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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9861
M&T BANK CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One M & T Plaza
Buffalo, New York 14240
(Address of principal (Zip Code)
executive offices)
(716) 842-5445
(Registrant's telephone number, including area code)
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 6, 1998: 7,775,123 shares.
M&T BANK CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 1998
Table of Contents of Information Required in Report Page
- --------------------------------------------------- ----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEET -
September 30, 1998 and December 31, 1997 3
CONSOLIDATED STATEMENT OF INCOME -
Three and nine months ended
September 30, 1998 and 1997 4
CONSOLIDATED STATEMENT OF CASH FLOWS -
Nine months ended September 30, 1998 and 1997 5
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY - Nine months ended
September 30, 1998 and 1997 6
CONSOLIDATED SUMMARY OF CHANGES IN
ALLOWANCE FOR POSSIBLE CREDIT LOSSES -
Nine months ended September 30, 1998 and 1997 6
NOTES TO FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 30
Part II. OTHER INFORMATION 30
Item 1. Legal Proceedings. 30
Item 2. Changes in Securities and Use of Proceeds. 30
Item 3. Defaults Upon Senior Securities. 30
Item 4. Submission of Matters to a Vote of Security
Holders. 30
Item 5. Other Information. 30
Item 6. Exhibits and Reports on Form 8-K. 30
SIGNATURES 31
EXHIBIT INDEX 32
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 1998 1997
- -------------------------------------- ------------ ----------
Assets Cash and due from banks $ 398,542 333,805
Money-market assets
Interest-bearing deposits at banks 909 668
Federal funds sold and agreements to resell securities 144,075 53,087
Trading account 196,276 57,291
------------ ----------
Total money-market assets 341,260 111,046
------------ ----------
Investment securities
Available for sale (cost: $2,225,148 at September 30, 1998;
$1,563,055 at December 31, 1997) 2,236,556 1,583,273
Held to maturity (market value: $95,602 at September 30,
1998; $84,176 at December 31, 1997) 95,376 83,665
Other (market value: $114,542 at September 30, 1998;
$58,280 at December 31, 1997) 114,542 58,280
------------ ----------
Total investment securities 2,446,474 1,725,218
------------ ----------
Loans and leases 15,388,132 11,765,533
Unearned discount (224,808) (268,965)
Allowance for possible credit losses (309,535) (274,656)
------------ ----------
Loans and leases, net 14,853,789 11,221,912
------------ ----------
Premises and equipment 170,920 121,984
Goodwill and core deposit intangible 556,137 17,288
Accrued interest and other assets 711,278 471,682
------------ ----------
Total assets $ 19,478,400 14,002,935
------------ ----------
------------ ----------
Liabilities Noninterest-bearing deposits $ 1,815,668 1,458,241
NOW accounts 486,996 346,795
Savings deposits 4,600,791 3,344,697
Time deposits 7,197,688 5,762,497
Deposits at foreign office 293,258 250,928
------------ ----------
Total deposits 14,394,401 11,163,158
------------ ----------
Federal funds purchased and agreements
to repurchase securities 1,486,647 930,775
Other short-term borrowings 354,555 120,143
Accrued interest and other liabilities 400,167 330,774
Long-term borrowings 1,193,453 427,819
------------ ----------
Total liabilities 17,829,223 12,972,669
------------ ----------
Stockholders' equity Preferred stock, $1 par, 1,000,000 shares authorized,
none outstanding -- --
Common stock, $5 par, 15,000,000 shares authorized, 8,101,539 shares
issued at September 30, 1998;
8,097,472 shares issued at December 31, 1997 40,508 40,487
Common stock issuable, 8,223 shares at September 30, 1998 3,834 --
Additional paid-in capital 484,829 103,233
Retained earnings 1,220,942 1,092,106
Accumulated other comprehensive income 6,782 12,016
Treasury stock - common, at cost -
220,226 shares at September 30, 1998;
1,487,123 shares at December 31, 1997 (107,718) (217,576)
------------ ----------
Total stockholders' equity 1,649,177 1,030,266
------------ ----------
Total liabilities and stockholders' equity $ 19,478,400 14,002,935
------------ ----------
------------ ----------
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 1998 1997 1998 1997
- -------------------------------------- -------- ------- -------- -------
Interest income Loans and leases, including fees $314,986 240,254 $879,487 705,055
Money-market assets
Deposits at banks 16 944 386 2,469
Federal funds sold and agreements
to resell securities 1,634 952 4,603 2,217
Trading account 1,763 382 2,368 1,013
Investment securities
Fully taxable 36,959 25,490 102,827 74,697
Exempt from federal taxes 2,084 1,679 5,757 3,957
-------- ------- -------- -------
Total interest income 357,442 269,701 995,428 789,408
-------- ------- -------- -------
Interest expense NOW accounts 1,328 803 3,472 2,558
Savings deposits 31,395 22,746 84,638 67,489
Time deposits 103,525 85,889 289,659 241,900
Deposits at foreign office 3,964 2,969 10,765 9,081
Short-term borrowings 29,376 8,801 78,942 32,731
Long-term borrowings 15,262 8,560 36,603 21,064
-------- ------- -------- -------
Total interest expense 184,850 129,768 504,079 374,823
-------- ------- -------- -------
Net interest income 172,592 139,933 491,349 414,585
Provision for possible credit losses 10,500 12,000 35,700 34,000
-------- ------- -------- -------
Net interest income after provision
for possible credit losses 162,092 127,933 455,649 380,585
-------- ------- -------- -------
Other income Mortgage banking revenues 16,405 12,748 48,741 36,995
Service charges on deposit accounts 15,940 10,865 41,354 31,976
Trust income 9,355 7,643 28,778 21,779
Merchant discount and other credit card fees 2,321 4,514 10,889 13,979
Trading account and foreign exchange gains (losses) (148) 1,427 2,137 3,372
Gain (loss) on sales of bank investment securities 376 (47) 698 (280)
Other revenues from operations 22,319 13,032 70,777 32,267
-------- ------- -------- -------
Total other income 66,568 50,182 203,374 140,088
-------- ------- -------- -------
Other expense Salaries and employee benefits 63,520 56,270 191,783 165,390
Equipment and net occupancy 18,876 13,302 50,233 39,690
Printing, postage and supplies 4,743 3,334 13,342 10,157
Amortization of goodwill and core deposit intangible 10,879 1,825 23,579 5,467
Other costs of operations 40,472 29,975 148,430 90,356
-------- ------- -------- -------
Total other expense 138,490 104,706 427,367 311,060
-------- ------- -------- -------
Income before income taxes 90,170 73,409 231,656 209,613
Income taxes 33,693 27,518 81,525 79,672
-------- ------- -------- -------
Net income $ 56,477 45,891 $150,131 129,941
-------- ------- -------- -------
Net income per common share
Basic $ 7.09 6.96 $ 19.84 19.59
Diluted 6.81 6.62 19.01 18.60
Cash dividends per common share 1.00 .80 2.80 2.40
Average common shares outstanding
Basic 7,966 6,592 7,566 6,634
Diluted 8,288 6,927 7,897 6,985
4
M&T BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine months ended
September 30
Dollars In thousands 1998 1997
- -------------------- --------------- ---------------
Cash flows from Net income $ 150,131 129,941
operating activities Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 35,700 34,000
Depreciation and amortization of premises
and equipment 18,936 15,679
Amortization of capitalized servicing rights 14,733 10,147
Amortization of goodwill and core deposit intangible 23,579 5,467
Provision for deferred income taxes (2,225) (11,389)
Asset write-downs 3,304 905
Net gain on sales of assets (4,257) (1,232)
Net change in accrued interest receivable, payable 12,451 17,869
Net change in other accrued income and expense 32,927 50,569
Net change in loans held for sale (141,177) 23,077
Net change in trading account assets and liabilities (141,036) 30,974
--------------- ---------------
Net cash provided by operating activities 3,066 306,007
--------------- ---------------
Cash flows from Proceeds from sales of investment securities
investing activities Available for sale 124,553 217,221
Other 3,976 --
Proceeds from maturities of investment securities
Available for sale 821,178 176,680
Held to maturity 74,536 67,561
Other 7,930 --
Purchases of investment securities
Available for sale (141,230) (576,468)
Held to maturity (34,405) (39,201)
Other (21,873) (3,936)
Net (increase) decrease in interest-bearing
deposits at banks (241) 46,529
Additions to capitalized servicing rights (9,516) (16,000)
Net increase in loans and leases (771,606) (604,303)
Proceeds from sale of retail credit card business 189,818 --
Capital expenditures, net (17,207) (7,517)
Acquisitions, net of cash acquired:
ONBANCorp, Inc. 20,790 --
Deposits and banking offices -- 123,043
Purchases of bank owned life insurance (150,000) (100,000)
Other, net (13,204) (3,460)
--------------- ---------------
Net cash provided (used) by investing activities 83,499 (719,851)
--------------- ---------------
Cash flows from Net increase (decrease) in deposits (533,682) 557,360
financing activities Net increase (decrease) in short-term borrowings 250,960 (379,204)
Proceeds from long-term borrowings 500,000 250,000
Payments on long-term borrowings (2,479) (120)
Purchases of treasury stock (135,528) (67,771)
Dividends paid - common (21,279) (15,920)
Other, net 11,168 850
--------------- ---------------
Net cash provided by financing activities 69,160 345,195
--------------- ---------------
Net increase (decrease) in cash and cash equivalents $ 155,725 (68,649)
Cash and cash equivalents at beginning of period 386,892 449,985
Cash and cash equivalents at end of period $ 542,617 381,336
--------------- ---------------
Supplemental Interest received during the period $ 999,174 784,005
disclosure of cash Interest paid during the period 500,793 354,753
flow information Income taxes paid during the period 48,162 40,915
--------------- ---------------
Supplemental schedule of Real estate acquired in settlement of loans $ 5,754 6,522
noncash investing and Acquisition of ONBANCorp, Inc:
financing activities Common stock issued $ 587,819 --
Fair value of:
Assets acquired (noncash) 5,205,420 --
Liabilities assumed 4,618,967 --
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 stock Total
------- ------ -------- ---------- --------- ------------- -------- -----------
1997
Balance - January 1, 1997 $-- 40,487 -- 96,597 937,072 (2,485) (166,012) $ 905,659
Comprehensive income:
Net income -- -- -- -- 129,941 -- -- 129,941
Other comprehensive income,
net of tax:
Unrealized gains on investment
securities, net of
reclassification adjustment -- -- -- -- -- 13,729 -- 13,729
-------
143,670
Exercise of stock options -- -- -- 4,934 -- -- 10,986 15,920
Purchases of treasury stock -- -- -- -- -- -- (67,771) (67,771)
Common stock cash dividends -
$2.40 per share -- -- -- -- (15,920) -- -- (15,920)
------- ------ -------- ---------- --------- ------------- --------- -----------
Balance - September 30, 1997 $-- 40,487 -- 101,531 1,051,093 11,244 (222,797) $ 981,558
------- ------ -------- ---------- --------- ------------- --------- -----------
------- ------ -------- ---------- --------- ------------- --------- -----------
1998
Balance - January 1, 1998 $-- 40,487 -- 103,233 1,092,106 12,016 (217,576) $1,030,266
Comprehensive income:
Net income -- -- -- -- 150,131 -- -- 150,131
Other comprehensive income,
net of tax:
Unrealized losses on investment
securities, net of
reclassification adjustment -- -- -- -- -- (5,234) -- (5,234)
-----------
144,897
Purchases of treasury stock -- -- -- -- -- -- (135,528) (135,528)
Acquisition of ONBANCorp:
Common stock issued -- 10 -- 364,427 -- -- 223,382 587,819
Fair value of stock options -- -- -- 19,424 -- -- -- 19,424
Stock-based compensation plans:
Exercise of stock options -- 11 -- (2,303) -- -- 21,768 19,476
Directors' stock plan -- -- -- 49 -- -- 177 226
Deferred bonus plan, net, including
dividend equivalents -- -- 3,834 (1) (16) -- 59 3,876
Common stock cash dividends -
$2.80 per share -- -- -- -- (21,279) -- -- (21,279)
------- ------ -------- ---------- --------- ------------- -------- -----------
Balance - September 30, 1998 $-- 40,508 3,834 484,829 1,220,942 6,782 (107,718) $ 1,649,177
------- ------ -------- ---------- --------- ------------- -------- -----------
------- ------ -------- ---------- --------- ------------- -------- -----------
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR POSSIBLE CREDIT LOSSES
(Unaudited)
Nine months ended September 30
Dollars in thousands 1998 1997
--------- -------
Beginning balance $ 274,656 270,466
Provision for possible credit losses 35,700 34,000
Allowance obtained through acquisition 27,905 --
Net charge-offs
Charge-offs (41,088) (44,332)
Recoveries 12,362 12,174
--------- -------
Total net charge-offs (28,726) (32,158)
--------- -------
Ending balance $ 309,535 272,308
--------- -------
--------- -------
6
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
In May 1998, First Empire State Corporation changed its name to M&T Bank
Corporation ("M&T"). The consolidated financial statements of M&T and
subsidiaries ("the Company") were compiled in accordance with the accounting
policies set forth in Note 1 of Notes to Financial Statements on pages 39
through 41 of the Company's 1997 Annual Report to stockholders, except as
described below. In the opinion of management, all adjustments necessary for a
fair presentation have been made and were all of a normal recurring nature.
Certain reclassifications have been made to the 1997 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
1998 1997 1998 1997
------- ------ ------- -------
(in thousands, except per share)
Income available to common stockholders:
Net income $56,477 45,891 150,131 129,941
Weighted-average shares
outstanding (including common
stock issuable) 7,966 6,592 7,566 6,634
Basic earnings per share $ 7.09 6.96 19.84 19.59
The computations of diluted earnings per share follow:
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
------- ------ ------- -------
(in thousands, except per share)
Income available to common
stockholders $56,477 45,891 150,131 129,941
Weighted-average shares
outstanding (including common
stock issuable) 7,966 6,592 7,566 6,634
Plus: incremental shares from
assumed conversions of
stock options 322 335 331 351
------- ------- ------- -------
Adjusted weighted-average shares
outstanding 8,288 6,927 7,897 6,985
Diluted earnings per share $ 6.81 6.62 19.01 18.60
3. Comprehensive income
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No.
130 establishes standards for reporting and displaying comprehensive income and
its components. Financial statements presented for periods prior to 1998 are
required to be reclassified to reflect application of the provisions of SFAS No.
130.
7
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. Comprehensive income, continued
The following table displays the components of other comprehensive income:
Nine months ended September 30, 1998
------------------------------------
Before-tax Income
amount taxes Net
------- ------ ------
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.
Nine months ended September 30, 1997
------------------------------------
Before-tax Income
amount taxes Net
------- ------ ------
Unrealized gains on investment securities:
Unrealized holding
gains during period $22,945 (9,382) 13,563
Add: reclassification
adjustment for losses
realized in net income 280 (114) 166
------- ------ ------
Net unrealized gains $23,225 (9,496) 13,729
------- ------ ------
------- ------ ------
4. Contribution of appreciated investment securities
In January 1998, M&T contributed appreciated investment securities with a fair
value of $24.6 million to an affiliated, tax-exempt private charitable
foundation. As a result of this transfer, the Company recognized tax-exempt
other income of $15.3 million and incurred charitable contributions expense of
$24.6 million. These amounts are included in the Consolidated Statement of
Income in "Other revenues from operations" and "Other costs of operations,"
respectively. The transfer provided an income tax benefit of approximately $10.0
million and, accordingly, resulted in an after-tax increase in net income of
$0.7 million.
5. Acquisition of ONBANCorp, Inc.
On April 1, 1998, M&T consummated the merger ("Merger") of ONBANCorp, Inc.
("ONBANCorp") with and into Olympia Financial Corp.("Olympia"), a wholly owned
subsidiary of M&T. Following the Merger, OnBank & Trust Co., Syracuse, New York,
and Franklin First Savings Bank, Wilkes-Barre, Pennsylvania, both wholly owned
subsidiaries of ONBANCorp, were merged with and into Manufacturers and Traders
Trust Company ("M&T Bank"), M&T's principal banking subsidiary.
After application of the election, allocation and proration procedures contained
in the merger agreement with ONBANCorp, M&T paid $266.3 million in cash and
issued 1,429,998 shares of common stock in exchange for the ONBANCorp common
shares outstanding at the time of acquisition. In addition, based on the merger
agreement and the exchange ratio provided for therein, M&T converted outstanding
and unexercised stock options granted by ONBANCorp into options to purchase
61,772 shares of M&T common stock. The purchase price of the transaction was
approximately $873.6 million based on the cash paid to ONBANCorp stockholders,
the market price of M&T common shares on October 28, 1997 before the terms of
the Merger were agreed to and announced by M&T and ONBANCorp, and the estimated
fair
8
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. Acquisition of ONBANCorp, Inc., continued
value of ONBANCorp stock options converted into M&T stock options.
Acquired assets, loans and deposits of ONBANCorp on April 1, 1998 totaled
approximately $5.5 billion, $3.0 billion and $3.8 billion, respectively. The
transaction has been accounted for as a purchase and, accordingly, operations
acquired from ONBANCorp have been included in the Company's financial results
since the acquisition date. In connection with the acquisition, the Company
recorded approximately $501 million of goodwill and $61 million of core deposit
intangible. The goodwill is being amortized on a straight-line basis over twenty
years and the core deposit intangible is being amortized on an accelerated basis
over ten years. The Company incurred expenses related to systems conversions and
other costs of integrating and conforming the acquired operations with and into
the Company of approximately $3.0 million and $21.3 million during the three and
nine month periods ended September 30, 1998, respectively. Since the systems
conversions and integration of operations is largely complete, the Company does
not expect to incur a material amount of additional integration costs.
Presented below is certain pro forma information as if ONBANCorp had been
acquired on January 1, 1997. These results combine the historical results of
ONBANCorp into the Company's Consolidated Statement of Income and, while certain
adjustments were made for the estimated impact of purchase accounting
adjustments and other acquisition-related activity, they are not necessarily
indicative of what would have occurred had the acquisition taken place at that
time. In particular, expenses related to systems conversions and other costs of
integration are included in the 1998 periods in which such costs were incurred
and, additionally, the Company expects to achieve further operating cost savings
as a result of the Merger which are not reflected in the pro forma amounts
presented below.
Pro forma
Nine months ended September 30
1998 1997
---------- ---------
(in thousands, except per share)
Interest income $1,078,640 1,050,162
Other income 210,442 170,371
Net income 143,620 132,203
Diluted earnings per common share $ 17.12 15.60
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.
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
9
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Borrowings, continued
The common securities of Trust I and Trust II are wholly owned by M&T and the
common securities of OnBank Trust I are wholly owned by Olympia. The common
securities of each trust ("Common Securities") are the only class of each
Trust's securities possessing general voting powers. The Capital Securities
represent preferred undivided interests in the assets of the corresponding Trust
and are classified in the Company's consolidated balance sheet as long-term
borrowings, with accumulated distributions on such securities included in
interest expense. Under the Federal Reserve Board's current risk-based capital
guidelines, the Capital Securities are includable in the Company's Tier 1
capital.
The proceeds from the issuances of the Capital Securities and Common Securities
were used by the Trusts to purchase the following amounts of junior subordinated
deferrable interest debentures ("Junior Subordinated Debentures") issued by M&T
in the case of Trust I and Trust II and Olympia in the case of OnBank Trust I:
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
obligations under such guarantee and the Capital Securities are subordinate and
junior in right of payment to all senior indebtedness of M&T and Olympia.
The Capital Securities are mandatorily redeemable in whole, but not in part,
upon repayment at the stated maturity dates of the Junior Subordinated
Debentures or the earlier redemption of the Junior Subordinated Debentures in
whole upon the occurrence of one or more events ("Events") set forth in the
indentures relating to the Capital Securities, and in whole or in part at any
time after the stated optional redemption dates (February 1, 2007 in the case of
Trust I and OnBank Trust I, and June 1, 2007 in the case of Trust II)
contemporaneously with the Company's optional redemption of the related Junior
Subordinated Debentures in whole or in part. The Junior Subordinated Debentures
are redeemable prior to their stated maturity dates at M&T's option in the case
of Trust I and Trust II
10
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Borrowings, continued
and Olympia's option in the case of OnBank Trust I (i) on or after the stated
optional redemption dates, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of one or more of the Events, in each
case subject to possible regulatory approval. The redemption price of the
Capital Securities upon their early redemption will be expressed as a percentage
of the liquidation amount plus accumulated but unpaid distributions. In the case
of Trust I, such percentage adjusts annually and ranges from 104.117% at
February 1, 2007 to 100.412% for the annual period ending January 31, 2017,
after which the percentage is 100%, subject to a make-whole amount if the early
redemption occurs prior to February 1, 2007. In the case of Trust II, such
percentage adjusts annually and ranges from 104.139% at June 1, 2007 to 100.414%
for the annual period ending May 31, 2017, after which the percentage is 100%,
subject to a make-whole amount if the early redemption occurs prior to June 1,
2007. In the case of OnBank Trust I, such percentage adjusts annually and ranges
from 104.625% at February 1, 2007 to 100.463% for the annual period ending
January 31, 2017, after which the percentage is 100%, subject to a make-whole
amount if the early redemption occurs prior to February 1, 2007.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
M&T Bank Corporation ("M&T") completed the acquisition of ONBANCorp, Inc.
("ONBANCorp"), a bank holding company headquartered in Syracuse, New York, on
April 1, 1998. Immediately after the acquisition, ONBANCorp's two banking
subsidiaries, OnBank & Trust Co. in Syracuse, which operated 59 offices in
upstate New York, and Franklin First Savings Bank in Wilkes-Barre, Pennsylvania,
which operated 19 offices in northeastern Pennsylvania, were merged with and
into Manufacturers and Traders Trust Company ("M&T Bank"), M&T's principal
banking subsidiary. The acquisition was accounted for using the purchase method
of accounting and, accordingly, the operations acquired from ONBANCorp have been
included in the financial results of M&T and its consolidated subsidiaries ("the
Company") since the acquisition date. ONBANCorp's stockholders received $266.3
million in cash and 1,429,998 shares of M&T common stock in exchange for
ONBANCorp shares outstanding at the time of acquisition. A summary of assets
acquired and liabilities assumed on April 1, 1998 in connection with the
ONBANCorp transaction follows (in thousands):
Assets
Investment securities $ 1,576,604
Loans and leases, net of unearned discount 2,970,306
Allowance for possible credit losses (27,905)
-----------
Loans and leases, net 2,942,401
Goodwill and core deposit intangible 562,426
Other assets 411,086
-----------
Total assets $ 5,492,517
-----------
-----------
Liabilities
Deposits $ 3,767,729
Short-term borrowings 541,689
Long-term borrowings 268,617
Other liabilities 40,932
-----------
Total liabilities $ 4,618,967
-----------
-----------
In connection with the acquisition, the Company recorded approximately $562
million of goodwill and core deposit intangible, and incurred nonrecurring
expenses related to systems conversions and other costs of integrating and
conforming the acquired operations with and into the operations of M&T Bank.
Such expenses totaled $3.0 million and $21.3 million during the three and nine
month periods ended September 30, 1998, respectively. Since the systems
conversions and integration of operations is largely complete, the Company does
not expect to incur a material amount of additional integration costs.
The Company's net income for the third quarter of 1998 was $56.5 million,
an increase of 23% from $45.9 million in the year-earlier quarter. Diluted
earnings per common share were $6.81 in the recent quarter, up 3% from $6.62 in
the third quarter of 1997. Net income was $44.7 million in the second quarter of
1998, representing $5.32 of diluted earnings per share. Basic earnings per share
increased 2% to $7.09 in the third quarter of 1998 from $6.96 in the comparable
1997 quarter and 28% from $5.55 earned in 1998's second quarter. The after-tax
impact on the third and second quarters of 1998 of nonrecurring expenses
associated with merging the operations of ONBANCorp into the Company was $1.8
million and $11.3 million, respectively, representing $.21 and $1.34 of diluted
earnings per share, respectively, and $.22 and $1.40 of basic earnings per
share, respectively. For the nine months ended September 30, 1998, net income
totaled $150.1 million or $19.01 per diluted share, up 16% and 2%, respectively,
from $129.9 million or $18.60 per share during the first nine months of 1997.
Basic earnings per share rose to $19.84 in the first nine months of 1998 from
$19.59 in the corresponding 1997 period. Nonrecurring merger-related expenses
lowered net
12
income during the nine month period ended September 30, 1998 by $14.0 million
and diluted and basic earnings per share by $1.77 and $1.85, respectively.
The Company's net income for the third quarter of 1998 expressed as an
annualized rate of return on average assets was 1.15%, compared with 1.36% and
.92% in the third quarter of 1997 and the second quarter of 1998, respectively.
The annualized rate of return on average common stockholders' equity was 13.48%
in the recent quarter, compared with 18.92% in the year- earlier quarter and
10.77% in 1998's second quarter. During the first nine months of 1998, the
annualized rates of return on average assets and average common stockholders'
equity were 1.13% and 13.73%, respectively, compared with 1.32% and 18.58%,
respectively, in the corresponding 1997 period. Excluding the impact of
merger-related expenses, the annualized returns on average assets and average
common equity were 1.19% and 13.91%, respectively, during the third quarter of
1998 and 1.24% and 15.01%, respectively, during the first nine months of 1998.
On July 31, 1998, M&T completed the sale of its retail credit card
business, including outstanding balances of approximately $186 million on that
date, and recognized a pre-tax gain of approximately $3.2 million. M&T continues
to offer credit cards to customers in the name of M&T Bank, but the cardholder
accounts are owned and serviced by the purchaser of that business.
Cash Operating Results
As a result of the acquisition of ONBANCorp on April 1, 1998 and, to a
significantly lesser extent, acquisitions of other entities in prior years, M&T
had recorded as assets at September 30, 1998 goodwill and core deposit
intangible totaling $556 million. Since the amortization of goodwill and core
deposit intangible does not result in a cash expense, M&T believes that
reporting its operating results on a "cash" (or "tangible") basis (which
excludes the after-tax effect of amortization of goodwill and core deposit
intangible and the related asset balances) represents a more relevant measure of
financial performance and better reflects the cash return on the investments
made by M&T to improve and expand its franchise. Cash basis data presented
herein do not exclude the effect of non-cash operating expenses such as
depreciation, provision for possible credit losses, or deferred income taxes
associated with the results of operations.
Excluding nonrecurring merger-related expenses, cash net income rose 43% to
$67.7 million in the recent quarter, from $47.4 million in the third quarter of
1997. On the same basis, diluted earnings per share for the third quarter of
1998 were $8.17, up 19% from $6.85 in the year-earlier quarter. Cash net income
and diluted earnings per share, excluding one-time expenses, were $65.4 million
and $7.78, respectively, in the second quarter of 1998. For the first nine
months of 1998 cash net income and diluted cash earnings per share, excluding
merger-related expenses, were $184.6 million and $23.37, respectively, up 37%
and 21%, respectively, from $134.6 million and $19.26 in the corresponding 1997
period.
Cash return on average tangible assets, excluding the impact of
nonrecurring merger-related expenses, was an annualized 1.42% in the recent
quarter, compared with 1.40% in the third quarter of 1997 and 1.38% in the
second quarter of 1998. Cash return on average tangible common equity, also
before one-time expenses, rose to an annualized 23.90% in the third quarter of
1998, compared with 19.98% in the year-earlier quarter and 23.50% in the second
1998 quarter. The annualized cash return on average tangible assets and average
tangible common stockholders' equity for the first nine months of 1998,
excluding one-time merger-related expenses, was 1.42% and 22.59%, respectively,
compared with 1.37% and 19.70%, respectively, in the corresponding 1997 period.
Including the effect of merger-related expenses, the annualized cash return on
average tangible assets for the three and nine month periods ended September 30,
1998 was 1.38% and 1.32%, respectively, and the annualized cash return on
average tangible common stockholders' equity was 23.28% and 20.87%,
respectively.
13
Taxable-equivalent Net Interest Income
Net interest income expressed on a taxable-equivalent basis was $174.5 million
in the third quarter of 1998, up $33.0 million or 23% from $141.5 million in the
year-earlier quarter, but lower than $178.9 million earned in the second quarter
of 1998. Growth in average loans and leases was the most significant factor
contributing to the improvement in net interest income from the third quarter of
1997. Average loans and leases increased $4.1 billion, or 37%, to $15.1 billion
in the third quarter of 1998 from $11.0 billion in the year-earlier quarter. The
primary reason for the higher loan balances compared with 1997 was the $3.0
billion of loans obtained on April 1, 1998 from the ONBANCorp acquisition,
including approximately $450 million of commercial loans, $380 million of
commercial real estate loans, $1.2 billion of residential mortgage loans and
$930 million of consumer loans. Partially offsetting these increases in average
loans and leases was the impact of the July 1998 sale of M&T's retail credit
card business. Average credit card balances for the third quarter of 1998
totaled $73 million, compared with $257 million in the corresponding 1997
quarter and $216 million in 1998's second quarter. Average loans and leases in
the recent quarter were $146 million, or 1%, higher than the second quarter of
1998 despite the impact of the sale of the retail credit card portfolio
described above and a decline in average commercial loan balances outstanding
attributable to lower levels of inventory floor plan loans to automobile dealers
resulting from normal seasonal fluctuations and the impact of a strike against
certain production facilities of General Motors Corporation during the recent
quarter. The accompanying table summarizes quarterly changes in the major
components of the loan and lease portfolio.
AVERAGE LOANS AND LEASES
(net of unearned discount) Percent increase
Dollars in millions (decrease) from
3rd Qtr. 3rd Qtr. 2nd Qtr.
1998 1997 1998
-------- -------- --------
Commercial, financial, etc. $ 2,935 32 % (1)%
Real estate - commercial 5,192 23 4
Real estate - consumer 4,081 82 3
Consumer
Automobile 1,425 37 3
Home equity 743 15 (1)
Credit cards 73 (71) (66)
Other 675 85 (7)
------ --- --
Total consumer 2,916 26 (5)
------ --- --
Total $15,124 37 % 1 %
====== === ==
Taxable-equivalent net interest income for the first nine months of 1998
totaled $496.6 million, up 19% from $418.8 million in the corresponding 1997
period. An increase in average loans and leases of $3.1 billion, including
approximately $2.0 billion attributable to the loans acquired in the ONBANCorp
transaction, was the primary contributor to this improvement.
Investment securities averaged $2.5 billion in the recent quarter,
including $1.1 billion acquired in the ONBANCorp transaction, up from $1.7
billion in the third quarter of 1997. Holdings of investment securities averaged
$2.9 billion in the second quarter of 1998, including $1.4 billion of securities
obtained in the acquisition of ONBANCorp. Money-market assets averaged $224
million in 1998's third quarter, compared with $156 million in both the
year-earlier quarter and the second quarter of 1998. For the first nine months
of 1998, average balances of investment securities and money-market assets were
$2.3 billion and $174 million, respectively, compared with $1.7 billion and $131
million, respectively, during the comparable period of 1997. Investment
securities obtained in the acquisition of ONBANCorp averaged approximately $800
million during the first nine months of 1998. In general, the size of the
investment securities and money-market assets portfolios are influenced by such
factors as demand for loans, which generally yield more than investment
securities and money-market assets, ongoing repayments, the levels of deposits,
and management of balance sheet size and resulting capital ratios.
14
As a result of the changes described above, average earning assets totaled
$17.9 billion in the third quarter of 1998, an increase of $5.0 billion, or 39%,
from $12.9 billion in the comparable 1997 quarter. Average earning assets were
$18.0 billion in the second quarter of 1998 and aggregated $16.4 billion and
$12.7 billion for the nine month periods ended September 30, 1998 and 1997,
respectively.
Core deposits represent the most significant source of funding to the
Company and generally carry lower interest rates than wholesale funds of
comparable maturities. Core 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. Core deposits include certificates of deposit under
$100,000 generated on a nationwide basis by M&T Bank, National Association ("M&T
Bank, N.A."), a wholly owned bank subsidiary of M&T. Core deposits obtained on
April 1, 1998 in conjunction with the acquisition of ONBANCorp totaled
approximately $2.8 billion. Average core deposits increased to $11.4 billion in
the third quarter of 1998, from $8.4 billion in the year-earlier quarter. Core
deposits averaged $11.5 billion in the second quarter of 1998. The accompanying
table provides an analysis of quarterly changes in the components of average
core deposits. For the nine months ended September 30, 1998 and 1997, core
deposits averaged $10.5 billion and $8.3 billion, respectively.
AVERAGE CORE DEPOSITS
Dollars in millions
Percent increase
(decrease) from
3rd Qtr. 3rd Qtr. 2nd Qtr.
1998 1997 1998
-------- -------- --------
NOW accounts $ 344 47 % 13 %
Savings deposits 4,709 37 -
Time deposits less than $100,000 4,600 32 (3)
Noninterest-bearing deposits 1,792 43 2
------ -- --
Total $11,445 36 % (1)%
====== == ==
In addition to core deposits, the Company obtains funding through domestic
time deposits of $100,000 or more, deposits originated through M&T Bank's
offshore branch office, and brokered certificates of deposit. Brokered deposits
are used as an alternative to short-term borrowings to lengthen the average
maturity of interest-bearing liabilities. Brokered deposits averaged $1.4
billion during the recent quarter, compared with $1.5 billion during both the
comparable 1997 period and the second quarter of 1998. At September 30, 1998,
brokered deposits totaled $1.4 billion and had a weighted average remaining term
to maturity of 2.02 years. However, certain of the deposits have provisions that
allow early redemption. Additional amounts of brokered deposits may be solicited
in the future depending on market conditions and the cost of funds available
from alternative sources at the time.
The Company uses borrowings from banks, securities dealers, the Federal
Home Loan Banks ("FHLB") and others as alternative sources of funding.
Short-term borrowings averaged $2.1 billion in the recent quarter, compared with
$641 million in the year-earlier quarter and $2.2 billion in the second quarter
of 1998. Long-term borrowings averaged $861 million and $428 million in the
third quarter of 1998 and 1997, respectively, and $695 million in the second
quarter of 1998. Long-term borrowings include $250 million of trust preferred
securities issued by two special-purpose entities formed by M&T during the first
half of 1997 and similar securities with a carrying value of $69 million that
were issued in the first quarter of 1997 by a special-purpose entity formed by
ONBANCorp, as well as $175 million of subordinated capital notes issued in prior
years by M&T Bank. Also included in average long-term borrowings during the
third quarter of 1998 were $348 million of FHLB borrowings, compared with $2
million in the year-earlier quarter and $182 million in the second quarter of
1998.
15
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. Net interest spread, or the difference between the
taxable-equivalent yield on earning assets and the rate paid on interest-bearing
liabilities, was 3.30% in the third quarter of 1998, compared with 3.65% in the
corresponding 1997 quarter. The yield on earning assets decreased 37 basis
points (hundredths of one percent) to 7.97% in the third quarter of 1998 from
8.34% in the year-earlier quarter. Approximately one-half of the 37 basis point
decrease in the recent quarter's yield was due to lower yielding residential
real estate loans, consumer loans and investment securities acquired in the
ONBANCorp transaction. Competitive pressure on interest rates charged for newly
originated loans, particularly commercial loans and commercial real estate
loans, also contributed to the decline in yield. The rate paid on
interest-bearing liabilities in the third quarter of 1998 was 4.67%, compared
with 4.69% in the corresponding 1997 quarter. The net interest spread was 3.44%
in the second quarter of 1998 when the yield on earning assets was 8.10% and the
rate paid on interest-bearing liabilities was 4.66%.
Interest-free funds, consisting largely of noninterest-bearing demand
deposits and stockholders' equity, contributed .57% to net interest margin, or
taxable equivalent net interest income expressed as an annualized percentage of
average earning assets, in the third quarter of 1998, compared with .70% in the
corresponding 1997 quarter and .55% in the second quarter of 1998. Average
interest-free funds totaled $2.2 billion in the third quarter of 1998, up from
$1.9 billion a year earlier and $2.1 billion in the second 1998 quarter. The
decline in the contribution to net interest margin of interest-free funds from
1997 was due, in part, to the goodwill and core deposit intangible assets
recorded in conjunction with the ONBANCorp acquisition, which averaged $549
million during the recent quarter, and the cash surrender value of bank-owned
life insurance, which averaged $362 million in the third quarter of 1998. The
cash surrender value of bank-owned life insurance averaged $44 million during
the third quarter of 1997. Increases in the cash surrender value of bank-owned
life insurance are not included in interest income, but rather are recorded in
"other revenue from operations." These two noninterest-earning assets mitigated
much of the benefit derived from increases in noninterest-bearing deposits and
stockholders' equity resulting from the ONBANCorp transaction.
Due to the changes described above, the Company's net interest margin was
3.87% in 1998's third quarter, compared with 4.35% in the comparable quarter of
1997 and 3.99% in the second quarter of 1998. During the first nine months of
1998 and 1997, the net interest margin was 4.04% and 4.42%, respectively.
The Company, as part of the management of interest rate risk, utilizes
interest rate swap agreements to modify the repricing characteristics of certain
portions of the loan and deposit portfolios. Revenue and expense arising from
these agreements are reflected in either the yields earned on loans or, as
appropriate, 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 September 30, 1998 and 1997 was $2.5 billion and
$3.0 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 $32 million swap, the Company pays a fixed rate of interest and
receives a variable rate. At September 30, 1998, the weighted average rates to
be received and paid under interest rate swap agreements were 6.29% and 5.63%,
respectively. As of September 30, 1998, the Company had also entered into
forward-starting swaps with an aggregate notional amount of $391 million in
which the Company will pay a fixed rate of interest and receive a variable rate.
Such forward- starting swaps had no effect on the Company's net interest income
through September 30, 1998. The average notional amounts of interest rate swaps
and the related effect on net interest income and margin are presented in the
accompanying table.
16
INTEREST RATE SWAPS
Dollars in thousands
Three months ended September 30
1998 1997
----------------------- ----------------------
Amount Rate * Amount Rate *
------ ---- ------ ----
Increase (decrease) in:
Interest income $ 688 .02% $ (96) -- %
Interest expense (2,859) (.07) (3,830) (.13)
----------- --- ----------- ---
Net interest
income/margin $ 3,547 .08 % $ 3,734 .12 %
----------- --- ----------- ---
----------- --- ----------- ---
Average notional
amount ** $ 2,538,794 $ 2,972,119
----------- -----------
Nine months ended September 30
1998 1997
----------------------- -------------------------
Amount Rate * Amount Rate *
------------ -------- ------------- ---------
Increase (decrease) in:
Interest income $ 1,378 .01 % $ (48) - %
Interest expense (9,193) (.09) (10,455) (.13)
------------ -------- ------------- ---------
Net interest
income/margin $ 10,571 .09 % $ 10,407 .11 %
------------ -------- ------------- ---------
------------ -------- ------------- ---------
Average notional
amount ** $ 2,530,748 $ 2,629,053
----------- -------------
----------- -------------
* 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, 1998 it would have received
approximately $31 million if all interest rate swap agreements entered into for
interest rate risk management purposes had been terminated. This estimated fair
value of the interest rate swap portfolio results from the effects of changing
interest rates and should be considered in the context of the entire balance
sheet and the Company's overall interest rate risk profile. Changes in the
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes are not recorded in the consolidated financial statements.
As a financial intermediary, the Company is exposed to various risks,
including liquidity and market risk. Liquidity risk arises whenever the
maturities of financial instruments included in assets and liabilities differ.
Accordingly, a critical element in managing a financial institution is ensuring
that sufficient cash flow and liquid assets are available to satisfy demands for
loans and deposit withdrawals, to fund operating expenses, and to be used for
other corporate purposes. Deposits and borrowings, maturities of money-market
assets, repayments of loans and investment securities, and cash generated from
operations, such as net interest income and fees collected for services, provide
the Company with other sources of liquidity. 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 utilizes dividend payments from its
banking subsidiaries, which are subject to various regulatory limitations, to
pay common stock dividends, repurchase treasury stock, and fund debt service and
other operating expenses. 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, 1998. The proceeds from $250 million of junior subordinated debt
issued to two special-purpose entities provided additional funds to M&T in 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
M&T or its subsidiary banks. Furthermore, management closely monitors the
Company's liquidity position for compliance with internal policies and believes
that available sources of liquidity are adequate to meet anticipated funding
needs.
17
Market risk is the risk of loss from adverse changes in interest rates and
the resulting impact on market prices of the Company's financial instruments.
The core banking activities of lending and deposit-taking expose the Company to
this interest rate risk. As a result of interest rate risk, net interest income
earned by the Company is subject to the effects of changing interest rates. The
Company measures interest rate risk by calculating the variability of net
interest income under various interest rate scenarios using projected balances
for earning assets, interest-bearing liabilities and off-balance sheet financial
instruments. Management's philosophy toward positioning the Company for interest
rate movements is to attempt to limit such variability. The balances of both on-
and off-balance sheet financial instruments used in the projections are based on
expected growth from forecasted business opportunities, anticipated prepayments
of mortgage-related assets and expected maturities of investment securities,
loans and deposits. Management supplements the modeling technique described
above with analyses of the Company's sensitivity to changes in the market values
of financial instruments resulting from changing interest rates.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's interest rate sensitivity with the aid of a computer
model which considers the impact of ongoing lending and deposit gathering
activities, as well as statistically derived interrelationships in the magnitude
and timing of the repricing of financial instruments, including the effect of
changing interest rates on expected prepayments and maturities. When deemed
prudent, management has taken actions, and intends to do so in the future, to
mitigate exposure to interest rate risk through the use of on- or off-balance
sheet financial instruments. Possible actions include, but are not limited to,
changes in the pricing of loan and deposit products, modifying the composition
of earning assets and interest-bearing liabilities, and entering into or
modifying existing interest rate swap agreements.
The accompanying table displays the estimated impact on net interest income
from financial instruments held for non-trading purposes resulting from changes
in interest rates during the first modeling year.
SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
(dollars in thousands) Calculated
increase (decrease)
in projected net
Changes in Interest Rates interest income
- ------------------------- ---------------
+200 basis points $ 376
+100 basis points 2,797
- -100 basis points (2,954)
- -200 basis points (6,161)
The calculation of the impact of changes in interest rates on net interest
income is based upon many assumptions, including interest rate spreads, the
shape of the yield curve, prepayments of mortgage-related assets, cash flows
from derivative and other financial instruments held for non-trading purposes,
loan and deposit volumes and pricing, and deposit maturities. The Company also
assumes gradual changes in interest rates of 100 and 200 basis points up and
down during a twelve-month period. These assumptions are inherently uncertain
and, as a result, the Company cannot precisely predict the impact of changes in
interest rates on net interest income. Actual results may differ significantly
due to timing, magnitude and frequency of interest rate changes and changes in
market conditions, as well as any actions, such as those previously described,
which management may take to counter these changes.
The Company engages in trading activities to meet the financial needs of
customers and to profit from perceived market opportunities. Trading activities
are conducted utilizing financial instruments that include forward and futures
contracts related to foreign currency exchange and mortgage-backed securities,
U.S. Treasury and other government securities, and interest rate contracts such
as swaps. As a result, the Company is exposed to foreign currency and interest
rate risk resulting from trading activities. However, the Company monitors its
trading position daily and generally
18
mitigates exposure arising from trading activities by entering into offsetting
positions. Accordingly, the Company's exposure to interest rate, foreign
exchange or other price risk related to trading activities as of September 30,
1998 was not considered material.
Provision for Possible Credit Losses
The provision for possible credit losses in the third quarter of 1998 was $10.5
million, down from $12.0 million in the year-earlier quarter and $13.2 million
in 1998's second quarter, in part reflecting the July 1998 sale of M&T's retail
credit card business. 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. Net loan charge-offs totaled $11.8 million in the
recent quarter, compared with $11.6 million and $9.0 million in the third
quarter of 1997 and the second quarter of 1998, respectively. Net charge-offs as
an annualized percentage of average loans and leases were .31% in the recent
quarter, compared with .42% in the corresponding 1997 quarter and .24% in the
second quarter of 1998. Net charge-offs of consumer loans in the recent quarter
were $8.5 million, compared with $8.2 million in the year-earlier period and
$9.3 million in 1998's second quarter. Net consumer loan charge-offs as an
annualized percentage of average consumer loans and leases were 1.16% in the
third quarter of 1998, compared with 1.42% in the corresponding quarter of 1997
and 1.21% in 1998's second quarter. Net charge-offs of credit card balances
included in net consumer loan charge-offs were $4.6 million and $4.5 million in
the third quarter of 1998 and 1997, respectively, and $4.6 million in the second
quarter of 1998. For the nine months ended September 30, 1998 and 1997, the
provision for possible credit losses was $35.7 million and $34.0 million,
respectively. Through September 30, net charge-offs were $28.7 million in 1998
and $32.2 million in 1997, representing .28% and .40%, respectively, of average
loans and leases. Consumer loan net charge-offs totaled $25.6 million and $26.8
million during the nine months ended September 30, 1998 and 1997, respectively.
Net credit card charge-offs were $13.8 million during the first nine months of
1998 and $14.4 million during the corresponding 1997 period.
Including $39.0 million of loans obtained in the acquisition of ONBANCorp,
nonperforming loans were $119.2 million or .79% of total loans and leases
outstanding at September 30, 1998, compared with $85.8 million or .76% a year
earlier and $127.2 million or .83% at June 30, 1998. Nonperforming commercial
real estate loans totaled $18.7 million at September 30, 1998, $24.9 million at
September 30, 1997 and $24.8 million at June 30, 1998. Nonperforming commercial
real estate loans include loans secured by properties located in the New York
City metropolitan area of $716 thousand at September 30, 1998, $10.1 million a
year earlier and $3.6 million at June 30, 1998. Nonperforming consumer loans and
leases totaled $27.6 million at September 30, 1998, compared with $19.5 million
at September 30, 1997 and $30.0 million at June 30, 1998. As a percentage of
consumer loan balances outstanding, nonperforming consumer loans and leases were
.96% at September 30, 1998 compared with .84% at September 30, 1997 and .99% at
June 30, 1998. Assets acquired in settlement of defaulted loans were $11.1
million at September 30, 1998, $8.2 million a year earlier and $12.2 million at
June 30, 1998.
A comparative summary of nonperforming assets and certain credit quality
ratios is presented in the accompanying table.
19
NONPERFORMING ASSETS
Dollars in thousands
1998 Quarters 1997 Quarters
Third Second First Fourth Third
-------- -------- -------- -------- --------
Nonaccrual loans $ 73,778 78,527 40,737 38,588 50,369
Loans past due
90 days or more 37,746 41,686 24,449 30,402 29,979
Renegotiated loans 7,656 7,025 4,819 11,660 5,413
-------- -------- -------- -------- --------
Total nonperforming loans 119,180 127,238 70,005 80,650 85,761
Real estate and other assets 11,106 12,211 7,828 8,413 8,239
-------- -------- -------- -------- --------
Total nonperforming assets $130,286 139,449 77,833 89,063 94,000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Government guaranteed
nonperforming loans* $ 13,776 16,062 14,787 17,712 17,853
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Nonperforming loans
to total loans and leases,
net of unearned discount .79% .83% .58% .70% .76%
Nonperforming assets
to total net loans and
real estate and other assets .86% .91% .65% .77% .83%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
* Included in total nonperforming loans.
The allowance for possible credit losses was $309.5 million, or 2.04% of
total loans and leases at September 30, 1998, compared with $272.3 million or
2.42% a year earlier, $274.7 million or 2.39% at December 31, 1997 and $310.8
million or 2.04% at June 30, 1998. The ratio of the allowance for possible
credit losses to nonperforming loans was 260% at the most recent quarter-end,
compared with 318% a year earlier, 341% at December 31, 1997 and 244% at June
30, 1998. 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. Impacting the assessment as of
September 30, 1998 was the effect that volatile economic conditions in foreign
markets were having on the domestic economy. While the Company's direct
international exposure is limited, the volatile conditions caused some
instability in the domestic economy. 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 significant
growth in recent years in loans to individual consumers, management cautiously
evaluated the impact of interest rates and overall economic conditions on the
ability of borrowers to meet repayment obligations when assessing the adequacy
of the Company's allowance for possible credit losses as of September 30, 1998.
Based upon the results of such review, management believes that the allowance
for possible credit losses at September 30, 1998 was adequate to absorb credit
losses from existing loans and leases.
Other Income
Other income totaled $66.6 million in the third quarter of 1998, up 33% from
$50.2 million in the year-earlier quarter. Approximately one-half of the
increase from the third quarter of 1997 was attributable to revenues related to
operations and market areas associated with the ONBANCorp acquisition. Other
income was $66.4 million in the second quarter of 1998. 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 affiliated, tax-exempt private charitable
foundation, other income was $188.1 million in the first nine months of 1998, up
34% from $140.1 million in the comparable 1997
20
period. Approximately one-third of this increase was attributable to revenues
related to operations and market areas associated with the ONBANCorp
acquisition. As a result of the charitable contribution noted above, the Company
also incurred $24.6 million of charitable contributions expense and realized
income tax benefits of $10.0 million.
Mortgage banking revenues totaled $16.4 million in the recent quarter,
compared with $12.7 million in the year-earlier quarter and $18.5 million in the
second quarter of 1998. Residential mortgage loan servicing fees were $7.3
million in the third quarter of 1998, compared with $6.2 million in the
year-earlier quarter and $7.8 million in the second quarter of 1998. Gains from
sales of residential mortgage loans and loan servicing rights were $8.1 million
in the recently completed quarter, compared with $5.8 million in the
corresponding 1997 quarter and $9.9 million in 1998's second quarter. During the
second quarter of 1998, the Company completed bulk sales of servicing rights
related to approximately $400 million of loans sold to investors in prior
periods resulting in a gain of $1.2 million. Due, in part, to generally
favorable interest rates for borrowers, during the third quarter of 1998
residential mortgage loans originated for sale to other investors totaled $939
million, up from $608 million in 1997's third quarter, but down slightly from
$953 million in the second 1998 quarter. Residential mortgage loans serviced for
others totaled $7.5 billion and $6.5 billion at September 30, 1998 and 1997,
respectively. Capitalized servicing assets were $64 million and $49 million at
September 30, 1998 and 1997, respectively. Loans serviced for others and the
related capitalized servicing assets obtained in the ONBANCorp acquisition were
$988 million and $16 million, respectively, at April 1, 1998.
Service charges on deposit accounts increased to $15.9 million in the third
quarter of 1998, up from $10.9 million in the corresponding quarter of the
previous year and $14.2 million in the second quarter of 1998. Fees for services
provided to customers in the areas formerly served by ONBANCorp contributed
approximately three-fourths of the increase from the third quarter of 1997.
Trust income was $9.4 million in the third quarter of 1998, compared with $7.6
million in last year's third quarter and $9.9 million in the second quarter of
1998. The increase from 1997 was due largely to higher revenues for investment
management and personal trust services. Merchant discount and credit card fees
were $2.3 million in the recent quarter, compared with $4.5 million in the
year-earlier period and $4.3 million in the second 1998 quarter. As further
discussed below, the decrease from the prior periods was predominately the
result of the July sale of the Company's retail credit card business. Trading
account and foreign exchange activity resulted in losses of $148 thousand in the
third quarter of 1998, compared with gains of $1.4 million and $506 thousand in
the third quarter of 1997 and the second quarter of 1998, respectively. Other
revenue from operations totaled $22.3 million in the recent quarter, compared
with $10.7 million in the corresponding quarter of 1997 and $18.7 million in the
second quarter of 1998. The increase from the year-earlier period was due
largely to an increase of $4.5 million of tax-exempt income earned from the
Company's ownership of bank-owned life insurance, a $3.2 million gain on the
previously mentioned sale of the Company's retail credit card business and an
increase of $2.3 million in fees for services provided to borrowers and other
credit customers.
For the nine-month period ended September 30, 1998, mortgage banking
revenues totaled $48.7 million, up 32% from $37.0 million in the corresponding
1997 period. Compared with the first nine months of 1997, mortgage servicing
fees and gains from sales of loans and loan servicing rights in 1998 were up by
$4.0 million and $7.2 million, respectively. Compared with the same period in
1997, service charges on deposit accounts increased 29% to $41.4 million during
the first nine months of 1998, while trust income increased 32% to $28.8
million. As a result of the factors discussed in the next paragraph, merchant
discount and credit card fees decreased 22% to $10.9 million from $14.0 million
in the similar period of 1997. Trading account and foreign exchange activity
resulted in gains of $2.1 million for the initial nine months of 1998, compared
with gains of $3.4 million during the first nine months of 1997. Excluding the
effect of the contribution of securities to the affiliated charitable
foundation, other
21
revenues from operations increased 72% to $55.5 million in the first nine months
of 1998 from $32.3 million in the comparable 1997 period. The increase resulted
largely from an increase of $11.9 million in tax-exempt income earned from
bank-owned life insurance, $4.6 million of increased fees for credit and other
services provided to borrowers and other customers, the $3.2 million gain from
the sale of the retail credit card business, a $2.3 million rise in automated
teller machine service fees and a $2.0 million increase in fees earned from the
sales of mutual funds and annuities. These latter fees totaled $13.5 million
during the first nine months of 1998.
Due to poorer than expected results, during 1997 and 1998 the Company
terminated all of its co-branded credit card programs and, as previously
discussed, sold its retail credit card business, including outstanding balances
of approximately $186 million, on July 31, 1998, recognizing a pre-tax gain
of $3.2 million. Outstanding credit card balances were $263.9 million, or 2.3%
of total loans and leases, at September 30, 1997 and $205.5 million, or 1.3%,
at June 30, 1998. Total credit card fees included in merchant discount and
credit card fees in the first nine months of 1998 were $8.3 million, compared
with $11.7 million in the corresponding 1997 period. Through the date of sale,
the results of operations of the retail credit card business in 1998, including
internal allocations of the provision for possible credit losses, interest
expense and other expenses, were essentially break-even. On the same basis, the
Company incurred a loss of approximately $8 million during the nine months
ended September 30, 1997.
Other Expense
Excluding the amortization of goodwill and core deposit intangible and
nonrecurring merger-related expenses, other expense totaled $124.6 million in
the third quarter of 1998, 21% higher than $102.9 million in the year-earlier
quarter, but down 2% from $127.4 million in the second quarter of 1998. On the
same basis, through the first nine months of 1998, other expense totaled $382.4
million, up 25% from $305.6 million in the corresponding 1997 period.
Nonrecurring merger-related expenses totaled $3.0 million and $16.7 million in
the third and second quarters of 1998, respectively, and $21.3 million for the
first nine months of 1998. The charitable contributions expense of $24.6 million
related to the January 1998 donation of appreciated investment securities
already discussed and higher operating expense levels resulting from combining
ONBANCorp with the Company largely explain the increases in expenses from 1997
to 1998. Since nearly all operating systems and support operations of ONBANCorp
have been converted to or combined with those of the Company, the Company's
operating expenses cannot be precisely divided between or attributed directly to
ONBANCorp or the Company as it existed prior to the merger.
Salaries and employee benefits expense was $63.5 million in the recent
quarter, 13% higher than the $56.3 million in the year-earlier quarter, but 9%
lower than the $69.9 million in the second quarter of 1998. For the first nine
months of 1998, salaries and employee benefits expense increased 16% to $191.8
million from $165.4 million in the corresponding 1997 period. Salaries and
employee benefits relating to the operations acquired from ONBANCorp largely
contributed to the increased expense level in the 1998 periods over 1997. Other
factors contributing to the higher expenses were merit salary increases and
higher costs associated with commissions, other incentive-based compensation
arrangements and employee benefits. Partially offsetting the impact of these
higher expenses was a decrease in expense associated with stock appreciation
rights. For the three and nine month periods ended September 30, 1998, expenses
for stock appreciation rights declined $7.9 million and $6.4 million,
respectively, from the comparable periods of 1997. Such expenses declined $6.7
million from the second to the third quarter of 1998.
Excluding one-time merger-related expenses and amortization of goodwill and
core deposit intangible, nonpersonnel expense totaled $61.9 million in
22
the recent quarter, compared with $46.6 million in the third quarter of 1997 and
$58.8 million in 1998's second quarter. On the same basis, such expenses were
$192.8 million during the first nine months of 1998, up 38% from $140.2 million
during the corresponding 1997 period. The increases from 1997 were largely the
result of expenses related to the acquired operations of ONBANCorp and an
increase in amortization of capitalized servicing rights. Including $1.2 million
of amortization of servicing rights obtained in the ONBANCorp acquisition,
amortization and impairment of capitalized servicing rights increased to $6.0
million in the third quarter of 1998 from $3.3 million in the third quarter of
1997. For the first nine months of 1998 and 1997, such expenses were $15.7
million and $10.1 million, respectively. The previously mentioned transfer of
securities to an affiliated charitable foundation in January 1998 also
contributed $24.6 million to the higher expense level during the first nine
months of 1998. Partially offsetting these increases were declines in co-branded
credit card rebate and other operating expenses based on card usage of $2.2
million and $577 thousand compared with the third quarter of 1997 and the second
quarter of 1998, respectively. Such expenses for the first nine months of 1998
were $2.8 million, compared with $8.5 million in the corresponding 1997 period.
Capital
Stockholders' equity at September 30, 1998 was $1.6 billion or 8.47% of total
assets, compared with $982 million or 7.18% of total assets a year earlier and
$1.0 billion or 7.36% at December 31, 1997. Stockholders' equity per share was
$209.03 at September 30, 1998, up from $149.31 and $155.86 at September 30 and
December 31, 1997, respectively. Excluding goodwill and core deposit intangible,
net of applicable tax effect, tangible equity per share was $141.43 at September
30, 1998, compared with $146.40 a year earlier and $153.24 at December 31, 1997.
To complete the acquisition of ONBANCorp on April 1, 1998, M&T issued 1,429,998
shares of common stock to former holders of ONBANCorp common stock and assumed
employee stock options for 61,772 shares of M&T common stock resulting in
additions to stockholders' equity of $587.8 million and $19.4 million,
respectively.
Stockholders' equity at September 30, 1998 reflected a gain of $6.8
million, or $.86 per share, for the net after-tax impact of unrealized gains on
investment securities classified as available for sale, compared with unrealized
gains of $11.2 million or $1.71 per share at September 30, 1997 and $12.0
million or $1.82 per share at December 31, 1997. Such unrealized gains 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
generally not recognized in determining regulatory capital. Core capital
includes the $250 million of trust preferred securities issued by two
special-purpose entities formed by M&T during 1997 and similar securities having
a carrying value of $69 million issued by a special-purpose entity formed by
ONBANCorp. As of September 30, 1998, total capital also included $160 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, 1998 are presented in the accompanying table.
23
REGULATORY CAPITAL RATIOS
September 30, 1998
M&T M&T M&T
(Consolidated) Bank Bank, N.A.
-------------- ---- ----------
Core capital 9.18% 8.51% 19.53%
Total capital 11.48% 10.83% 20.79%
Leverage 7.44% 6.97% 9.28%
The rate of internal capital generation, or net income less dividends paid
expressed as an annualized percentage of average total stockholders' equity, was
11.59% and 11.79% during the three and nine month periods ended September 30,
1998, compared with 16.75% and 16.30% during the comparable periods of 1997 and
8.84% in the second 1998 quarter.
During the third quarter of 1998, M&T acquired 128,660 shares of its common
stock pursuant to the repurchase program announced in February 1997. In October,
this program was completed with a purchase of 1,318 shares of M&T's common
stock. Under the completed program, a total of 155,133 shares were repurchased
at an average cost of $479.54 per share. In the aggregate, M&T repurchased
280,439 common shares during the first nine months of 1998 at a total cost of
$135.5 million. In October 1998, M&T announced another plan to repurchase up to
200,674 additional shares for reissuance upon the possible future exercise of
outstanding stock options, and through November 6, 1998 had acquired 114,449
shares at an average cost of $462.62 per share.
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. The Company is currently working to resolve the
potential impact of the Year 2000 problem. The risk for the Company is that
all of the corrections and testing will not be made in time for its own
Computer Systems and for those third parties doing business with or providing
services to the Company.
Addressing the Year 2000 problem requires that the Company identify,
remediate and test its Computer Systems that have date sensitive functions.
As part of this process, the Company has 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"). As a result of
completed testing under a planned program to test for such compliance,
management presently believes that approximately one-half of all of the
Company's Mission Critical Computer Systems are Year 2000 compliant.
Management currently anticipates that all but two of the Company's Mission
Critical Computer Systems will be Year 2000 compliant by the end of 1998, and
that the two remaining Mission Critical Computer Systems will be Year 2000
compliant by March 31, 1999. The Company currently expects that its remaining
computer Systems will be Year 2000 compliant before the new millennium.
The Company could also be adversely affected if its vendors, customers
and other third parties that supply or rely on data processing systems are
not Year 2000 compliant prior to the end of 1999. The Company, therefore, is
working with its data processing vendors and providing information to its
commercial customers regarding Year 2000 issues. Specifically, lending
officers have been trained to address Year 2000 issues with customers,
including assessing customer needs for Year 2000 compliance. The Company is
also addressing the Year 2000 risks posed by other third 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. Notwithstanding the Company's
efforts, a risk remains due to the uncertainty that such third parties will
not be Year 2000 compliant before the new millennium. As a result, it is
24
possible that if all aspects of Year 2000 issues are not adequately
resolved by each of the third parties referred to above, the Company's future
business operations, financial position and results of operations could be
adversely impacted. 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. As of September 30, 1998, the
Company has not yet received sufficient information from all such third
parties about their remediation plans to predict the outcome of their efforts.
Management is monitoring the Company's progress regarding Year 2000
issues. The Company has established a 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, management is in the
process of identifying and/or developing appropriate contingency plans should
any critical issues not be resolved prior to January 1, 2000.
Through September 30, 1998, the Company has spent approximately $3
million (including approximately $2 million during the first nine months of
1998) in addressing its potential Year 2000 problems. Management believes
that the Company is continuing to devote appropriate financial and human
resources to resolve its Year 2000 issues in a timely manner, and currently
estimates that it will expend an additional $6 to $8 million in order to
address Year 2000 issues. A majority of the Company's past and future Year
2000 expenses relate to internal costs and constitute resources that would
otherwise have been reallocated within the Company. Such reallocation 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 as 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.
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 asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security, or a foreign currency denominated forecasted
transaction.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. An entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. Those methods must be consistent with the entity's approach to
managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of the
statement. Early application of all of the provisions of
25
SFAS No. 133 is encouraged, but is permitted only as of the beginning of
any fiscal quarter that began after issuance of the statement. SFAS No. 133
should not be applied retroactively to financial statements of prior periods.
The Company intends to adopt SFAS No. 133 as of January 1, 2000; however,
it has not yet quantified the financial statement impact of adoption, nor has
the method of adoption been determined. The Company anticipates that adoption of
SFAS No. 133 could increase the volatility of reported earnings and
stockholders' equity and could result in the modification of certain data
processing systems and hedging practices.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this quarterly report contain forward- looking
statements that are based on current expectations, estimates and projections
about the Company's business, management's beliefs and assumptions made by
management. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Future Factors include changes in interest rates, spreads on earning assets
and interest-bearing liabilities, and interest rate sensitivity; credit losses;
sources of liquidity; regulatory supervision and oversight, including required
capital levels; increasing price and product/service competition by competitors,
including new entrants; rapid technological developments and changes; the
ability to continue to introduce competitive new products and services on a
timely, cost-effective basis; the mix of products/services; containing costs and
expenses; governmental and public policy changes, including environmental
regulations; protection and validity of intellectual property rights; reliance
on large customers; technological, implementation and cost/financial risks in
large, multi-year contracts; technological, implementation and financial risks
associated with Year 2000 issues; the outcome of pending and future litigation
and governmental proceedings; continued availability of financing; and financial
resources in the amounts, at the times and on the terms required to support the
Company's future businesses. These are representative of the Future Factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general economic conditions, including interest rate and currency
exchange rate fluctuations, and other Future Factors.
26
M&T BANK CORPORATION AND SUBSIDIARIES
QUARTERLY TRENDS
1998 Quarters 1997 Quarters
Taxable-equivalent basis Third Second First Fourth Third Second First
- ------------------------ -------- ------- ------- ------- ------- ------- -------
Earnings and dividends
Amounts in thousands, except per share
Interest income $359,339 363,503 277,803 277,166 271,305 265,301 257,029
Interest expense 184,850 184,644 134,585 133,270 129,768 125,734 119,321
-------- -------- -------- -------- -------- -------- --------
Net interest income 174,489 178,859 143,218 143,896 141,537 139,567 137,708
Less: provision for possible credit losses 10,500 13,200 12,000 12,000 12,000 11,000 11,000
Other income 66,568 66,410 70,396 52,979 50,182 43,983 45,923
Less: other expense 138,490 155,004 133,873 110,716 104,706 102,070 104,284
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 92,067 77,065 67,741 74,159 75,013 70,480 68,347
Applicable income taxes 33,693 30,587 17,245 26,246 27,518 26,329 25,825
Taxable-equivalent adjustment 1,897 1,779 1,541 1,613 1,604 1,360 1,263
-------- -------- -------- -------- -------- -------- --------
Net income $ 56,477 44,699 48,955 46,300 45,891 42,791 41,259
-------- -------- -------- -------- -------- -------- --------
Per common share data
Net income
Basic $ 7.09 5.55 7.34 7.01 6.96 6.46 6.17
Diluted 6.81 5.32 7.01 6.66 6.62 6.17 5.81
Cash dividends $ 1.00 1.00 .80 .80 .80 .80 .80
Average common shares outstanding
Basic 7,966 8,051 6,666 6,599 6,592 6,627 6,685
Diluted 8,288 8,409 6,981 6,955 6,927 6,928 7,100
-------- -------- -------- -------- -------- -------- --------
Performance ratios, annualized
Return on
Average assets 1.15% .92% 1.41% 1.33% 1.36% 1.31% 1.30%
Average common stockholders' equity 13.48% 10.77% 18.86% 18.25% 18.92% 18.55% 18.24%
Net interest margin on average earning assets 3.87% 3.99% 4.35% 4.34% 4.35% 4.41% 4.50%
Nonperforming assets to total assets,
at end of quarter .67% .69% .53% .64% .69% .79% .81%
-------- -------- -------- -------- -------- -------- --------
Cash (tangible) operating results (1)
Net income (in thousands) $ 67,703 65,445 51,448 47,837 47,428 44,350 42,773
Diluted net income per common share 8.17 7.78 7.37 6.88 6.85 6.40 6.02
Annualized return on
Average tangible assets 1.42% 1.38% 1.49% 1.38% 1.40% 1.36% 1.35%
Average tangible common
stockholders' equity 23.90% 23.50% 20.13% 19.20% 19.98% 19.70% 19.39%
-------- -------- -------- -------- -------- -------- --------
Balance sheet data
Dollars in millions, except per share
Average balances
Total assets $ 19,455 19,547 14,055 13,785 13,424 13,148 12,866
Earning assets 17,881 17,992 13,357 13,148 12,905 12,700 12,420
Investment securities 2,533 2,858 1,614 1,721 1,747 1,715 1,611
Loans and leases, net of unearned
discount 15,124 14,978 11,602 11,327 11,002 10,842 10,715
Deposits 14,552 14,726 10,988 11,261 11,170 10,914 10,454
Stockholders' equity 1,662 1,664 1,053 1,007 962 925 917
-------- -------- -------- -------- -------- -------- --------
At end of quarter
Total assets $ 19,478 20,138 14,570 14,003 13,675 13,441 13,122
Earning assets 17,905 18,419 13,778 13,333 13,100 12,903 12,621
Investment securities 2,446 2,707 1,530 1,725 1,752 1,708 1,693
Loans and leases, net of unearned
discount 15,163 15,245 12,033 11,497 11,271 10,980 10,803
Deposits 14,394 14,813 11,085 11,163 11,205 11,186 10,533
Stockholders' equity 1,649 1,659 1,069 1,030 982 951 912
Equity per common share 209.03 207.18 160.06 155.86 149.31 143.64 137.33
Tangible equity per common share 141.43 139.37 157.75 153.24 146.40 140.43 133.84
-------- -------- -------- -------- -------- -------- --------
Market price per common share
High $ 582 554 504 468 415 343 1/2 336
Low 410 480 429 401 335 303 281
Closing 461 554 499 7/8 465 415 337 320
-------- -------- -------- -------- -------- -------- --------
(1) Excludes amortization and balances related to goodwill and core deposit
intangible and nonrecurring merger-related expenses, net of applicable
income tax effects.
27
M&T BANK CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
1998 Third quarter
Average Average
Average balance in millions; interest in thousands balance Interest rate
- -------------------------------------------------- ---------- ---------- -------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc $ 2,935 $ 61,547 8.32%
Real estate 9,273 188,843 8.15
Consumer 2,916 65,230 8.87
---------- ---------- ----
Total loans and leases, net 15,124 315,620 8.28
---------- ---------- ----
Money-market assets
Interest-bearing deposits at banks 2 16 3.07
Federal funds sold and agreements
to resell securities 119 1,634 5.44
Trading account 103 1,797 6.93
---------- ---------- ----
Total money-market assets 224 3,447 6.11
---------- ---------- ----
Investment securities**
U.S. Treasury and federal agencies 1,561 23,644 6.01
Obligations of states and political subdivisions 85 1,321 6.18
Other 887 15,307 6.84
---------- ---------- ----
Total investment securities 2,533 40,272 6.31
---------- ---------- ----
Total earning assets 17,881 359,339 7.97
---------- ---------- ----
Allowance for possible credit losses (311)
Cash and due from banks 413
Other assets 1,472
---------- ---------- ----
Total assets $ 19,455
---------- ---------- ----
---------- ---------- ----
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 344 1,328 1.53
Savings deposits 4,709 31,395 2.65
Time deposits 7,414 103,525 5.54
Deposits at foreign office 293 3,964 5.36
---------- ---------- ----
Total interest-bearing deposits 12,760 140,212 4.36
---------- ---------- ----
Short-term borrowings 2,069 29,376 5.63
Long-term borrowings 861 15,262 7.03
---------- ---------- ----
Total interest-bearing liabilities 15,690 184,850 4.67
---------- ---------- ----
Noninterest-bearing deposits 1,792
Other liabilities 311
---------- ---------- ----
Total liabilities 17,793
---------- ---------- ----
Stockholders' equity 1,662
---------- ---------- ----
Total liabilities and stockholders' equity $ 19,455
---------- ---------- ----
Net interest spread 3.30
Contribution of interest-free funds .57
---------- ---------- ----
Net interest income/margin on earning assets $ 174,489 3.87%
---------- ---------- ----
---------- ---------- ----
1998 Second quarter
Average Average
Average balance in millions; interest in thousands balance Interest rate
- -------------------------------------------------- ------- -------- --------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc 2,954 62,026 8.42%
Real estate 8,951 184,120 8.23
Consumer 3,073 69,672 9.09
------ ------- ----
Total loans and leases, net 14,978 315,818 8.46
------ ------- ----
Money-market assets
Interest-bearing deposits at banks 37 364 3.93
Federal funds sold and agreements
to resell securities 88 1,247 5.70
Trading account 31 494 6.31
------ ------- ----
Total money-market assets 156 2,105 5.40
------ ------- ----
Investment securities**
U.S. Treasury and federal agencies 1,816 27,620 6.10
Obligations of states and political subdivisions 90 1,396 6.25
Other 952 16,564 6.98
------ ------- ----
Total investment securities 2,858 45,580 6.40
------ ------- ----
Total earning assets 17,992 363,503 8.10
------ ------- ----
Allowance for possible credit losses (310)
Cash and due from banks 417
Other assets 1,448
------ ------- ----
Total assets 19,547
------ ------- ----
------ ------- ----
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts 304 1,189 1.57
Savings deposits 4,718 30,636 2.60
Time deposits 7,686 105,500 5.51
Deposits at foreign office 267 3,562 5.34
------ ------- ----
Total interest-bearing deposits 12,975 140,887 4.36
------ ------- ----
Short-term borrowings 2,207 30,969 5.63
Long-term borrowings 695 12,788 7.38
------ ------- ----
Total interest-bearing liabilities 15,877 184,644 4.66
------ ------- ----
Noninterest-bearing deposits 1,751
Other liabilities 255
------ ------- ----
Total liabilities 17,883
------ ------- ----
Stockholders' equity 1,664
------ ------- ----
Total liabilities and stockholders' equity 19,547
------ ------- ----
Net interest spread 3.44
Contribution of interest-free funds .55
------ ------- ----
Net interest income/margin on earning assets 178,859 3.99%
------ ------- ----
------ ------- ----
1998 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 2,393 49,755 8.43%
Real estate 7,012 148,744 8.49
Consumer 2,197 51,194 9.45
------ ------- ----
Total loans and leases, net 11,602 249,693 8.73
------ ------- ----
Money-market assets
Interest-bearing deposits at banks 1 6 2.91
Federal funds sold and agreements
to resell securities 127 1,722 5.51
Trading account 13 169 5.13
------ ------- ----
Total money-market assets 141 1,897 5.45
------ ------- ----
Investment securities**
U.S. Treasury and federal agencies 1,013 15,861 6.35
Obligations of states and political subdivisions 37 628 6.83
Other 564 9,724 7.00
------ ------- ----
Total investment securities 1,614 26,213 6.59
------ ------- ----
Total earning assets 13,357 277,803 8.43
------ ------- ----
Allowance for possible credit losses (279)
Cash and due from banks 321
Other assets 656
------ ------- ----
Total assets 14,055
------ ------- ----
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts 270 955 1.44
Savings deposits 3,446 22,607 2.66
Time deposits 5,753 80,634 5.68
Deposits at foreign office 247 3,239 5.31
------ ------- ----
Total interest-bearing deposits 9,716 107,435 4.48
------ ------- ----
Short-term borrowings 1,353 18,597 5.57
Long-term borrowings 428 8,553 8.11
------ ------- ----
Total interest-bearing liabilities 11,497 134,585 4.75
------ ------- ----
Noninterest-bearing deposits 1,272
Other liabilities 233
------ ------- ----
Total liabilities 13,002
------ ------- ----
Stockholders' equity 1,053
------ ------- ----
Total liabilities and stockholders' equity 14,055
------ ------- ----
Net interest spread 3.68
Contribution of interest-free funds .67
------ ------- ----
Net interest income/margin on earning assets 143,218 4.35%
------ ------- ----
------ ------- ----
* Includes nonaccrual loans
** Includes available for sale securities at amortized cost
(continued)
28
M&T BANK CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
1997 Fourth quarter 1997 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 $ 2,353 $ 49,625 8.37% 2,226 47,527 8.47%
Real estate 6,752 145,960 8.65 6,468 139,184 8.61
Consumer 2,222 52,259 9.33 2,308 54,025 9.28
--------- --------- ---- ------ ------- ----
Total loans and leases, net 11,327 247,844 8.68 11,002 240,736 8.68
--------- --------- ---- ------ ------- ----
Money-market assets
Interest-bearing deposits at banks 1 6 2.80 63 944 5.91
Federal funds sold and agreements
to resell securities 56 772 5.50 69 952 5.47
Trading account 43 825 7.55 24 414 6.96
--------- --------- ---- ------ ------- ----
Total money-market assets 100 1,603 6.36 156 2,310 5.88
--------- --------- ---- ------ ------- ----
Investment securities**
U.S. Treasury and federal agencies 1,098 17,328 6.26 1,132 17,959 6.29
Obligations of states and political subdivisions 40 672 6.60 45 755 6.61
Other 583 9,719 6.62 570 9,545 6.64
--------- --------- ---- ------ ------- ----
Total investment securities 1,721 27,719 6.39 1,747 28,259 6.42
--------- --------- ---- ------ ------- ----
Total earning assets 13,148 277,166 8.36 12,905 271,305 8.34
--------- --------- ---- ------ ------- ----
Allowance for possible credit losses (273) (273)
Cash and due from banks 322 303
Other assets 588 489
--------- --------- ---- ------ ------- ----
Total assets $ 13,785 13,424
--------- --------- ---- ------ ------- ----
--------- --------- ---- ------ ------- ----
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 257 897 1.39 234 803 1.36
Savings deposits 3,483 23,418 2.67 3,443 22,746 2.62
Time deposits 5,978 85,711 5.69 6,021 85,889 5.66
Deposits at foreign office 227 3,079 5.37 221 2,969 5.32
--------- --------- ---- ------ ------- ----
Total interest-bearing deposits 9,945 113,105 4.51 9,919 112,407 4.50
--------- --------- ---- ------ ------- ----
Short-term borrowings 829 11,610 5.56 641 8,801 5.45
Long-term borrowings 428 8,555 7.93 428 8,560 7.94
--------- --------- ---- ------ ------- ----
Total interest-bearing liabilities 11,202 133,270 4.72 10,988 129,768 4.69
--------- --------- ---- ------ ------- ----
Noninterest-bearing deposits 1,316 1,251
Other liabilities 260 223
--------- --------- ---- ------ ------- ----
Total liabilities 12,778 12,462
--------- --------- ---- ------ ------- ----
Stockholders' equity 1,007 962
--------- --------- ---- ------ ------- ----
Total liabilities and stockholders' equity $ 13,785 13,424
--------- --------- ---- ------ ------- ----
--------- --------- ---- ------ ------- ----
Net interest spread 3.64 3.65
Contribution of interest-free funds .70 .70
--------- --------- ---- ------ ------- ----
Net interest income/margin on earning assets $ 143,896 4.34% 141,537 4.35%
--------- --------- ---- ------ ------- ----
--------- --------- ---- ------ ------- ----
* Includes nonaccrual loans.
** Includes available for sale securities at amortized cost.
29
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. M&T did not file any Current Reports on Form 8-K
during the fiscal quarter ended September 30, 1998.
30
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 13, 1998 By: /s/ Michael P. Pinto
---------------------
Michael P. Pinto
Executive Vice President
and Chief Financial Officer
31
EXHIBIT INDEX
Exhibit
No.
- -------
27.1 Financial Data Schedule. Filed herewith.
32
9
9-MOS
DEC-31-1998
SEP-30-1998
398,542
909
144,075
196,276
2,236,556
95,376
95,422
15,388,132
309,535
19,478,400
14,394,401
1,841,202
400,167
1,193,453
0
0
40,508
1,608,669
19,478,400
879,487
108,584
7,357
995,428
388,534
504,079
491,349
35,700
698
427,367
231,656
150,131
0
0
150,131
19.84
19.01
4.04
73,778
37,746
7,656
0
274,656
41,088
12,362
309,535
190,041
0
119,494
