rate fluctuations, and other Future Factors.
18
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
QUARTERLY TRENDS
1997 QUARTERS 1996 QUARTERS
--------------------- ------------------------------------------
TAXABLE-EQUIVALENT BASIS SECOND FIRST FOURTH THIRD SECOND FIRST
- ------------------------------------ ---------- --------- --------- --------- --------- ---------
Earnings and dividends
Amounts in thousands, except per
share
Interest income..................... $ 265,301 257,029 257,196 251,336 248,673 244,714
Interest expense.................... 125,734 119,321 119,343 117,884 114,996 114,185
---------- --------- --------- --------- --------- ---------
Net interest income................. 139,567 137,708 137,853 133,452 133,677 130,529
Less: provision for possible credit
losses............................ 11,000 11,000 11,475 10,475 11,700 9,675
Other income........................ 43,983 45,923 47,641 44,893 41,463 36,251
Less: other expense................. 102,070 104,284 107,082 107,658 97,921 96,317
---------- --------- --------- --------- --------- ---------
Income before income taxes.......... 70,480 68,347 66,937 60,212 65,519 60,788
Applicable income taxes............. 26,329 25,825 25,288 23,090 25,790 23,698
Taxable-equivalent adjustment....... 1,360 1,263 1,229 1,251 1,070 937
---------- --------- --------- --------- --------- ---------
Net income.......................... $ 42,791 41,259 40,420 35,871 38,659 36,153
---------- --------- --------- --------- --------- ---------
Cash dividends on preferred stock... $ -- -- -- -- -- 900
Per common share data
Net income
Primary......................... 6.17 5.81 5.70 5.05 5.36 5.20
Fully diluted................... 6.15 5.80 5.68 5.05 5.36 4.96
Net income, excluding securities
transactions
Primary......................... 6.19 5.81 5.73 5.05 5.36 5.17
Fully diluted................... 6.17 5.80 5.71 5.05 5.36 4.93
Cash dividends.................... $ .80 .80 .70 .70 .70 .70
Average common shares outstanding
Primary........................... 6,928 7,100 7,098 7,104 7,212 6,778
Fully diluted..................... 6,950 7,114 7,121 7,106 7,216 7,295
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
Balance sheet data
Dollars in millions, except per
share
Average balances
Total assets...................... $ 13,148 12,866 12,728 12,556 12,486 12,141
Earning assets.................... 12,740 12,464 12,308 12,124 12,044 11,695
Investment securities............. 1,715 1,611 1,659 1,798 1,939 1,830
Loans and leases, net of unearned
discount........................ 10,842 10,715 10,527 10,253 9,997 9,672
Deposits.......................... 10,914 10,454 10,609 10,459 10,069 9,496
Stockholders' equity.............. 925 917 891 857 855 849
---------- --------- --------- --------- --------- ---------
At end of quarter
Total assets...................... $ 13,441 13,122 12,944 12,821 12,542 12,671
Earning assets.................... 12,903 12,621 12,504 12,282 12,015 12,129
Investment securities............. 1,708 1,693 1,572 1,753 1,817 2,108
Loans and leases, net of unearned
discount........................ 10,980 10,803 10,722 10,437 10,129 9,912
Deposits.......................... 11,186 10,533 10,514 10,554 10,193 9,719
Stockholders' equity.............. 951 912 906 878 861 847
Equity per common share........... 143.64 137.33 135.45 130.58 126.70 123.76
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
Performance ratios, annualized
Return on
Average assets.................... 1.31% 1.30% 1.26% 1.14% 1.25% 1.20%
Average common stockholders'
equity.......................... 18.55% 18.24% 18.05% 16.64% 18.18% 17.50%
Net interest margin on average
earning assets.................... 4.39% 4.48% 4.46% 4.38% 4.46% 4.49%
Nonperforming assets to total
assets, at end of quarter......... .79% .81% .82% .82% .75% .71%
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
Market price per common share
High.............................. $ 343 1/2 336 289 5/8 258 247 247 3/4
Low............................... 303 281 250 239 232 209
Closing........................... 337 320 288 249 241 246
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
1997 SECOND QUARTER 1997 FIRST QUARTER 1996 FOURTH QUARTER
AVERAGE BALANCE IN MILLIONS; AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST IN THOUSANDS BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Earning assets
Loans and leases, net
of unearned discount*
Commercial, financial, etc...... $ 2,260 $ 47,680 8.46% 2,187 44,623 8.27% 2,072 42,480 8.16%
Real estate..................... 6,265 134,710 8.60 6,139 131,135 8.54 6,082 131,894 8.67
Consumer........................ 2,317 53,347 9.23 2,389 54,311 9.22 2,373 55,118 9.24
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net... 10,842 235,737 8.72 10,715 230,069 8.71 10,527 229,492 8.67
- --------------------------------------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at
banks........................... 54 816 6.01 48 709 6.01 50 762 6.03
Federal funds sold and agreements
to resell securities............ 64 860 5.40 32 405 5.22 37 492 5.32
Trading account................... 65 443 2.74 58 255 1.78 35 283 3.21
- --------------------------------------------------------------------------------------------------------------------------------
Total money-market assets..... 183 2,119 4.64 138 1,369 4.04 122 1,537 5.01
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Investment securities**
U.S. Treasury and federal
agencies........................ 1,192 19,002 6.39 1,064 16,679 6.36 1,097 17,069 6.19
Obligations of states and
political subdivisions.......... 44 728 6.59 41 677 6.66 41 682 6.54
Other............................. 479 7,715 6.46 506 8,235 6.61 521 8,416 6.43
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Total investment securities... 1,715 27,445 6.42 1,611 25,591 6.44 1,659 26,167 6.27
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Total earning assets.......... 12,740 265,301 8.35 12,464 257,029 8.36 12,308 257,196 8.31
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Allowance for possible credit
losses............................ (272) (272) (271)
Cash and due from banks............. 307 298 325
Other assets........................ 373 376 366
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Total assets.................. $13,148 12,866 12,728
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- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts...................... $ 259 835 1.30 281 920 1.33 327 1,247 1.52
Savings deposits.................. 3,406 22,495 2.65 3,346 22,248 2.70 3,291 22,458 2.71
Time deposits..................... 5,852 82,254 5.64 5,410 73,757 5.53 5,516 77,006 5.55
Deposits at foreign office........ 216 2,873 5.33 255 3,239 5.16 258 3,354 5.16
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Total interest-bearing deposits 9,733 108,457 4.47 9,292 100,164 4.37 9,392 104,065 4.41
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Short-term borrowings............... 789 10,230 5.20 1,075 13,700 5.17 881 11,785 5.32
Long-term borrowings................ 355 7,047 7.93 278 5,457 7.96 186 3,493 7.47
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Total interest- bearing
liabilities................. 10,877 125,734 4.64 10,645 119,321 4.55 10,459 119,343 4.54
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Demand deposits..................... 1,181 1,162 1,217
Other liabilities................... 165 142 161
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Total liabilities............. 12,223 11,949 11,837
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Stockholders' equity................ 925 917 891
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity........ $13,148 12,866 12,728
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Net interest spread................. 3.71 3.81 3.77
Contribution of interest-free
funds............................. 0.68 .67 .69
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Net interest income/margin on
earning assets.................... $139,567 4.39% 137,708 4.48% 137,853 4.46%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
20
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
(continued)
1996 THIRD QUARTER 1996 SECOND QUARTER
AVERAGE BALANCE IN MILLIONS; AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST IN THOUSANDS BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------
Assets
Earning assets
Loans and leases, net of
unearned discount*
Commercial, financial, etc....... $ 2,023 $ 41,322 8.12% 2,032 41,682 8.25%
Real estate...................... 5,972 128,704 8.62 5,846 126,747 8.67
Consumer......................... 2,258 52,268 9.21 2,119 49,160 9.33
- --------------------------------------------------------------------------------------------------
Total loans and leases, net.... 10,253 222,294 8.62 9,997 217,589 8.75
- --------------------------------------------------------------------------------------------------
Money-market assets
Interest-bearing deposits at banks. 24 354 5.98 18 266 6.14
Federal funds sold and agreements
to resell securities............. 23 311 5.46 58 779 5.38
Trading account.................... 26 247 3.73 32 264 3.33
- --------------------------------------------------------------------------------------------------
Total money-market assets...... 73 912 5.00 108 1,309 4.89
- --------------------------------------------------------------------------------------------------
Investment securities**
U.S. Treasury and federal agencies. 1,208 18,719 6.16 1,324 20,248 6.15
Obligations of states and political
subdivisions..................... 44 711 6.43 41 668 6.50
Other.............................. 546 8,700 6.34 574 8,859 6.21
- --------------------------------------------------------------------------------------------------
Total investment securities.... 1,798 28,130 6.23 1,939 29,775 6.17
- --------------------------------------------------------------------------------------------------
Total earning assets........... 12,124 251,336 8.25 12,044 248,673 8.30
- --------------------------------------------------------------------------------------------------
Allowance for possible credit losses. (271) (269)
Cash and due from banks.............. 345 331
Other assets......................... 358 380
- --------------------------------------------------------------------------------------------------
Total assets................... $12,556 12,486
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts....................... $ 794 2,768 1.39 760 2,642 1.40
Savings deposits................... 2,854 21,170 2.95 2,872 20,673 2.90
Time deposits...................... 5,359 74,706 5.55 5,026 68,920 5.51
Deposits at foreign office......... 257 3,382 5.23 273 3,534 5.20
- --------------------------------------------------------------------------------------------------
Total interest-bearing
deposits..................... 9,264 102,026 4.38 8,931 95,769 4.31
- --------------------------------------------------------------------------------------------------
Short-term borrowings................ 928 12,311 5.28 1,243 15,657 5.07
Long-term borrowings................. 188 3,547 7.48 190 3,570 7.55
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Total interest-bearing
liabilities.................. 10,380 117,884 4.52 10,364 114,996 4.46
- --------------------------------------------------------------------------------------------------
Demand deposits...................... 1,195 1,138
Other liabilities.................... 124 129
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Total liabilities.............. 11,699 11,631
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Stockholders' equity................. 857 855
- --------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity......... $12,556 12,486
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Net interest spread.................. 3.73 3.84
Contribution of interest-free funds.. .65 .62
- --------------------------------------------------------------------------------------------------
Net interest income/margin on earning
assets............................. $133,452 4.38% 133,677 4.46%
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
M&T Bank, N.A. and Giant of Maryland, Inc. ("Giant") are arbitrating
the rights and liabilities of the parties to each other in connection with
the termination of their co-branded credit card agreement. The resolution
of this matter has been submitted to arbitration under the auspices of the
American Arbitration Association following the termination of legal
proceedings between the parties that were formerly pending in the United
States District Court for the District of Maryland. M&T Bank, N.A. initiated
the arbitration proceeding. Giant alleges in the arbitration proceeding that
M&T Bank, N.A. breached the co-branded credit card agreement by seeking to
terminate the agreement and negligently misrepresenting certain information
provided to Giant, and seeks damages in excess of $37 million, plus interest,
costs, attorneys fees and other unspecified relief. M&T Bank, N.A. has
denied Giant's allegations in the arbitration proceeding, and is pursuing
its own claims against Giant in the same proceeding. Management believes
that M&T Bank, N.A. has meritorious defenses to Giant's claims and is
vigorously defending against them while pursuing relief under M&T Bank,
N.A.'s claims against Giant.
First Empire and its subsidiaries are subject in the normal course of
business to various other pending and threatened legal proceedings in which
claims for monetary damages are asserted. Management, after consultation
with legal counsel, does not anticipate that the aggregate ultimate
liability, if any, arising out of litigation pending against First Empire or
its subsidiaries will be material to First Empire's consolidated financial
position, but at the present time is not in a position to determine whether
such litigation will have a material adverse effect on First Empire's
consolidated results of operations in any future reporting period.
Item 2. Changes in Securities.
(a) (Not applicable.)
(b) In June 1997, Trust II, a Delaware business trust, issued $100
million of 8.277% Capital Securities. The Common Securities of Trust II are
wholly owned by First Empire, and the Capital Securities represent preferred
undivided interests in the assets of Trust II. The proceeds from the
issuance of the Capital Securities ($100 million) and Common Securities
($3.09 million) were used by Trust II to purchase $103.09 million of 8.277%
Junior Subordinated Debentures issued by First Empire. The Junior
Subordinated Debentures represent the sole asset of Trust II and payments
under the Junior Subordinated Debentures are Trust II's sole source of cash
flow.
Holders of the Capital Securities receive preferential cumulative cash
distributions semi-annually each June 1st and December 1st at a rate of
8.277% per annum on the stated liquidation amount ($1,000) per Capital
Security unless First Empire exercises its right to extend the payment of
interest on the Junior Subordinated Debentures for up to ten semi-annual
periods, in which case payment of distributions on the Capital Securities
will be deferred for a comparable period. During an extended interest
period, First Empire may not pay dividends or distributions on, or
repurchase, redeem or acquire any shares of its capital stock.
Item 3. Defaults Upon Senior Securities.
(Not applicable.)
Item 4. Submission of Matters to a Vote of Security Holders.
Information concerning the matters submitted to a vote of stockholders
at First Empire's Annual Meeting of Stockholders held on April 15, 1997 was
previously reported in response to Item 4 of Part II of First Empire's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
22
Item 5. Other Information.
On June 30, 1997, William C. Rappolt retired as Executive Vice President and
Treasurer of First Empire and M&T Bank. Mr. Rappolt was succeeded in those
positions on July 1, 1997 by Adam C. Kugler, previously a Senior Vice
President in M&T Bank's Treasury Division.
Also in June of 1997, the Company announced the appointment of Emerson L.
Brumback to the position of Executive Vice President of First Empire and M&T
Bank effective as of July 8, 1997. Mr. Brumback's immediate past position
was executive vice president, national retail distribution, at Banc One
Corporation.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report:
Exhibit
No.
- -------
11.1 Statement re: Computation of Earnings Per Common Share. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K. The following Current Reports on Form 8-K
were filed with the Securities and Exchange Commission:
On June 2, 1997, a Current Report on Form 8-K dated May 24, 1997 was
filed to announce the consummation of the merger of The East New York Savings
Bank with and into M&T Bank.
On June 16, 1997, a Current Report on Form 8-K dated June 6, 1997 was
filed to announce First Empire's completion of a $100 million offering of
Capital Securities.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST EMPIRE STATE CORPORATION
Date: August 6, 1997 By: /s/ Michael P. Pinto
------------------------------
Michael P. Pinto
Executive Vice President
and Chief Financial Officer
24
EXHIBIT INDEX
EXHIBIT
NO.
- -------
11.1 Statement re: Computation of Earnings Per Common Share. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
25
Exhibit No.11.1
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FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
COMPUTATION OF EARNINGS PER COMMON SHARE JUNE 30 JUNE 30
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Primary Average common shares outstanding 6,627 6,832 6,656 6,616
Common stock equivalents * 301 380 358 379
- ---------------------------------------------------------------------------------------------------------------
Primary common shares outstanding 6,928 7,212 7,014 6,995
- ---------------------------------------------------------------------------------------------------------------
Net income $42,791 38,659 84,050 74,812
Less: Cash dividends on preferred stock 0 0 0 900
- ---------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders $42,791 38,659 84,050 73,912
- ---------------------------------------------------------------------------------------------------------------
Earnings per common share--primary $ 6.17 5.36 11.98 10.56
- ---------------------------------------------------------------------------------------------------------------
Fully diluted Average common shares outstanding 6,627 6,832 6,656 6,616
Common stock equivalents * 323 384 376 384
Assumed conversion of 9% convertible
preferred stock 0 0 0 245
- ---------------------------------------------------------------------------------------------------------------
Fully diluted average common shares
outstanding 6,950 7,216 7,032 7,245
- ---------------------------------------------------------------------------------------------------------------
Net income $42,791 38,659 84,050 74,812
- ---------------------------------------------------------------------------------------------------------------
Earnings per common share--fully diluted $ 6.15 5.36 11.95 10.32
- ---------------------------------------------------------------------------------------------------------------
- ------------------------
* Represents shares of First Empire's common stock issuable upon the assumed
exercise of outstanding stock options granted pursuant to the First Empire
State Corporation 1983 Stock Option Plan under the "treasury stock" method
of accounting.
9
6-MOS
DEC-31-1997
JUN-30-1997
399,094
96,116
46,309
72,484
1,561,442
146,930
147,422
11,313,318
271,933
13,440,995
11,186,195
658,966
216,878
427,919
0
0
40,487
910,550
13,440,995
484,801
51,485
3,421
519,707
208,621
245,055
274,652
22,000
(233)
206,354
136,204
84,050
0
0
84,050
11.98
11.95
4.44
82,525
31,810
2,741
0
270,466
29,883
9,350
271,933
144,240
0
127,693
