UNITED STATES
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended June 30, 2001 | ||
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
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
|
14203 | |
(Address of principal
|
(Zip Code) | |
executive offices)
|
(716) 842-5445
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.
Number of shares of the registrants Common Stock, $.50 par value, outstanding as of the close of business on July 31, 2001: 96,381,161 shares.
M&T BANK CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2001
Table of Contents of Information Required in Report | Page | ||||||
Part I. FINANCIAL INFORMATION | |||||||
Item 1.
|
Financial Statements. | ||||||
CONSOLIDATED BALANCE SHEET June 30, 2001 and December 31, 2000 |
3 | ||||||
CONSOLIDATED STATEMENT OF INCOME Three and six months ended June 30, 2001 and 2000 |
4 | ||||||
CONSOLIDATED STATEMENT OF CASH FLOWS Six months ended June 30, 2001 and 2000 |
5 | ||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY Six months ended June 30, 2001 and 2000 |
6 | ||||||
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR CREDIT LOSSES Six months ended June 30, 2001 and 2000 |
6 | ||||||
NOTES TO FINANCIAL STATEMENTS | 7 | ||||||
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. | 14 | |||||
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk. | 35 | |||||
Part II. OTHER INFORMATION | |||||||
Item 1.
|
Legal Proceedings. | 35 | |||||
Item 2.
|
Changes in Securities and Use of Proceeds. | 35 | |||||
Item 3.
|
Defaults Upon Senior Securities. | 35 | |||||
Item 4.
|
Submission of Matters to a Vote of Security Holders. | 35 | |||||
Item 5.
|
Other Information. | 35 | |||||
Item 6.
|
Exhibits and Reports on Form 8-K. | 35 | |||||
SIGNATURES | 36 | ||||||
EXHIBIT INDEX | 37 |
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEET (Unaudited)
June 30, | December 31, | |||||||||||||
Dollars in thousands, except per share | 2001 | 2000 | ||||||||||||
Assets
|
Cash and due from banks | $ | 713,685 | 750,259 | ||||||||||
Money-market assets | ||||||||||||||
Interest-bearing deposits at banks | 3,848 | 3,102 | ||||||||||||
Federal funds sold and agreements to resell securities | 29,780 | 17,261 | ||||||||||||
Trading account | 36,771 | 37,431 | ||||||||||||
Total money-market assets | 70,399 | 57,794 | ||||||||||||
Investment securities | ||||||||||||||
Available for sale (cost: $3,028,958 at June 30, 2001; | ||||||||||||||
$3,035,031 at December 31, 2000) | 3,046,082 | 3,034,304 | ||||||||||||
Held to maturity (market value: $103,297 at June 30, 2001; | ||||||||||||||
$77,959 at December 31, 2000) | 102,361 | 81,025 | ||||||||||||
Other (market value: $228,726 at June 30, 2001; | ||||||||||||||
$194,524 at December 31, 2000) | 228,726 | 194,524 | ||||||||||||
Total investment securities | 3,377,169 | 3,309,853 | ||||||||||||
Loans and leases | 24,987,125 | 22,970,314 | ||||||||||||
Unearned discount | (212,697 | ) | (227,500 | ) | ||||||||||
Allowance for credit losses | (408,506 | ) | (374,703 | ) | ||||||||||
Loans and leases, net | 24,365,922 | 22,368,111 | ||||||||||||
Premises and equipment | 268,584 | 257,975 | ||||||||||||
Goodwill and core deposit intangible | 1,347,951 | 1,199,407 | ||||||||||||
Accrued interest and other assets | 1,058,436 | 1,006,057 | ||||||||||||
Total assets | $ | 31,202,146 | 28,949,456 | |||||||||||
Liabilities
|
Noninterest-bearing deposits | $ | 3,371,044 | 3,344,913 | ||||||||||
NOW accounts | 925,050 | 873,472 | ||||||||||||
Savings deposits | 7,061,535 | 6,105,689 | ||||||||||||
Time deposits | 8,354,380 | 9,664,088 | ||||||||||||
Deposits at foreign office | 329,432 | 244,511 | ||||||||||||
Total deposits | 20,041,441 | 20,232,673 | ||||||||||||
Federal funds purchased and agreements | ||||||||||||||
to repurchase securities | 3,079,569 | 1,440,887 | ||||||||||||
Other short-term borrowings | 891,785 | 631,937 | ||||||||||||
Accrued interest and other liabilities | 475,600 | 528,958 | ||||||||||||
Long-term borrowings | 3,727,043 | 3,414,516 | ||||||||||||
Total liabilities | 28,215,438 | 26,248,971 | ||||||||||||
Stockholders equity
|
Preferred stock, $1 par, 1,000,000 shares authorized, | |||||||||||||
none outstanding | | | ||||||||||||
Common stock, $.50 par, 150,000,000 shares authorized, | ||||||||||||||
97,139,347 shares issued at June 30, 2001; | ||||||||||||||
93,244,101 shares issued at December 31, 2000 | 48,570 | 46,622 | ||||||||||||
Common stock issuable, 135,366 shares at June 30, 2001; | ||||||||||||||
88,543 shares at December 31, 2000 | 6,400 | 4,077 | ||||||||||||
Additional paid-in capital | 1,128,856 | 914,575 | ||||||||||||
Retained earnings | 1,865,605 | 1,735,643 | ||||||||||||
Accumulated other comprehensive income, net | 10,417 | (432 | ) | |||||||||||
Treasury stock common, at cost 935,406 shares at | ||||||||||||||
June 30, 2001; none at December 31, 2000 | (73,140 | ) | | |||||||||||
Total stockholders equity | 2,986,708 | 2,700,485 | ||||||||||||
Total liabilities and stockholders equity | $ | 31,202,146 | 28,949,456 | |||||||||||
-3-
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||
In thousands, except per share | 2001 | 2000 | 2001 | 2000 | |||||||||||||||||
Interest income |
Loans and leases, including fees | $ | 483,955 | 362,435 | $ | 974,567 | 721,237 | ||||||||||||||
Money-market assets | |||||||||||||||||||||
Deposits at banks | 29 | 14 | 66 | 24 | |||||||||||||||||
Federal funds sold and agreements | |||||||||||||||||||||
to resell securities | 164 | 2,833 | 951 | 12,421 | |||||||||||||||||
Trading account | 82 | 646 | 184 | 757 | |||||||||||||||||
Investment securities | |||||||||||||||||||||
Fully taxable | 48,837 | 38,920 | 99,441 | 66,721 | |||||||||||||||||
Exempt from federal taxes | 6,558 | 2,612 | 12,994 | 5,158 | |||||||||||||||||
Total interest income | 539,625 | 407,460 | 1,088,203 | 806,318 | |||||||||||||||||
Interest expense |
NOW accounts | 2,206 | 1,252 | 5,391 | 2,560 | ||||||||||||||||
Savings deposits | 34,529 | 30,770 | 72,681 | 62,493 | |||||||||||||||||
Time deposits | 120,721 | 100,281 | 260,909 | 198,529 | |||||||||||||||||
Deposits at foreign office | 3,027 | 3,754 | 6,432 | 6,800 | |||||||||||||||||
Short-term borrowings | 38,526 | 42,226 | 72,795 | 81,985 | |||||||||||||||||
Long-term borrowings | 53,468 | 30,423 | 110,866 | 60,070 | |||||||||||||||||
Total interest expense | 252,477 | 208,706 | 529,074 | 412,437 | |||||||||||||||||
Net interest income | 287,148 | 198,754 | 559,129 | 393,881 | |||||||||||||||||
Provision for credit losses | 24,000 | 6,000 | 42,500 | 15,000 | |||||||||||||||||
Net interest income after provision | |||||||||||||||||||||
for credit losses | 263,148 | 192,754 | 516,629 | 378,881 | |||||||||||||||||
Other income |
Mortgage banking revenues | 25,029 | 14,972 | 50,689 | 29,531 | ||||||||||||||||
Service charges on deposit accounts | 36,313 | 20,954 | 68,847 | 41,414 | |||||||||||||||||
Trust income | 16,317 | 9,761 | 32,144 | 19,741 | |||||||||||||||||
Brokerage services income | 9,470 | 8,054 | 19,480 | 17,462 | |||||||||||||||||
Trading account and foreign exchange gains | 1,566 | 219 | 2,368 | 513 | |||||||||||||||||
Gain on sales of bank investment securities | 1,550 | 26 | 1,629 | 26 | |||||||||||||||||
Other revenues from operations | 27,591 | 19,396 | 54,406 | 36,693 | |||||||||||||||||
Total other income | 117,836 | 73,382 | 229,563 | 145,380 | |||||||||||||||||
Other expense |
Salaries and employee benefits | 109,455 | 76,938 | 215,342 | 153,639 | ||||||||||||||||
Equipment and net occupancy | 27,727 | 17,583 | 55,885 | 35,702 | |||||||||||||||||
Printing, postage and supplies | 6,230 | 4,222 | 13,304 | 8,716 | |||||||||||||||||
Amortization of goodwill and core deposit intangible | 31,149 | 14,103 | 60,960 | 28,510 | |||||||||||||||||
Other costs of operations | 58,451 | 42,864 | 122,322 | 79,740 | |||||||||||||||||
Total other expense | 233,012 | 155,710 | 467,813 | 306,307 | |||||||||||||||||
Income before taxes | 147,972 | 110,426 | 278,379 | 217,954 | |||||||||||||||||
Income taxes | 53,164 | 38,888 | 99,905 | 78,181 | |||||||||||||||||
Net income | $ | 94,808 | 71,538 | $ | 178,474 | 139,773 | |||||||||||||||
Net income per common share | |||||||||||||||||||||
Basic | $ | .98 | .93 | $ | 1.85 | 1.82 | |||||||||||||||
Diluted | .94 | .91 | 1.79 | 1.77 | |||||||||||||||||
Cash dividends per common share | $ | .25 | .125 | $ | .50 | .25 | |||||||||||||||
Average common shares outstanding | |||||||||||||||||||||
Basic | 97,125 | 76,631 | 96,281 | 76,872 | |||||||||||||||||
Diluted | 100,722 | 78,876 | 99,668 | 79,049 |
-4-
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six months ended June 30 | ||||||||||||||
In thousands | 2001 | 2000 | ||||||||||||
Cash flows from
|
Net income | $ | 178,474 | 139,773 | ||||||||||
operating activities
|
Adjustments to reconcile net income to net cash | |||||||||||||
provided by operating activities | ||||||||||||||
Provision for credit losses | 42,500 | 15,000 | ||||||||||||
Depreciation and amortization of premises | ||||||||||||||
and equipment | 20,477 | 13,637 | ||||||||||||
Amortization of capitalized servicing rights | 15,126 | 10,881 | ||||||||||||
Amortization of goodwill and core deposit intangible | 60,960 | 28,510 | ||||||||||||
Provision for deferred income taxes | (15,031 | ) | (6,968 | ) | ||||||||||
Asset write-downs | 749 | 1,114 | ||||||||||||
Net (gain) loss on sales of assets | (866 | ) | 2,456 | |||||||||||
Net change in accrued interest receivable, payable | (6,814 | ) | 5,005 | |||||||||||
Net change in other accrued income and expense | (16,593 | ) | (31,442 | ) | ||||||||||
Net change in loans held for sale | (316,427 | ) | (18,035 | ) | ||||||||||
Net change in trading account assets and liabilities | 236 | (5,432 | ) | |||||||||||
Net cash provided (used) by operating activities | (37,209 | ) | 154,499 | |||||||||||
Cash flows from
|
Proceeds from sales of investment securities | |||||||||||||
investing activities
|
Available for sale | 274,014 | 112,288 | |||||||||||
Other | 18 | 20,052 | ||||||||||||
Proceeds from maturities of investment securities | ||||||||||||||
Available for sale | 430,211 | 169,420 | ||||||||||||
Held to maturity | 33,694 | 30,286 | ||||||||||||
Purchases of investment securities | ||||||||||||||
Available for sale | (276,564 | ) | (265,206 | ) | ||||||||||
Held to maturity | (34,561 | ) | (31,232 | ) | ||||||||||
Other | (23,636 | ) | (20,498 | ) | ||||||||||
Additions to capitalized servicing rights | (17,790 | ) | (31,238 | ) | ||||||||||
Net increase in loans and leases | (752,754 | ) | (556,844 | ) | ||||||||||
Capital expenditures, net | (10,099 | ) | (3,491 | ) | ||||||||||
Acquisitions, net of cash acquired: | ||||||||||||||
Banks and bank holding companies | (56,247 | ) | | |||||||||||
Other companies | | (4,303 | ) | |||||||||||
Purchases of bank owned life insurance | | (35,000 | ) | |||||||||||
Other, net | (11,372 | ) | 10,963 | |||||||||||
Net cash used by investing activities | (445,086 | ) | (604,803 | ) | ||||||||||
Cash flows from
|
Net decrease in deposits | (1,575,914 | ) | (149,974 | ) | |||||||||
financing activities
|
Net increase in short-term borrowings | 1,863,300 | 50,755 | |||||||||||
Proceeds from long-term borrowings | 450,450 | 1,246 | ||||||||||||
Payments on long-term borrowings | (165,210 | ) | (1,449 | ) | ||||||||||
Purchases of treasury stock | (82,299 | ) | (54,947 | ) | ||||||||||
Dividends paid - common | (48,432 | ) | (19,151 | ) | ||||||||||
Other, net | 16,345 | (3,252 | ) | |||||||||||
Net cash provided (used) by financing activities | 458,240 | (176,772 | ) | |||||||||||
Net decrease in cash and cash equivalents | $ | (24,055 | ) | (627,076 | ) | |||||||||
Cash and cash equivalents at beginning of period | 767,520 | 1,236,310 | ||||||||||||
Cash and cash equivalents at end of period | $ | 743,465 | 609,234 | |||||||||||
Supplemental
|
Interest received during the period | $ | 1,109,019 | 799,839 | ||||||||||
disclosure of cash
|
Interest paid during the period | 559,205 | 398,551 | |||||||||||
flow information
|
Income taxes paid during the period | 73,286 | 80,713 | |||||||||||
Supplemental schedule of
|
Real estate acquired in settlement of loans | $ | 7,459 | 5,612 | ||||||||||
noncash investing and
|
Acquisition of banks and bank holding companies: | |||||||||||||
financing activities
|
Common stock issued | 169,270 | | |||||||||||
Fair value of: | ||||||||||||||
Assets acquired (noncash) | 1,674,360 | | ||||||||||||
Liabilities assumed | 1,461,449 | | ||||||||||||
Stock options | 6,646 | | ||||||||||||
Securitization of residential mortgage loans allocated to: | ||||||||||||||
Available for sale investment securities | | 1,018,216 | ||||||||||||
Capitalized servicing rights | | 14,282 | ||||||||||||
-5-
Accumulated | ||||||||||||||||||||||||||||||||||||
Common | Additional | other | ||||||||||||||||||||||||||||||||||
Preferred | Common | stock | paid-in | Retained | comprehensive | Treasury | ||||||||||||||||||||||||||||||
In thousands, except per share | stock | stock | issuable | capital | earnings | income, net | stock | Total | ||||||||||||||||||||||||||||
2000
|
||||||||||||||||||||||||||||||||||||
Balance January 1, 2000
|
$ | | 40,508 | 3,937 | 458,729 | 1,501,530 | (26,047 | ) | (181,611 | ) | $ | 1,797,046 | ||||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||
Net income
|
| | | | 139,773 | | | 139,773 | ||||||||||||||||||||||||||||
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||
Unrealized losses on investment securities, net of
reclassification adjustment
|
| | | | | (21,678 | ) | | (21,678 | ) | ||||||||||||||||||||||||||
118,095 | ||||||||||||||||||||||||||||||||||||
Purchases of treasury stock
|
| | | | | | (54,947 | ) | (54,947 | ) | ||||||||||||||||||||||||||
Stock-based compensation plans:
|
||||||||||||||||||||||||||||||||||||
Exercise of stock options
|
| | | (16,686 | ) | | | 27,012 | 10,326 | |||||||||||||||||||||||||||
Directors stock plan
|
| | | (14 | ) | | | 162 | 148 | |||||||||||||||||||||||||||
Deferred compensation plans, net, including dividend equivalents
|
| | 263 | | (22 | ) | | 259 | 500 | |||||||||||||||||||||||||||
Common stock cash dividends
|
||||||||||||||||||||||||||||||||||||
$.25 per share |
| | | | (19,151 | ) | | | (19,151 | ) | ||||||||||||||||||||||||||
Balance June 30, 2000 |
$ | | 40,508 | 4,200 | 442,029 | 1,622,130 | (47,725 | ) | (209,125 | ) | $ | 1,852,017 | ||||||||||||||||||||||||
2001
|
||||||||||||||||||||||||||||||||||||
Balance January 1, 2001
|
$ | | 46,622 | 4,077 | 914,575 | 1,735,643 | (432 | ) | | $ | 2,700,485 | |||||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||
Net income
|
| | | | 178,474 | | | 178,474 | ||||||||||||||||||||||||||||
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||
Unrealized gains on investment securities, net of
reclassification adjustment
|
| | | | | 10,849 | | 10,849 | ||||||||||||||||||||||||||||
189,323 | ||||||||||||||||||||||||||||||||||||
Purchases of treasury stock
|
| | | | | | (82,299 | ) | (82,299 | ) | ||||||||||||||||||||||||||
Acquisition of Premier National Bancorp, Inc.:
|
||||||||||||||||||||||||||||||||||||
Common stock issued
|
| 1,220 | | 168,050 | | | | 169,270 | ||||||||||||||||||||||||||||
Fair value of stock options
|
| | | 6,646 | | | | 6,646 | ||||||||||||||||||||||||||||
Repayment of management stock ownership program receivable
|
| | | 112 | | | | 112 | ||||||||||||||||||||||||||||
Stock-based compensation plans: |
||||||||||||||||||||||||||||||||||||
Exercise of stock options |
| 722 | | 38,904 | | | 9,159 | 48,785 | ||||||||||||||||||||||||||||
Directors stock plan
|
| 2 | | 231 | | | | 233 | ||||||||||||||||||||||||||||
Deferred compensation plans, net, including dividend equivalents
|
| 4 | 2,323 | 338 | (80 | ) | | | 2,585 | |||||||||||||||||||||||||||
Common stock cash dividends
|
||||||||||||||||||||||||||||||||||||
$.50 per share |
| | | | (48,432 | ) | | | (48,432 | ) | ||||||||||||||||||||||||||
Balance June 30, 2001
|
$ | | 48,570 | 6,400 | 1,128,856 | 1,865,605 | 10,417 | (73,140 | ) | $ | 2,986,708 | |||||||||||||||||||||||||
CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR CREDIT LOSSES (Unaudited)
Six months ended June 30 | ||||||||||
In thousands | 2001 | 2000 | ||||||||
Beginning balance
|
$ | 374,703 | 316,165 | |||||||
Provision for credit losses
|
42,500 | 15,000 | ||||||||
Allowance obtained through acquisitions
|
22,112 | | ||||||||
Net charge-offs
|
||||||||||
Charge-offs
|
(41,538 | ) | (19,230 | ) | ||||||
Recoveries
|
10,729 | 8,230 | ||||||||
Total net charge-offs
|
(30,809 | ) | (11,000 | ) | ||||||
Ending balance
|
$ | 408,506 | 320,165 | |||||||
-6-
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
The consolidated financial statements of M&T Bank Corporation (M&T) and subsidiaries (the Company) were compiled in accordance with the accounting policies set forth in note 1 of Notes to Financial Statements included in the Companys 2000 Annual Report, except as described below. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.
2. Accounting for derivative instruments and hedging activities
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position 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.
Pursuant to SFAS No. 133, 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 entitys approach to managing risk.
The Company utilizes derivatives, as defined in SFAS No. 133, to hedge the exposure to changes in the fair value of a recognized asset or liability or an unrecognized commitment. The January 1, 2001 transition adjustment prescribed by SFAS No. 133 was not material to the Companys consolidated financial position or its results of operations. As a result of adopting the provisions of SFAS No. 133, hedged residential real estate loans held for sale, commitments to originate loans for sale, and commitments to sell loans are now generally recorded in the consolidated balance sheet at estimated fair market value, rather than at the lower of aggregate cost or fair market value, which was the Companys policy prior to January 1, 2001. As a result, included in mortgage banking revenues in the first half of 2001 were net unrealized pre-tax gains related to loans held for sale, commitments to originate loans for sale, and commitments to sell loans of approximately $7.2 million ($4.4 million net of applicable income taxes). Similar unrealized gains were $5.8 million ($3.5 million net of applicable income taxes) in the first quarter of 2001. As a result, the net impact of SFAS No. 133 on mortgage banking revenues during the second quarter of 2001 was approximately $1.4 million ($.9 million after applicable income taxes).
The Company utilizes interest rate swap agreements as part of the management of interest-rate risk to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. The Companys currently existing interest rate swap agreements have been designated as fair value hedges and, as such, the fair value of the derivatives (the interest rate swaps) and changes in the fair value of the hedged items are recorded in the Companys balance sheet with the corresponding gain or loss being recognized in current earnings. The difference between changes in the fair value of interest rate swaps and the hedged items represents hedge ineffectiveness and is recorded in Other revenues from operations in the Companys consolidated statement of income. The fair value of interest rate swaps entered into for interest rate risk management purposes represented unrealized pre-tax gains of
-7-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. Accounting for derivative instruments and hedging activities, continued
approximately $4 million at June 30, 2001. Such gains were offset by unrealized losses on the hedged items and, as a result, the amount of hedge ineffectiveness recognized during the three-month and six-month periods ended June 30, 2001 was insignificant.
3. Earnings per share
The computations of basic earnings per share follow:
Three months ended | Six months ended | ||||||||||||||||
June 30 | June 30 | ||||||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||||||
(in thousands, except per share) | |||||||||||||||||
Income available to common stockholders: | |||||||||||||||||
Net income | $ | 94,808 | 71,538 | 178,474 | 139,773 | ||||||||||||
Weighted-average shares
outstanding (including common stock issuable) |
97,125 | 76,631 | 96,281 | 76,872 | |||||||||||||
Basic earnings per share | $ | .98 | .93 | 1.85 | 1.82 |
The computations of diluted earnings per share follow:
Three months ended | Six months ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||||
(in thousands, except per share) | ||||||||||||||||
Income available to common stockholders | $ | 94,808 | 71,538 | 178,474 | 139,773 | |||||||||||
Weighted-average shares outstanding | 97,125 | 76,631 | 96,281 | 76,872 | ||||||||||||
Plus: incremental shares from
assumed conversion of stock options |
3,597 | 2,245 | 3,387 | 2,177 | ||||||||||||
Adjusted weighted-average shares outstanding | 100,722 | 78,876 | 99,668 | 79,049 | ||||||||||||
Diluted earnings per share | $ | .94 | .91 | 1.79 | 1.77 |
4. Comprehensive income
The following tables display the components of other comprehensive income:
Six months ended June 30, 2001 | |||||||||||||
Before-tax | Income | ||||||||||||
amount | taxes | Net | |||||||||||
(in thousands) | |||||||||||||
Unrealized gains on investment securities: | |||||||||||||
Unrealized holding gains during period | $ | 19,480 | 7,640 | 11,840 | |||||||||
Reclassification adjustment for gains realized in net income | 1,629 | 638 | 991 | ||||||||||
Net unrealized gains | $ | 17,851 | 7,002 | 10,849 | |||||||||
-8-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. Comprehensive income, continued
Six months ended June 30, 2000 | ||||||||||||||
Before-tax | Income | |||||||||||||
amount | taxes | Net | ||||||||||||
(in thousands) | ||||||||||||||
Unrealized losses on investment securities: | ||||||||||||||
Unrealized holding losses during period | $ | (36,598 | ) | (14,936 | ) | (21,662 | ) | |||||||
Reclassification adjustment for gains realized in net income | 26 | 10 | 16 | |||||||||||
Net unrealized losses | $ | (36,624 | ) | (14,946 | ) | (21,678 | ) | |||||||
5. Acquisition
On February 9, 2001, M&T acquired Premier National Bancorp, Inc. (Premier), a bank holding company headquartered in Lagrangeville, New York. Following the merger, Premier National Bank, Premiers bank subsidiary, was merged into Manufacturers and Traders Trust Company (M&T Bank), M&Ts principal bank subsidiary. Premier National Bank operated 34 banking offices in the mid-Hudson Valley region of New York State. After application of the election, allocation, and proration procedures contained in the merger agreement with Premier, M&T paid $171 million in cash and issued 2,440,812 shares of M&T common stock in exchange for the Premier shares outstanding at the time of acquisition. In addition, based on the merger agreement and the exchange ratio provided therein, M&T converted outstanding and unexercised stock options granted by Premier into options to purchase 224,734 shares of M&T common stock. The purchase price was approximately $347 million.
Acquired assets, loans and deposits of Premier on February 9, 2001 totaled approximately $1.8 billion, $1.0 billion and $1.4 billion, respectively. The transaction has been accounted for using the purchase method of accounting and, accordingly, operations acquired from Premier have been included in the Companys financial results since the acquisition date. In connection with the acquisition, the Company recorded approximately $179 million of goodwill and $31 million of core deposit intangible. The goodwill is being amortized over twenty years using the straight-line method and the core deposit intangible is being amortized over seven years using an accelerated method.
The Company incurred expenses related to systems conversions and other costs of integrating and conforming acquired operations with and into the Company of approximately $8.0 million ($4.8 million net of applicable income taxes) during the three-month period ended March 31, 2001. There were no similar expenses incurred during the three-month period ended June 30, 2001 or during the three-month and six-month periods ended June 30, 2000.
6. Borrowings
In 1997, M&T Capital Trust I (Trust I), M&T Capital Trust II (Trust II), and M&T Capital Trust III (Trust III and, together with Trust I and Trust II, the Trusts) issued $310 million of preferred capital securities. Including the unamortized portion of a purchase accounting adjustment to reflect estimated fair value at the April 1, 1998 acquisition of the common securities of Trust III, the preferred capital securities had a financial statement carrying value of approximately $318 million at June 30, 2001 and December 31, 2000.
Other than the following payment terms (and the redemption terms described
-9-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Borrowings, continued
below), the preferred capital securities issued by the Trusts (Capital Securities) are identical in all material respects:
Distribution | Distribution | |||||
Trust | Rate | Dates | ||||
Trust I
|
8.234 | % | February 1 and August 1 | |||
Trust II
|
8.277 | % | June 1 and December 1 | |||
Trust III
|
9.25 | % | February 1 and August 1 |
The common securities of Trust I and Trust II are wholly owned by M&T and the common securities of Trust III are wholly owned by Olympia Financial Corp. (Olympia), a wholly owned subsidiary of M&T. The common securities of each Trust (Common Securities) are the only class of each Trusts securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding Trust and are classified in the Companys consolidated balance sheet as long-term borrowings, with accumulated distributions on such securities included in interest expense. Under the Federal Reserve Boards current risk-based capital guidelines, the Capital Securities are includable in the Companys 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) of M&T in the case of Trust I and Trust II and Olympia in the case of Trust III:
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. |
|||
Trust III
|
$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 Trust III, exercises 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 companys 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 Trust III of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The
-10-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. Borrowings, continued
obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T and Olympia.
The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events (Events) set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after the stated optional redemption dates (February 1, 2007 in the case of Trust I and Trust III, and June 1, 2007 in the case of Trust II) contemporaneously with the Companys 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&Ts option in the case of Trust I and Trust II and at Olympias option in the case of Trust III (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 Trust III, such percentage adjusts annually and ranges from 104.625% at February 1, 2007 to 100.463% for the annual period ending January 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to February 1, 2007.
7. Segment information
Reportable segments have been determined based upon the Companys internal profitability reporting system, which is organized by strategic business units. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.
The financial information of the Companys segments was compiled utilizing the accounting policies described in note 19 to the Companys consolidated financial statements as of and for the year ended December 31, 2000. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, the financial information of the reported segments is not necessarily comparable with similar information reported by other financial
-11-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. Segment information, continued
institutions. Information about the Companys segments is presented in the following tables.
Three months ended June 30 | ||||||||||||||||||||||||
2001 | 2000 | |||||||||||||||||||||||
Inter- | Net | Inter- | Net | |||||||||||||||||||||
Total | segment | income | Total | segment | income | |||||||||||||||||||
revenues(a) | revenues | (loss) | revenues(a) | revenues | (loss) | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial Banking | $ | 70,190 | 129 | 28,971 | 53,657 | 99 | 23,478 | |||||||||||||||||
Commercial Real Estate | 40,108 | 229 | 20,735 | 34,166 | 189 | 17,856 | ||||||||||||||||||
Discretionary Portfolio | 23,803 | 958 | 13,716 | 13,817 | (74 | ) | 7,653 | |||||||||||||||||
Residential Mortgage Banking | 51,668 | 13,040 | 10,697 | 26,322 | 5,789 | 1,238 | ||||||||||||||||||
Retail Banking | 206,104 | 3,092 | 52,587 | 133,090 | 2,285 | 37,818 | ||||||||||||||||||
All Other | 13,111 | (17,448 | ) | (31,898 | ) | 11,084 | (8,288 | ) | (16,505 | ) | ||||||||||||||
Total | $ | 404,984 | | 94,808 | 272,136 | | 71,538 | |||||||||||||||||
Six months ended June 30 | ||||||||||||||||||||||||
2001 | 2000 | |||||||||||||||||||||||
Inter- | Net | Inter- | Net | |||||||||||||||||||||
Total | segment | income | Total | segment | income | |||||||||||||||||||
revenues(a) | revenues | (loss) | revenues(a) | revenues | (loss) | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Commercial Banking | $ | 140,476 | 316 | 58,135 | 104,688 | 186 | 44,972 | |||||||||||||||||
Commercial Real Estate | 78,266 | 423 | 40,410 | 67,431 | 390 | 35,100 | ||||||||||||||||||
Discretionary Portfolio | 42,249 | 2,025 | 24,766 | 29,996 | (168 | ) | 16,042 | |||||||||||||||||
Residential Mortgage Banking | 95,644 | 22,048 | 19,659 | 51,068 | 11,004 | 3,093 | ||||||||||||||||||
Retail Banking | 407,417 | 5,950 | 105,251 | 261,071 | 4,719 | 70,922 | ||||||||||||||||||
All Other | 24,640 | (30,762 | ) | (69,747 | ) | 25,007 | (16,131 | ) | (30,356 | ) | ||||||||||||||
Total | $ | 788,692 | | 178,474 | 539,261 | | 139,773 | |||||||||||||||||
(a) | Total revenues are comprised of net interest income and other income. Net interest income is the difference between taxable-equivalent interest earned on assets and interest paid on liabilities owned by a segment and a funding charge (credit) based on the Companys internal funds transfer pricing methodology. Segments are charged a cost to fund any assets (e.g. loans) and are paid a funding credit for any funds provided (e.g. deposits). The taxable-equivalent adjustment aggregated $4,799,000 and $2,250,000 for the three-month periods ended June 30, 2001 and 2000, respectively, and $9,186,000 and $4,456,000 for the six-month periods ended June 30, 2001 and 2000, respectively, and is eliminated in All Other total revenues. Intersegment revenues are included in total revenues of |
-12-
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. Segment information, continued
the reportable segments. The elimination of intersegment revenues is included in the determination of All Other total revenues.
Average total assets | ||||||||||||
Six months ended | Year ended | |||||||||||
June 30, | December 31, | |||||||||||
2001 | 2000 | 2000 | ||||||||||
(in millions) | ||||||||||||
Commercial Banking | $ | 6,632 | 4,869 | 5,274 | ||||||||
Commercial Real Estate | 5,623 | 4,630 | 4,839 | |||||||||
Discretionary Portfolio | 7,438 | 6,477 | 6,431 | |||||||||
Residential Mortgage Banking | 1,204 | 539 | 662 | |||||||||
Retail Banking | 7,654 | 4,536 | 5,186 | |||||||||
All Other | 1,899 | 1,093 | 1,266 | |||||||||
Total | $ | 30,450 | 22,144 | 23,658 | ||||||||
-13-
Item 2. | Managements Discussion and Analysis of Financial Condition and |
Overview
Net income of M&T Bank Corporation (M&T) was $94.8 million or $.94 of diluted earnings per common share in the second quarter of 2001, increases of 33% and 3%, respectively, from the second quarter of 2000 when net income was $71.5 million or $.91 of diluted earnings per common share. Net income was $83.7 million or $.85 of diluted earnings per common share in the initial 2001 quarter. Basic earnings per common share rose 5% to $.98 in the recent quarter from $.93 in the year-earlier quarter and 11% from $.88 earned in the first quarter of 2001. The after-tax impact of nonrecurring merger-related expenses associated with M&Ts merger and acquisition activity described below was $4.8 million or $.05 of diluted and basic earnings per share in 2001s initial quarter. There were no significant merger-related expenses in the second quarter of 2001 or 2000.
For the six months ended June 30, 2001, net income was $178.5 million or $1.79 per diluted share, up 28% and 1%, respectively, from $139.8 million or $1.77 per diluted share during the first half of 2000. Basic earnings per share rose to $1.85 in the first six months of 2001 from $1.82 in the corresponding 2000 period. Nonrecurring merger-related expenses lowered net income during the first six months of 2001 by $4.8 million (after tax-effect) and diluted and basic earnings per share by $.05. There were no similar expenses during the first six months of 2000.
The annualized rate of return on average total assets for M&T and its consolidated subsidiaries (the Company) in the second quarter of 2001 was 1.23%, compared with 1.32% in the year-earlier quarter and 1.14% in 2001s initial quarter. The annualized rate of return on average common stockholders equity was 12.61% in the recent quarter, compared with 15.75% in the second quarter of 2000 and 11.84% in the first quarter of 2001. During the first half of 2001, the annualized rates of return on average assets and average common stockholders equity were 1.18% and 12.24%, respectively, compared with 1.27% and 15.45%, respectively, in the corresponding 2000 period. Excluding the impact of merger-related expenses, the annualized returns on average assets and average common equity were 1.20% and 12.52%, respectively, during the first quarter of 2001, and 1.21% and 12.57%, respectively, during the first six months of 2001.
On February 9, 2001, M&T acquired Premier National Bancorp, Inc. (Premier), a bank holding company headquartered in Lagrangeville, New York. Premier National Bank, Premiers bank subsidiary, was merged into Manufacturers and Traders Trust Company (M&T Bank), M&Ts principal bank subsidiary, on that date. Premier National Bank operated 34 banking offices in the mid-Hudson Valley region of New York State. As of the merger date, assets acquired totaled approximately $1.8 billion, including approximately $1.0 billion of loans and leases, and liabilities assumed were approximately $1.5 billion, including approximately $1.4 billion of deposits. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the operations acquired from Premier have been included in M&Ts financial results subsequent to the acquisition date. Premiers stockholders received $171 million in cash and 2,440,812 shares of M&T common stock in exchange for the Premier shares outstanding at the time of the acquisition. In connection with the acquisition, the Company recorded approximately $210 million of goodwill and core deposit intangible.
On October 6, 2000, M&T completed the acquisition of Keystone Financial, Inc. (Keystone), a bank holding company headquartered in Harrisburg, Pennsylvania. Keystone Financial Bank, N.A., Keystones bank subsidiary, was merged into M&T Bank on that date. Keystone Financial Bank, N.A. operated banking offices in Pennsylvania, Maryland and West Virginia. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the operations acquired from Keystone have been included in M&Ts financial results subsequent to the acquisition date. Keystones stockholders received $375 million in cash and 15,900,292 shares
-14-
of M&T common stock in exchange for the Keystone shares outstanding at the time of acquisition. As of the merger date, assets acquired totaled approximately $7.4 billion and included $4.8 billion of loans and leases and $1.2 billion of investment securities, and liabilities assumed were approximately $6.4 billion and included $5.2 billion of deposits. The Company recorded approximately $615 million of goodwill and core deposit intangible as a result of the Keystone acquisition.
In connection with the acquisitions described above, the Company 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. Nonrecurring expenses associated with the Premier and Keystone acquisitions totaled approximately $8.0 million ($4.8 million after-tax) during the first quarter of 2001. There were no similar expenses during the second quarter of 2001 nor the first half of 2000.
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 established accounting and reporting standards for derivative instruments 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.
Pursuant to SFAS No. 133, 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 entitys approach to managing risk.
The January 1, 2001 transition adjustment prescribed by SFAS No. 133 was not material to the Companys consolidated financial position or its results of operations. As a result of adopting the provisions of SFAS No. 133, hedged residential real estate loans held for sale, commitments to originate loans for sale, and commitments to sell loans are now generally recorded in the consolidated balance sheet at estimated fair market value, rather than at the lower of aggregate cost or fair market value, which was the Companys policy prior to January 1, 2001. As a result, included in mortgage banking revenues in the first half of 2001 were net unrealized pre-tax gains related to loans held for sale, commitments to originate loans for sale, and commitments to sell loans of approximately $7.2 million ($4.4 million after-tax). Similar unrealized gains were $5.8 million ($3.5 million after-tax) in the first quarter of 2001. As a result, the net impact of SFAS No. 133 on mortgage banking revenues during the second quarter of 2001 was approximately $1.4 million ($.9 million after-tax). In general, such unrealized gains are reversed and subsequently recognized as realized gains as the loans are sold. The impact on the Companys results of operations resulting from the adoption of SFAS No. 133 as related to the Companys use of interest rate swaps to manage interest rate risk associated with other earning assets and interest-bearing liabilities was not significant.
Cash Operating Results
Unlike many other banking companies, M&T has accounted for substantially all of its business combinations using the purchase method of accounting. As a result, the Company had recorded intangible assets consisting predominately of goodwill and core deposit intangible totaling $1.3 billion at June 30, 2001, $1.2 billion at December 31, 2000 and $625 million at June 30, 2000. Included in such intangible assets at June 30, 2001, December 31, 2000 and
-15-
June 30, 2000 was goodwill of $1.2 billion, $1.0 billion and $554 million, respectively. Charges for amortization of goodwill and core deposit intangible, after tax effect, were $16.9 million ($.17 per diluted share) and $8.2 million ($.08 per diluted share), respectively, during the second quarter of 2001 and $15.8 million ($.16 per diluted share) and $8.1 million ($.08 per diluted share), respectively, during the first quarter of 2001. Similar charges were $8.6 million ($.11 per diluted share) and $2.8 million ($.03 per diluted share), respectively, during 2000s second quarter and $17.3 million ($.22 per diluted share) and $5.7 million ($.07 per diluted share), respectively, during 2000s first half. Since the amortization of goodwill and core deposit intangible does not result in a cash expense, M&T believes that supplemental reporting of its operating results on a cash or tangible basis (which excludes the after-tax effect of amortization of goodwill and core deposit intangible and the related asset balances) represents a relevant measure of financial performance. The supplemental cash basis data presented herein does not exclude the effect of other non-cash operating expenses such as depreciation, provision for credit losses, or deferred income taxes associated with the results of operations. Unless noted otherwise, cash basis data does, however, exclude the after-tax impact of nonrecurring merger-related expenses associated with acquisitions.
Cash net income was $119.9 million in the second quarter of 2001, up 45% from $82.9 million in the comparable quarter of 2000. Diluted cash earnings per share for the recent quarter were $1.19, an increase of 13% from $1.05 in the year-earlier quarter. Cash net income and diluted cash earnings per share were $112.4 million and $1.14, respectively, in the initial 2001 quarter. For the first six months of 2001, cash net income and diluted cash earnings per share were $232.3 million and $2.33, respectively, up 43% and 13%, respectively, from $162.8 million and $2.06 in the corresponding 2000 period.
The annualized cash return on average tangible assets was 1.62% in the recent quarter, compared with 1.57% in the second quarter of 2000 and 1.59% in the initial quarter of 2001. Cash return on average tangible common equity was an annualized 27.99% in the second quarter of 2001, compared with 27.46% in the year-earlier quarter and 27.93% in the first quarter of 2001. For the first half of 2001, the annualized cash return on average tangible assets and average tangible common stockholders equity was 1.61% and 27.96%, respectively, compared with 1.52% and 27.21%, respectively, in the corresponding 2000 period. Including the effect of merger-related expenses, the annualized cash returns on average tangible assets and average tangible common stockholders equity for the first half of 2001 were 1.57% and 27.38%, respectively.
Taxable-equivalent Net Interest Income
Higher average loan balances outstanding, coupled with a widening of the Companys net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest bearing liabilities, led to a 45% increase in taxable-equivalent net interest income to $291.9 million in the second quarter of 2001, compared with $201.0 million in the year-earlier quarter. Taxable-equivalent net interest income was $276.4 million in the first quarter of 2001 when average loans and leases were $23.4 billion. Including the impact of loans obtained in the acquisitions of Keystone and Premier, average loans and leases rose $7.3 billion, or 42%, to $24.5 billion in the second quarter of 2001 from $17.2 billion in the year-earlier quarter. Loans and leases obtained in the Keystone merger were $4.8 billion on October 6, 2000 and included approximately $1.2 billion of commercial loans, $1.3 billion of commercial real estate loans, $1.1 billion of residential real estate loans, and $1.2 billion of consumer loans and leases. Loans obtained through the acquisition of Premier totaled $994 million on February 9, 2001 and included $127 million of commercial loans, $317 million of commercial real estate loans, $356 million of residential real estate loans, and $194 million of consumer loans. These factors were partially offset by the impact of the securitization of approximately $1.0 billion of residential real estate loans during the second
-16-
quarter of 2000. The resulting mortgage-backed securities, which are fully guaranteed by the Federal National Mortgage Association, are included in the Companys portfolio of available for sale investment securities. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.
AVERAGE LOANS AND LEASES
Percent | |||||||||||||||
increase from | |||||||||||||||
2nd Qtr. | 2nd Qtr. | 1st Qtr. | |||||||||||||
2001 | 2000 | 2001 | |||||||||||||
Commercial, financial, etc.
|
$ | 5,383 | 39 | % | 4 | % | |||||||||
Real estate commercial
|
9,232 | 38 | 3 | ||||||||||||
Real estate consumer
|
5,263 | 52 | 5 | ||||||||||||
Consumer
|
|||||||||||||||
Automobile
|
2,051 | 55 | 11 | ||||||||||||
Home equity
|
1,222 | 30 | 5 | ||||||||||||
Other
|
1,309 | 49 | 2 | ||||||||||||
Total consumer
|
4,582 | 46 | 7 | ||||||||||||
Total
|
$ | 24,460 | 42 | % | 5 | % | |||||||||
For the first half of 2001, taxable-equivalent net interest income was $568.3 million, up 43% from $398.3 million in the corresponding 2000 period. An increase in average loans and leases of $6.6 billion was the leading factor contributing to this improvement.
Investment securities averaged $3.5 billion in the recent quarter, up from $2.6 billion in the second quarter of 2000 and equal to the initial quarter of 2001. The increase from the year-earlier period reflects the impact of the Keystone and Premier acquisitions. The investment securities portfolio is largely comprised of residential mortgage-backed securities and collateralized mortgage obligations, commercial real estate mortgage-backed securities, and shorter-term U.S. Treasury notes. The Company has also invested in debt securities issued by municipalities and debt and preferred equity securities issued by government-sponsored agencies and certain financial institutions. When purchasing investment securities, the Company considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to prepayment and other risks assumed. The Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, or credit risk associated with a particular security.
Money-market assets, which are comprised of interest-earning deposits at banks, interest-earning trading account assets, Federal funds sold and agreements to resell securities, averaged $31 million in 2001s second quarter, compared with $213 million in the year-earlier quarter and $75 million in the first quarter of 2001. In general, the size of the investment securities and money-market assets portfolios are influenced by such factors as demand for loans, which generally yield more than investment securities and money-market assets, ongoing repayments, the levels of deposits, and management of balance sheet size and resulting capital ratios.
As a result of the changes described herein, average earning assets increased 40% to $28.0 billion in the recent quarter from $20.0 billion in the second quarter of 2000. Average earning assets were $26.9 billion in the first quarter of 2001 and aggregated $27.5 billion and $20.1 billion for the six months ended June 30, 2001 and 2000, respectively.
Core deposits, consisting of noninterest-bearing deposits, interest-bearing transaction accounts, savings deposits and nonbrokered domestic time deposits under $100,000, represent the most significant source of funding to the Company and generally carry lower interest rates than wholesale funds of comparable maturities. The Companys branch network is the principal source of core deposits. Core deposits include certificates of deposit under
-17-
$100,000 generated on a nationwide basis by M&T Bank, National Association (M&T Bank, N.A.), a wholly owned subsidiary of M&T. Average core deposits totaled $17.7 billion in the second quarter of 2001, up from $12.5 billion in the second quarter of 2000 and $17.5 billion in the initial 2001 quarter. Core deposits obtained in the Keystone and Premier transactions as of the respective acquisitions dates were $4.7 billion and $1.2 billion, respectively. The accompanying table provides an analysis of quarterly changes in the components of average core deposits. For the six months ended June 30, 2001 and 2000, core deposits averaged $17.6 billion and $12.5 billion, respectively.
AVERAGE CORE DEPOSITS
Percent increase | |||||||||||||
(decrease) from | |||||||||||||
2nd Qtr. | 2nd Qtr. | 1st Qtr. | |||||||||||
2001 | 2000 | 2001 | |||||||||||
NOW accounts
|
$ | 708 | 71 | % | (1 | )% | |||||||
Savings deposits
|
7,280 | 37 | 8 | ||||||||||
Time deposits less than $100,000
|
6,482 | 41 | (5 | ) | |||||||||
Noninterest-bearing deposits
|
3,269 | 50 | 3 | ||||||||||
Total
|
$ | 17,739 | 42 | % | 1 | % | |||||||
The Company also obtains funding through domestic time deposits of $100,000 or more, deposits originated through M&T Banks offshore branch office, and brokered certificates of deposit. Brokered deposits have been used as an alternative to short-term borrowings to lengthen the average maturity of interest-bearing liabilities. Brokered deposits averaged $463 million during the recent quarter, compared with $735 million and $521 million in the second quarter of 2000 and the first quarter of 2001, respectively. At June 30, 2001, brokered deposits totaled $447 million and had a weighted average remaining term to maturity of 0.8 years. Certain of the brokered deposits have provisions that allow early redemption. In connection with the Companys management of interest rate risk, interest rate swaps have been entered into under which the Company receives a fixed rate of interest and pays a variable rate and that have notional amounts and terms substantially similar to the amounts and terms of many of the brokered deposits. Additional amounts of brokered deposits may be solicited in the future depending on market conditions and the cost of funds available from alternative sources at the time.
In addition to deposits, the Company uses borrowings from banks, securities dealers, the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Pittsburgh (together, the FHLB), and others as sources of funding. Short-term borrowings averaged $3.5 billion in the recent quarter, compared with $2.7 billion in the year-earlier quarter and $2.5 billion in the first quarter of 2001. Long-term borrowings averaged $3.5 billion in the second quarter of 2001, compared with $1.8 billion and $3.4 billion in the second quarter of 2000 and the first quarter of 2001, respectively. Included in average long-term borrowings were amounts borrowed from the FHLB totaling $2.3 billion in both the second and first quarters of 2001, and $1.3 billion in the second quarter of 2000. Also included in long-term borrowings were $318 million of trust preferred securities issued in 1997. Further information regarding the trust preferred securities is provided in note 6 of Notes to Financial Statements. Also included in average long-term borrowings were subordinated capital notes of $674 million in the recently completed quarter and the first quarter of 2001, compared with $175 million in the second quarter of 2000. In connection with the acquisitions of Keystone and Premier, M&T Bank issued $500 million of 8% subordinated capital notes on October 5, 2000.
In addition to changes in the composition of the Companys earning assets and interest-bearing liabilities, changes in interest rates and spreads can impact net interest income. Largely as a result of lower levels of interest rates following actions taken by the Federal Reserve during the first half of 2001, the rate paid on interest-bearing liabilities during the
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second quarter of 2001 declined to 4.16%, compared with 4.80% in the corresponding quarter of 2000 and 4.78% during 2001s first quarter. In comparison, the yield on the Companys earning assets decreased to 7.80% in the recent quarter, from 8.25% in the second quarter of 2000 and 8.33% in the initial 2001 quarter. The impact of the more rapid repricing of interest-bearing liabilities than earning assets contributed to an increase in the net interest spread to 3.64% in 2001s second quarter, compared with 3.45% in 2000s second quarter and 3.55% in the first quarter of 2001. For the first half of 2001, the net interest spread was 3.60%, an increase of 19 basis points (hundredths of one percent) from 3.41% in the corresponding 2000 period. The yield on earning assets and the rate paid on interest-bearing liabilities was 8.06% and 4.46%, respectively, in the first half of 2001, compared with 8.13% and 4.72%, respectively, a year earlier.
Net interest-free funds consist largely of noninterest-bearing demand deposits and stockholders equity, partially offset by bank owned life insurance and non-earning assets, including goodwill and core deposit intangible. Average interest-free funds totaled $3.6 billion in the second quarter of 2001, up from $2.5 billion a year earlier and $3.5 billion in the initial 2001 quarter. During the first half of 2001 and 2000, average net interest-free funds were $3.6 billion and $2.5 billion, respectively. Goodwill and core deposit intangible averaged $1.4 billion and $631 million during the second quarter of 2001 and 2000, respectively, and $1.3 billion during the initial 2001 quarter. The cash surrender value of bank owned life insurance averaged $569 million and $433 million in the second quarter of 2001 and 2000, respectively, and $561 million in the first quarter of 2001. Tax-exempt income earned from increases in the cash surrender value of bank owned life insurance is not included in interest income, but rather is recorded in other revenues from operations.
The contribution of net interest-free funds to net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets, was .54% in the second quarter of 2001, compared with .60% in the corresponding 2000 quarter and .61% in the first quarter of 2001. The lower contribution to net interest margin of net interest-free funds in the recent quarter was due largely to the decrease in the average rates paid on interest-bearing liabilities that were used to compute the value of such contribution. For the first six months of the year, the contribution of net interest-free funds to net interest margin was .57% in 2001 and .58% in 2000.
Reflecting the changes described herein, the Companys net interest margin was 4.18% in 2001s second quarter, up 13 basis points from 4.05% in the second quarter of 2000 and up 2 basis points from 4.16% in the initial 2001 quarter. During the first six months of 2001 and 2000, the net interest margin was 4.17% and 3.99%, respectively.
As part of the management of interest rate risk, the Company utilizes interest rate swap agreements to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. Periodic settlement amounts arising from these agreements are generally reflected in either the yields earned on assets or, as appropriate, the rates paid on interest-bearing liabilities. The notional amount of interest rate swap agreements entered into for interest rate risk management purposes as of June 30, 2001 and 2000 was $456 million and $671 million, respectively, and $511 million as of March 31, 2001 and $534 million as of December 31, 2000. In general, under the terms of these swaps, the Company receives payments based on the outstanding notional amount of the swaps at fixed rates and makes payments at variable rates. In anticipation of the previously noted issuance of $500 million of fixed-rate subordinated notes in October 2000, the Company terminated certain interest rate swap agreements, including forward-starting swaps, with an aggregate notional amount of approximately $421 million in September 2000. Under the terms of the terminated swaps, the Company would have made fixed-rate payments and received variable-rate payments.
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As previously discussed, the Company adopted SFAS No. 133 on January 1, 2001. As a result, the Companys interest rate swap agreements as of June 30, 2001 had been designated as fair value hedges. In a fair value hedge, the fair value of the derivative (the interest rate swap) and changes in the fair value of the hedged item are recorded in the Companys balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate swaps and the hedged items represents hedge ineffectiveness and is recorded in Other revenues from operations in the Companys consolidated statement of income. The amount of hedge ineffectiveness recognized in 2001 was not material to the Companys results of operations. The estimated fair value of interest rate swaps entered into for interest rate risk management purposes was approximately $4 million at June 30, 2001 and was substantially offset by unrealized losses on the fair value of the hedged items. The changes in the fair values of the interest rate swaps and the hedged items result from the effects of changing interest rates. Prior to the adoption of SFAS No. 133, the fair value of interest rate swaps entered into for interest rate risk management purposes was not recorded in the Companys consolidated balance sheet. The unrecognized fair value gain associated with such interest rate swaps was approximately $14 million at June 30, 2000 and $1 million at December 31, 2000.
The weighted average rates to be received and paid under interest rate swap agreements were 6.21% and 4.32%, respectively, at June 30, 2001. The average notional amounts of interest rate swaps and the related effect on net interest income and margin are presented in the accompanying table.
INTEREST RATE SWAPS
Three months ended June 30 | |||||||||||||||||
2001 | 2000 | ||||||||||||||||
Amount | Rate * | Amount | Rate * | ||||||||||||||
Increase (decrease) in:
|
|||||||||||||||||
Interest income
|
$ | (74 | ) | | % | $ | 106 | | % | ||||||||
Interest expense
|
(1,756 | ) | (.03 | ) | 55 | | |||||||||||
Net interest income/margin
|
$ | 1,682 | .02 | % | $ | 51 | | % | |||||||||
Average notional amount **
|
$ | 482,533 | $ | 937,902 | |||||||||||||
Six months ended June 30 | |||||||||||||||||
2001 | 2000 | ||||||||||||||||
Amount | Rate * | Amount | Rate * | ||||||||||||||
Increase (decrease) in:
|
|||||||||||||||||
Interest income
|
$ | (95 | ) | | % | $ | 742 | .01 | % | ||||||||
Interest expense
|
(2,068 | ) | (.02 | ) | (340 | ) | | ||||||||||
Net interest income/margin
|
$ | 1,973 | .01 | % | $ | 1,082 | .01 | % | |||||||||
Average notional amount **
|
$ | 502,953 | $ | 1,163,597 | |||||||||||||
* | Computed as an annualized percentage of average earning assets or interest-bearing liabilities. |
As a financial intermediary, the Company is exposed to various risks, including liquidity and market risk. Liquidity refers to the Companys ability to ensure that sufficient cash flow and liquid assets are available to satisfy demands for loans and deposit withdrawals, to fund operating costs, and to be used for other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. Deposits and borrowings, maturities of money-market assets and investment securities, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services, provide the Company with sources of liquidity. M&Ts banking subsidiaries have access to additional funding sources through FHLB
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borrowings, as well as other available borrowing facilities. M&T Banks issuance of $500 million of 8% subordinated capital notes in October 2000 provided liquidity and facilitated the acquisitions of Keystone and Premier. M&Ts primary source of funds to pay for operating expenses, shareholder dividends and treasury stock repurchases has historically been the receipt of dividends from its banking subsidiaries, which are subject to various regulatory limitations. Dividends from any banking subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current year and the two preceding years. For purposes of this test, at June 30, 2001 approximately $503 million was available for payment of dividends to M&T from banking subsidiaries without prior regulatory approval. These historic sources of cash flows were augmented in 1997 by the proceeds from issuance of trust preferred securities. M&T also maintains a $30 million line of credit with an unaffiliated commercial bank, of which there were no borrowings outstanding at June 30, 2001.
Management closely monitors the Companys liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. Furthermore, 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.
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Companys financial instruments. The primary market risk the Company is exposed to is interest rate risk. The core banking activities of lending and deposit-taking expose the Company to interest rate risk. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. As a result, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and off-balance sheet financial instruments. Managements philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of both on- and off-balance sheet financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of mortgage-related assets and expected maturities of investment securities, loans and deposits. Management supplements the modeling technique described above with analyses of market values of the Companys financial instruments.
The Companys Asset-Liability Committee, which includes members of senior management, monitors the Companys interest rate sensitivity with the aid of a computer model that 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, modifying or terminating interest rate swap agreements.
The accompanying table as of June 30, 2001 and December 31, 2000 displays the estimated impact on projected net interest income from non-trading financial instruments resulting from changes in interest rates during the first modeling year.
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SENSITIVITY OF NET INTEREST INCOME
Calculated increase (decrease) | ||||||||
in projected net interest income | ||||||||
Changes in Interest Rates | June 30, 2001 | December 31, 2000 | ||||||
+200 basis points
|
$ | (17,512 | ) | 6,040 | ||||
+100 basis points
|
(9,446 | ) | (5,471 | ) | ||||
-100 basis points
|
(7,029 | ) | (12,494 | ) | ||||
-200 basis points
|
(3,874 | ) | (14,878 | ) |
Many assumptions were utilized by the Company to calculate the impact that changes in interest rates may have on net interest income. The more significant assumptions related to the rate of 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 assumed 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 the 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 such changes.
The Company engages in trading activities to meet the financial needs of customers and to profit from perceived market opportunities. Financial instruments utilized in trading activities have included forward and futures contracts related to foreign currencies and mortgage-backed securities, U.S. Treasury and other government securities, mortgage-backed securities and interest rate contracts, such as swaps. The Company generally mitigates the foreign currency and interest rate risk associated with trading activities by entering into offsetting trading positions. The amounts of gross and net trading positions as well as the type of trading activities conducted by the Company are subject to a well-defined series of potential loss exposure limits established by the Asset-Liability Committee.
The notional amounts of interest rate and foreign currency and other option and futures contracts totaled $932 million and $232 million, respectively, at June 30, 2001, $1.0 billion and $473 million, respectively, at June 30, 2000, and $769 million and $293 million, respectively, at December 31, 2000. The notional amounts of these trading contracts are not recorded in the consolidated balance sheet. However, the fair values of all financial instruments used for trading activities are recorded in the consolidated balance sheet. The fair values of all trading account assets and liabilities were $37 million and $22 million, respectively, at June 30, 2001, $35 million and $22 million, respectively, at June 30, 2000, and $37 million and $22 million, respectively, at December 31, 2000. Given the Companys policies, limits and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading activities was not material.
Provision for Credit Losses
A provision for credit losses is recorded to adjust the Companys allowance for credit losses to a level that is adequate to absorb losses inherent in the loan and lease portfolio. The provision for credit losses in the second quarter of 2001 was $24.0 million, up from $6.0 million in the second quarter of 2000 and $18.5 million in the initial quarter of 2001. Net loan charge-offs rose to $14.9 million in the second quarter of 2001, from $4.4 million in the year-earlier quarter. Net charge-offs were $15.9 million in the first quarter of 2001. Net charge-offs as an annualized percentage of average loans and leases were .24% in the recent quarter, compared with .10% in the corresponding 2000 quarter and .28% in the initial quarter of 2001. For the six months ended June 30, 2001 and 2000, the provision for credit losses was $42.5 million and $15.0 million, respectively. Through June 30, net charge-offs were $30.8 million in 2001 and $11.0 million in 2000, representing .26%
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and .13%, respectively, of average loans and leases. A summary of net charge-offs by loan type is presented below.
NET CHARGE-OFFS (RECOVERIES)
2001 | |||||||||||||||
Year- | |||||||||||||||
1st Qtr. | 2nd Qtr. | to-date | |||||||||||||
Commercial, financial, etc.
|
$ | 2,135 | 6,004 | 8,139 | |||||||||||
Real estate:
|
|||||||||||||||
Commercial
|
4,066 | 132 | 4,198 | ||||||||||||
Residential
|
1,505 | 1,874 | 3,379 | ||||||||||||
Consumer
|
8,197 | 6,896 | 15,093 | ||||||||||||
|
$ | 15,903 | 14,906 | 30,809 | |||||||||||
2000 | |||||||||||||||
Year- | |||||||||||||||
1st Qtr. | 2nd Qtr. | to-date | |||||||||||||
Commercial, financial, etc.
|
$ | 1,419 | 195 | 1,614 | |||||||||||
Real estate:
|
|||||||||||||||
Commercial
|
(412 | ) | (778 | ) | (1,190 | ) | |||||||||
Residential
|
1,046 | 1,426 | 2,472 | ||||||||||||
Consumer
|
4,517 | 3,587 | 8,104 | ||||||||||||
|
$ | 6,570 | 4,430 | 11,000 | |||||||||||
Nonperforming loans, which consist of nonaccrual and restructured loans, were $161.6 million or .65% of total loans and leases outstanding at June 30, 2001, compared with $62.7 million or .37% at June 30, 2000, $110.6 million or .49% at December 31, 2000, and $160.8 million or .67% at March 31, 2001. Non-performing loans obtained in the acquisition of Keystone were $59 million at June 30, 2001, $55 million at March 31, 2001 and $43 million at December 31, 2000. Non-performing loans obtained in the acquisition of Premier were $5 million and $6 million at June 30 and March 31, 2001, respectively. Accruing loans past due 90 days or more aggregated $139.1 million or .56% of total loans and leases at June 30, 2001, compared with $28.6 million or .17% a year earlier, $141.8 million or .62% at December 31, 2000 and $141.4 million or .58% at March 31, 2001. The higher level of such loans at the dates mentioned compared with June 30, 2000 resulted predominately from the inclusion at those respective dates of one-to-four family residential mortgage loans serviced by the Company and repurchased since November 2000 from the Government National Mortgage Association (GNMA). The repurchased loans totaled $100 million, $101 million and $87 million as of June 30, 2001, March 31, 2001 and December 31, 2000, respectively. The outstanding principal balances of such loans are fully guaranteed by government agencies. The loans were repurchased to reduce servicing costs associated with these loans, including a requirement to advance principal and interest payments to GNMA that had not been received from individual mortgagors.
Commercial loans and leases classified as nonperforming aggregated $60.6 million at June 30, 2001, $18.3 million at June 30, 2000, $25.5 million at December 31, 2000 and $53.1 million at March 31, 2001. Commercial loans acquired in the Keystone merger that were classified as nonperforming at June 30, 2001 totaled $10.3 million, compared with $8.2 million and $12.7 million at March 31, 2001 and December 31, 2000, respectively.
Nonperforming commercial real estate loans totaled $40.7 million at June 30, 2001, $10.2 million at June 30, 2000, $37.0 million at December 31, 2000, and $43.4 million at March 31, 2001. Commercial real estate loans acquired in the Keystone merger that were classified as nonperforming at June 30, 2001 totaled $28.7 million, compared with $29.7 million and $23.0 million at March 31, 2001 and December 31, 2000, respectively. Nonperforming commercial real estate loans obtained in the Premier transaction totaled $1.9 million and $3.8 million at June 30 and March 31, 2001, respectively.
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Nonperforming residential real estate loans totaled $39.2 million and $25.8 million at June 30, 2001 and 2000, respectively, $36.0 million at December 31, 2000, and $43.1 million at March 31, 2001. Residential real estate loans past due 90 days or more and accruing interest totaled $126.2 million at June 30, 2001, compared with $12.4 million at June 30, 2000, $115.3 million at December 31, 2000 and $124.8 million at March 31, 2001. The higher levels of such loans when compared with June 30, 2000 resulted largely from the inclusion of the previously discussed loans repurchased from GNMA.
Nonperforming consumer loans and leases totaled $21.1 million at June 30, 2001, compared with $8.4 million at June 30, 2000, $12.1 million at December 31, 2000, and $21.3 million at March 31, 2001. As a percentage of consumer loan balances outstanding, nonperforming consumer loans and leases were .45% at June 30, 2001, .26% at June 30, 2000, .29% at December 31, 2000 and .48% at March 31, 2001. During the first quarter of 2001, the Company began classifying non-guaranteed consumer loans and leases past due 90 days or more as nonaccrual. Previously, such loans accrued interest until the loan balances were charged off. The change in classification did not have a material effect on the Companys results of operations or its financial condition.
Assets acquired in settlement of defaulted loans were $11.1 million at June 30, 2001, $8.4 million at June 30, 2000, $13.6 million at December 31, 2000 and $13.1 million at March 31, 2001.
A comparative summary of nonperforming assets and certain past due loan data and credit quality ratios is presented in the accompanying table.
NONPERFORMING ASSET AND PAST DUE LOAN DATA
2001 Quarters | 2000 Quarters | |||||||||||||||||||||
Second | First | Fourth | Third | Second | ||||||||||||||||||
Nonaccrual loans
|
$ | 152,885 | 151,927 | 100,951 | 52,640 | 53,802 | ||||||||||||||||
Renegotiated loans
|
8,739 | 8,864 | 9,688 | 9,159 | 8,877 | |||||||||||||||||
Total nonperforming loans |
161,624 | 160,791 | 110,639 | 61,799 | 62,679 | |||||||||||||||||
Real estate and other assets owned
|
11,106 | 13,099 | 13,619 | 8,631 | 8,415 | |||||||||||||||||
Total nonperforming assets |
$ | 172,730 | 173,890 | 124,258 | 70,430 | 71,094 | ||||||||||||||||
Accruing loans past due 90 days or more*
|
$ | 139,062 | 141,355 | 141,843 | 30,430 | 28,584 | ||||||||||||||||
Government guaranteed nonperforming loans included in totals above
| ||||||||||||||||||||||
Nonperforming loans
|
$ | 11,181 | 9,757 | 8,625 | 7,265 | 5,977 | ||||||||||||||||
Accruing loans past due 90 days or more
|
111,788 | 112,224 | 102,505 | 11,911 | 13,632 | |||||||||||||||||
Nonperforming loans to total loans and leases, net of unearned
discount
|
.65 | % | .67 | % | .49 | % | .36 | % | .37 | % | ||||||||||||
Nonperforming assets to total net loans and leases and real
estate and other assets owned
|
.70 | % | .72 | % | .55 | % | .41 | % | .42 | % | ||||||||||||
Accruing loans past due 90 days or more to total loans and
leases, net of unearned discount
|
.56 | % | .58 | % | .62 | % | .18 | % | .17 | % | ||||||||||||
* Primarily residential mortgage loans and consumer loans.
-24-
The allowance for credit losses was $408.5 million, or 1.65% of total loans and leases at June 30, 2001, compared with $320.2 million or 1.89% a year earlier, $374.7 million or 1.65% at December 31, 2000 and $399.4 million or 1.65% at March 31, 2001. The ratio of the allowance for credit losses to nonperforming loans was 253% at the most recent quarter-end, compared with 511% a year earlier, 339% at December 31, 2000 and 248% at March 31, 2001. The level of the allowance reflects managements evaluation of the loan and lease portfolio as of each date. 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. Management cautiously evaluated the impact of overall economic conditions on the ability of borrowers to meet repayment obligations when assessing the adequacy of the Companys allowance for credit losses as of June 30, 2001. In addition to the impact of acquisitions, factors considered by management when performing such assessment included, but were not limited to: (i) the concentration of commercial real estate loans in the Companys 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; (ii) the amount of commercial and industrial loans to businesses in areas of New York State outside of the New York City metropolitan area and in Pennsylvania that have historically experienced economic growth rates lower than those experienced by the vast majority of other regions of the country; and (iii) significant growth in loans and leases to individual consumers. Based upon the results of such review, management believes that the allowance for credit losses at June 30, 2001 was adequate to absorb credit losses inherent in the Companys portfolio as of that date.
Other Income
Other income totaled $117.8 million in the second quarter of 2001, compared with $73.4 million in the year-earlier quarter and $111.7 million in the first quarter of 2001. Approximately 60% of the increase from the second quarter of 2000 to the second quarter of 2001 was attributable to revenues related to operations and/or market areas associated with the Keystone and Premier acquisitions.
Mortgage banking revenues totaled $25.0 million in the recent quarter, compared with $15.0 million in the year-earlier quarter and $25.7 million in the first quarter of 2001. The higher revenues as compared with the year-earlier quarter were due largely to the impact of lower interest rates on residential mortgage loan origination volume. In particular, mortgage banking revenues in the second quarter of 2001 reflected a generally favorable interest rate environment for borrowers, whereas higher interest rates initiated by the Federal Reserve in the second half of 1999 and first quarter of 2000 negatively impacted mortgage loan origination volume in the second quarter of 2000. Residential mortgage loans originated for sale to other investors totaled $1.3 billion during the second quarter of 2001, compared with $591 million in 2000s second quarter and $978 million in the initial 2001 quarter. Realized gains from sales of residential mortgage loans and loan servicing rights and unrealized gains from recording residential mortgage loans and related commitments to originate and commitments to sell such loans at fair market value aggregated $12.5 million in the recently completed quarter, compared with $12.7 million in the first quarter of 2001. Realized gains from the sale of residential mortgage loans and loan servicing rights were $5.7 million in the second quarter of 2000. As noted earlier, the Company adopted SFAS No. 133 as of January 1, 2001. SFAS No. 133 requires that changes in the fair value of hedged residential mortgage loans originated for sale and related commitments to sell and commitments to originate residential mortgage loans be recorded in the Companys results of operations. Such unrealized gains totaled approximately $7.2 million (pre-tax) at June 30, 2001. Similar unrealized gains were
-25-
approximately $5.8 million (pre-tax) at March 31, 2001 and, as a result, the net effect of recognizing unrealized gains on 2001s second quarter mortgage banking revenues was $1.4 million. Prior to the adoption of SFAS No. 133, residential mortgage loans originated for sale and related commitments to sell loans and to originate loans for sale were recorded in the consolidated balance sheet at the lower of aggregate cost or fair market value. Residential mortgage loan servicing fees were $10.7 million in the recently completed quarter, compared with $7.8 million in the year-earlier period and $10.2 million in 2001s first quarter. Residential mortgage loans serviced for others totaled $9.7 billion at each of June 30, 2001, March 31, 2001 and December 31, 2000, and $8.7 billion at June 30, 2000. Capitalized servicing assets were $103 million at June 30, 2001, compared with $81 million at June 30, 2000, $101 million at December 31, 2000 and $99 million at March 31, 2001. Residential mortgage loans held for sale totaled $871 million and $257 million at June 30, 2001 and 2000, respectively, $525 million at December 31, 2000, and $659 million at March 31, 2001.
Service charges on deposit accounts rose 73% to $36.3 million in the second quarter of 2001 from $21.0 million in the corresponding quarter of the previous year. Fees for services provided to customers in areas formerly served by Keystone contributed approximately 50% of the increase. Service charges on deposit accounts were $32.5 million in the initial quarter of 2001. About one-third of the increase in the second quarter of 2001 compared with the immediately preceding quarter resulted from the impact of the Premier acquisition. Trust income totaled $16.3 million in the recent quarter and $15.8 million in the first quarter of 2001, up from $9.8 million in last years second quarter, largely the result of the Keystone acquisition. Brokerage services income, which includes revenues from the sale of mutual funds and annuities and securities brokerage fees, totaled $9.5 million in the recent quarter, compared with $8.1 million in the second quarter of 2000 and $10.0 million in the first quarter of 2001. Trading account and foreign exchange activity resulted in gains of $1.6 million in the second quarter of 2001, compared with gains of $219 thousand in the corresponding quarter of 2000 and $802 thousand in 2001s first quarter. Other revenues from operations totaled $27.6 million in the recent quarter, compared with $19.4 million in the corresponding quarter of 2000 and $26.8 million in the initial quarter of 2001. Included in other revenues from operations is tax-exempt income from bank owned life insurance, which represents increases in the cash surrender value of life insurance policies and benefits received. Such income totaled $8.5 million in 2001s second quarter, compared with $6.0 million in the year-earlier quarter and $7.8 million in 2001s initial three months. The remaining increase in other revenues from operations from the second quarter of 2000 to the recent quarter was largely due to the impact of the Keystone acquisition.
Other income totaled $229.6 million in the first half of 2001, up 58% from $145.4 million in the year-earlier period. Approximately one-half of the increase was attributable to the impact of the acquisition of Keystone.
For the six-month period ended June 30, 2001, mortgage banking revenues totaled $50.7 million, up 72% from $29.5 million in the corresponding 2000 period. The increase in such revenues was the result of the lower interest rate environment and the implementation of SFAS No. 133, as previously mentioned. Realized gains from sales of residential mortgage loans and loan servicing rights and unrealized gains from recording residential mortgage loans and related commitments to originate and commitments to sell such loans at fair market value aggregated $25.2 million in 2001. Realized gains from the sale of residential mortgage loans and loan servicing rights were $12.4 million for the first six months of 2000. Reflecting the Keystone and Premier acquisitions, service charges on deposit accounts rose to $68.8 million during the first half of 2001, up 66% from $41.4 million in the comparable 2000 period. Largely the result of the Keystone acquisition, Trust income increased 63% to $32.1 million in the first half of 2001 from $19.7 million in the corresponding 2000 period. Brokerage services income increased 12% to $19.5 million in the first six months of 2001 from $17.5 million in the similar 2000 period. Trading account and foreign exchange activity resulted in gains of $2.4 million for the initial half of 2001, compared with gains of $513 thousand during the first six months of 2000.
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Other revenues from operations increased 48% to $54.4 million in the first six months of 2001 from $36.7 million in the comparable 2000 period. The higher levels of brokerage services income and other revenues from operations in the first six months of 2001 compared with the similar 2000 period were largely due to the impact of the Companys recent acquisitions.
Other Expense
Operating expenses, which exclude amortization of goodwill and core deposit intangible as well as non-recurring merger-related expenses, totaled $201.9 million in the second quarter of 2001, up from $141.6 million in the second quarter of 2000 and $197.0 million in the first quarter of 2001. On the same basis, through the first half of 2001, operating expenses totaled $398.8 million, an increase of 44% from $277.8 million in the comparable 2000 period. Expenses related to acquired operations significantly contributed to the higher expense levels in the 2001 periods compared with the 2000 periods. However, since the operating systems and support operations related to Keystone and Premier have been combined with those of the Company, the Companys operating expenses cannot be precisely divided between or attributed directly to the acquired operations or to the Company as it existed prior to each transaction. Components of other expense considered to be non-operating in nature and therefore excluded from the operating expense totals noted above were amortization of goodwill and core deposit intangible of $31.1 million in the second quarter of 2001, $14.1 million in the year-earlier quarter and $29.8 million in the first quarter of 2001; and merger-related expenses of $8.0 million in 2001s first quarter. There were no merger-related expenses in the second quarters of 2001 and 2000. Amortization of goodwill and core deposit intangible totaled $61.0 million in the first six months of 2001, up from $28.5 million in the corresponding 2000 period. Merger-related expenses were $8.0 million in the first half of 2001, while there were no similar expenses in the comparable period of 2000.
Salaries and employee benefits expense totaled $109.5 million in the recent quarter, 42% higher than the $76.9 million incurred in the corresponding 2000 quarter and 3% higher than $105.9 million in the first quarter of 2001. For the first six months of 2001, salaries and employee benefits expense increased 40% to $215.3 million from $153.6 million in the corresponding 2000 period. Excluding the non-operating expense items previously noted, nonpersonnel expense totaled $92.4 million in the second quarter of 2001, up from $64.7 million in the second quarter of 2000 and $91.4 million in the first quarter of 2001. On the same basis, such expenses were $183.8 million during the first six months of 2001, an increase of 48% from $124.2 million during the corresponding 2000 period. The most significant factor contributing to the higher expense levels in 2001 compared with 2000 were expenses associated with the acquired operations of Keystone and Premier.
The Companys cash efficiency ratio, or operating expense (excluding amortization of goodwill and core deposit intangible and merger-related expenses) divided by the sum of taxable-equivalent net interest income and other income (excluding gains from sales of bank investment securities) was 49.5% during the recent quarter, 51.6% during the second quarter of 2000 and 50.8% in 2001s initial quarter. The cash efficiency ratios for the six-month periods ended June 30, 2001 and 2000 were 50.1% and 51.1%, respectively.
Capital
Stockholders equity at June 30, 2001 was $3.0 billion or 9.57% of total assets, compared with $1.9 billion or 8.52% of total assets a year earlier and $2.7 billion or 9.33% at December 31, 2000. On a per share basis, stockholders equity was $31.00 at June 30, 2001, up from $24.18 and $28.93 at June 30 and December 31, 2000, respectively. Excluding goodwill and core deposit intangible, net of applicable tax effect, tangible equity per share
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was $17.68 at June 30, 2001, compared with $16.28 at June 30, 2000 and $16.74 at December 31, 2000. To complete the acquisitions of Premier on February 9, 2001 and Keystone on October 6, 2000, M&T issued 2,440,812 and 15,900,292 shares of common stock, respectively, and assumed employee stock options to purchase 224,734 and 1,259,493 shares of M&T common stock, respectively. As a result, at the respective acquisition date, stockholders equity increased by $176 million in connection with the Premier acquisition and by $664 million in connection with the Keystone acquisition.
Stockholders equity at June 30, 2001 reflected $10.4 million, or $.11 per share, for the net after-tax impact of unrealized gains on investment securities classified as available for sale, compared with unrealized losses of $47.7 million or $.62 per share at June 30, 2000 and unrealized losses of $432 thousand or $.01 per share at December 31, 2000. Such unrealized gains or losses are generally due to changes in interest rates and represent the difference, net of applicable income tax effect, between the estimated fair value and amortized cost of investment securities classified as available for sale.
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. Core capital includes the $318 million carrying value of trust preferred securities as described in note 6 of Notes to Financial Statements. As of June 30, 2001, total capital also included $594 million of subordinated notes issued by M&T Bank in prior years.
The Companys rate of regulatory capital generation, or cash net income (reduced by the impact of nonrecurring merger-related expenses) less dividends paid expressed as an annualized percentage of regulatory core capital at the beginning of the period, was 20.09% during the second quarter of 2001, compared with 19.21% in the year-earlier quarter and 18.58% in the first 2001 quarter.
The regulatory capital ratios of the Company and its banking subsidiaries, M&T Bank and M&T Bank, N.A., as of June 30, 2001 are presented in the accompanying table.
REGULATORY CAPITAL RATIOS
M&T | M&T | M&T | ||||||||||
(Consolidated) | Bank | Bank, N.A. | ||||||||||
Core capital
|
7.39 | % | 7.35 | % | 11.57 | % | ||||||
Total capital
|
10.90 | % | 10.91 | % | 12.40 | % | ||||||
Leverage
|
6.56 | % | 6.57 | % | 6.91 | % |
During the second quarter of 2001, M&T completed the stock repurchase program it had announced in November 1999 by repurchasing 271,790 shares at an average cost of $74.60 per share. In total, M&T repurchased 1,904,650 shares pursuant to such program at an average cost of $47.29 per share. On June 25, 2001, M&T announced that it had been authorized by its Board of Directors to purchase up to 3,500,000 additional common shares to be used in connection with the possible future exercise of outstanding stock options. Through June 30, 2001, M&T had repurchased 791,267 shares of common stock pursuant to this latest program at an average cost of $78.39 per share.
Segment Information
The Commercial Banking segments earnings were $29.0 million in the second quarter of 2001, approximately equal to the first quarter of 2001, but up from $23.5 million in the similar 2000 quarter. The major factor for the increase from the year-earlier period was a $14.0 million increase in net
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interest income, due to a 35% increase in average loans outstanding, offset in part by a $5.2 million increase in the provision for credit losses. Approximately two-thirds of the increase in loans outstanding was attributable to the Keystone acquisition. For the six months ended June 30, 2001 and 2000, earnings for this segment were $58.1 million and $45.0 million, respectively. The higher net income in 2001 resulted largely from an increase of $30.4 million in net interest income, due to an increase of 36% in average loans outstanding, of which approximately two-thirds was attributable to the Keystone acquisition, offset, in part, by an $8.7 million increase in the provision for credit losses.
In the second quarter of 2001, the Commercial Real Estate segment contributed net income of $20.7 million, compared with $17.9 million in the year-earlier period and $19.7 million in the initial 2001 quarter. An increase of $6.7 million in net interest income, the result of a 23% increase in average loan balances, was the major factor in the recent quarters improved earnings when compared with the second quarter of 2000. Over one-third of the increase in the segments net interest income was attributable to the Keystone acquisition. The increase in net income from the first quarter was largely due to higher net interest income, the result of higher loan balances outstanding. Net income in the first six months of 2001 and 2000 was $40.4 million and $35.1 million, respectively. Higher net interest income of $11.6 million, the result of a 22% increase in average loan balances outstanding, was the major factor for the increase in net income for this segment. Approximately 40% of the increase in net interest income was attributable to the Keystone acquisition.
Net income contributed by the Discretionary Portfolio segment in the second quarter of 2001 totaled $13.7 million, compared with $7.7 million in the second quarter of 2000 and $11.1 million in the initial quarter of 2001. The increase in net income from both the second quarter of 2000 and the first quarter of 2001 was due to higher gains from sales of bank investment securities, tax-exempt income earned from bank-owned life insurance, and net interest income from loans, the result of higher net interest margin and balances outstanding. For the first six months of 2001, net income for the Discretionary Portfolio segment was $24.8 million, compared with $16.0 million in the corresponding 2000 period. The increase from 2000 was due, in part, to an increase in tax-exempt income earned from bank-owned life insurance of $4.6 million, a $1.9 million increase in trading account and foreign exchange gains and a $1.6 million increase in gains from sales of bank investment securities.
The Residential Mortgage Banking segment had net income of $10.7 million in the second quarter of 2001, compared with $1.2 million in the year-earlier period and $9.0 million in the first quarter of 2001. Net income for this segment for the first six months of 2001 was $19.7 million, compared with $3.1 million in the similar period of 2000. The higher levels of earnings in 2001 when compared with the corresponding periods of 2000 were largely due to the effects of higher residential mortgage loan origination volume and loan servicing fees. The previously described adoption of SFAS No. 133 contributed $4.4 million to this segments net income during the first half of 2001. The increase in net income from the first quarter of 2001 was due to higher net interest income, primarily the result of higher loan margins and balances outstanding.
Retail Banking earned $52.6 million in 2001s second quarter, little changed from the first quarter of 2001, but up 39% from $37.8 million in 2000s comparable period. Higher net interest income of $55.1 million, the result of increases in average loan and deposit balances, and higher deposit service charges of $12.2 million, offset in part by higher operating expenses of $38.2 million, were the leading factors contributing to the increase from the second quarter of 2000. The higher deposit and loan balances, deposit service charges, and operating expenses were largely the result of the Keystone and Premier acquisitions. For the first six months of 2001, this segments net income increased 48% to $105.3 million from $70.9 million in the first half of 2000. Higher net interest income and deposit service charges of $112.3 million and $22.1 million, respectively, offset, in part, by higher operating expenses of $72.8 million, all largely the result of the
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Keystone and Premier acquisitions, were the leading factors contributing to the significant improvement from the first half of 2000.
Recently Issued Accounting Standards Not Yet Adopted
In June 2001, the Financial Accounting Standards Board (FASB) approved for issuance Statement of Financial Accounting Standards (SFAS) Nos. 141 and 142. SFAS No. 141, Business Combinations, revised accounting standards and disclosure requirements for business combinations. All business combinations are now required to be accounted for using the purchase method of accounting; use of the pooling-of-interests (pooling) method of accounting is prohibited. SFAS No. 141 requires that goodwill be initially recognized as an asset in the financial statements and measured as the excess of the cost of an acquired entity over the net difference between amounts assigned to assets acquired and liabilities assumed. The statement also requires that an acquired intangible asset be recognized apart from goodwill if that asset arises from contractual or other legal rights. SFAS No. 141 stipulates that the pooling method of accounting may not be used for business combinations initiated after June 30, 2001. However, prior business combinations accounted for by the pooling method will be grandfathered. The provisions of SFAS No. 141 related to the application of the purchase method of accounting (including the separate recognition of identifiable intangible assets) is effective for any business combination completed after June 30, 2001.
SFAS No. 142 Goodwill and Other Intangible Assets, revises accounting standards for all purchased intangible assets but not the accounting for internally developed intangible assets. SFAS No. 142 requires that goodwill not be amortized, but rather that it be tested for impairment at the reporting unit level, which is either at the same level or one level below an operating segment. All acquired goodwill should be assigned to reporting units, then tested for impairment no less frequently than annually. Acquired intangible assets (other than goodwill) should be amortized over their useful economic lives and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. However, an acquired intangible asset (other than goodwill) with an indefinite useful economic life should not be amortized until its life is determined to be finite. SFAS No. 142 also stipulates various disclosures and financial statement presentation requirements relating to goodwill and intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is not permitted for companies with fiscal years beginning prior to March 15, 2001, and the statement must be adopted as of the beginning of a fiscal year. Companies should perform the first impairment test on all goodwill within six months of initially applying the provisions of the statement. The useful economic life of previously recognized intangible assets should be reassessed upon adoption of the statement, remaining amortization periods should be adjusted accordingly, and intangible assets deemed to have an indefinite life should no longer be amortized. Once SFAS No. 142 is adopted by the Company, it is expected that the Companys results of operations will be significantly impacted due to changes in the accounting for amortization and impairment of goodwill. Information about the Companys amortization of goodwill is presented herein under the heading Cash Operating Results.
Forward-Looking Statements
Managements 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 Companys business, managements 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
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obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Future Factors include changes in interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity; credit losses; sources of liquidity; legislation affecting the financial services industry as a whole, and the Company individually; regulatory supervision and oversight, including required capital levels; increasing price and product/service competition by competitors, including new entrants; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; the mix of products/services; containing costs and expenses; governmental and public policy changes, including environmental regulations; protection and validity of intellectual property rights; reliance on large customers; technological, implementation and cost/financial risks in large, multi-year contracts; the outcome of pending and future litigation and governmental proceedings; continued availability of financing; financial resources in the amounts, at the times and on the terms required to support the Companys future businesses; and material differences in the actual financial results of merger and acquisition activities compared to the Companys initial expectations, including the full realization of anticipated cost savings and revenue enhancements. 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.
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AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES
2001 Second quarter | 2001 First quarter | 2000 Fourth quarter | ||||||||||||||||||||||||||||||||||||
Average balance in millions; | Average | Average | Average | Average | Average | Average | ||||||||||||||||||||||||||||||||
interest in thousands | balance | Interest | rate | balance | Interest | rate | balance | Interest | rate | |||||||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||||||||||||
Earning assets
Loans and leases, net of unearned |
||||||||||||||||||||||||||||||||||||||
discount*
|
||||||||||||||||||||||||||||||||||||||
Commercial, financial, etc.
|
$ | 5,383 | $ | 99,701 | 7.43 | % | 5,178 | 107,830 | 8.45 | % | 4,926 | 111,700 | 9.02 | % | ||||||||||||||||||||||||
Real estate commercial
|
9,232 | 186,385 | 8.08 | 8,935 | 188,067 | 8.42 | 8,572 | 186,371 | 8.70 | |||||||||||||||||||||||||||||
Real estate consumer
|
5,263 | 103,686 | 7.88 | 4,991 | 99,295 | 7.96 | 4,604 | 93,660 | 8.14 | |||||||||||||||||||||||||||||
Consumer
|
4,582 | 95,509 | 8.36 | 4,288 | 96,603 | 9.14 | 4,039 | 93,905 | 9.25 | |||||||||||||||||||||||||||||
Total loans and leases, net
|
24,460 | 485,281 | 7.96 | 23,392 | 491,795 | 8.53 | 22,141 | 485,636 | 8.73 | |||||||||||||||||||||||||||||
Money-market assets
Interest-bearing deposits at banks |
4 | 29 | 3.34 | 3 | 37 | 4.59 | 18 | 264 | 5.75 | |||||||||||||||||||||||||||||
Federal funds sold and agreements to resell securities
|
14 | 164 | 4.56 | 59 | 787 | 5.48 | 13 | 220 | 6.76 | |||||||||||||||||||||||||||||
Trading account
|
13 | 95 | 2.86 | 13 | 116 | 3.54 | 15 | 125 | 3.34 | |||||||||||||||||||||||||||||
Total money-market assets
|
31 | 288 | 3.69 | 75 | 940 | 5.11 | 46 | 609 | 5.25 | |||||||||||||||||||||||||||||
Investment securities**
|
||||||||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies
|
1,781 | 29,285 | 6.60 | 1,955 | 33,697 | 6.99 | 2,272 | 38,540 | 6.75 | |||||||||||||||||||||||||||||
Obligations of states and political subdivisions
|
380 | 7,161 | 7.54 | 332 | 6,418 | 7.75 | 240 | 4,819 | 8.02 | |||||||||||||||||||||||||||||
Other
|
1,341 | 22,409 | 6.70 | 1,183 | 20,115 | 6.89 | 1,047 | 18,741 | 7.12 | |||||||||||||||||||||||||||||
Total investment securities
|
3,502 | 58,855 | 6.74 | 3,470 | 60,230 | 7.04 | 3,559 | 62,100 | 6.94 | |||||||||||||||||||||||||||||
Total earning assets
|
27,993 | 544,424 | 7.80 | 26,937 | 552,965 | 8.33 | 25,746 | 548,345 | 8.47 | |||||||||||||||||||||||||||||
Allowance for credit losses
|
(406 | ) | (391 | ) | (374 | ) | ||||||||||||||||||||||||||||||||
Cash and due from banks
|
683 | 685 | 694 | |||||||||||||||||||||||||||||||||||
Other assets
|
2,747 | 2,647 | 2,421 | |||||||||||||||||||||||||||||||||||
Total assets
|
$ | 31,017 | 29,878 | 28,487 | ||||||||||||||||||||||||||||||||||
Liabilities and stockholders equity
|
||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities
|
||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits
|
||||||||||||||||||||||||||||||||||||||
NOW accounts
|
$ | 708 | 2,206 | 1.25 | 717 | 3,185 | 1.80 | 695 | 3,692 | 2.11 | ||||||||||||||||||||||||||||
Savings deposits
|
7,280 | 34,529 | 1.90 | 6,765 | 38,152 | 2.29 | 6,200 | 39,357 | 2.53 | |||||||||||||||||||||||||||||
Time deposits
|
9,029 | 120,721 | 5.36 | 9,803 | 140,188 | 5.80 | 9,568 | 144,030 | 5.99 | |||||||||||||||||||||||||||||
Deposits at foreign office
|
304 | 3,027 | 3.99 | 263 | 3,405 | 5.25 | 265 | 4,040 | 6.06 | |||||||||||||||||||||||||||||
Total interest-bearing deposits
|
17,321 | 160,483 | 3.72 | 17,548 | 184,930 | 4.27 | 16,728 | 191,119 | 4.55 | |||||||||||||||||||||||||||||
Short-term borrowings
|
3,543 | 38,526 | 4.36 | 2,452 | 34,269 | 5.67 | 2,486 | 41,260 | 6.60 | |||||||||||||||||||||||||||||
Long-term borrowings
|
3,485 | 53,468 | 6.15 | 3,443 | 57,398 | 6.76 | 3,025 | 54,159 | 7.12 | |||||||||||||||||||||||||||||
Total interest-bearing liabilities
|
24,349 | 252,477 | 4.16 | 23,443 | 276,597 | 4.78 | 22,239 | 286,538 | 5.12 | |||||||||||||||||||||||||||||
Noninterest-bearing deposits
|
3,269 | 3,186 | 3,172 | |||||||||||||||||||||||||||||||||||
Other liabilities
|
384 | 383 | 480 | |||||||||||||||||||||||||||||||||||
Total liabilities
|
28,002 | 27,012 | 25,891 | |||||||||||||||||||||||||||||||||||
Stockholders equity
|
3,015 | 2,866 | 2,596 | |||||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity
|
$ | 31,017 | 29,878 | 28,487 | ||||||||||||||||||||||||||||||||||
Net interest spread |
3.64 | 3.55 | 3.35 | |||||||||||||||||||||||||||||||||||
Contribution of interest-free funds
|
.54 | .61 | .70 | |||||||||||||||||||||||||||||||||||
Net interest income/margin on earning assets |
$ | 291,947 | 4.18 | % | 276,368 | 4.16 | % | 261,807 | 4.05 | % | ||||||||||||||||||||||||||||
* | Includes nonaccrual loans. |
** | Includes available for sale securities at amortized cost. | (continued) |
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AVERAGE BALANCE SHEETS AND ANNUALIZED TAXABLE-EQUIVALENT RATES (continued)
2000 Third quarter | 2000 Second quarter | |||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||
Average balance in millions; interest in thousands | balance | Interest | rate | balance | Interest | rate | ||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||
Earning assets Loans and leases, net of unearned discount* |
||||||||||||||||||||||||||
Commercial, financial, etc.
|
$ | 3,978 | $ | 90,407 | 9.04 | % | 3,863 | 85,127 | 8.86 | % | ||||||||||||||||
Real estate commercial
|
6,867 | 147,932 | 8.62 | 6,710 | 142,606 | 8.50 | ||||||||||||||||||||
Real estate consumer
|
3,061 | 61,053 | 7.98 | 3,464 | 66,340 | 7.66 | ||||||||||||||||||||
Consumer
|
3,257 | 75,087 | 9.17 | 3,144 | 69,099 | 8.84 | ||||||||||||||||||||
Total loans and leases, net
|
17,163 | 374,479 | 8.68 | 17,181 | 363,172 | 8.50 | ||||||||||||||||||||
Money-market assets
|
||||||||||||||||||||||||||
Interest-bearing deposits at banks
|
1 | 20 | 4.64 | 2 | 14 | 3.82 | ||||||||||||||||||||
Federal funds sold and agreements to resell securities
|
15 | 250 | 6.74 | 170 | 2,833 | 6.71 | ||||||||||||||||||||
Trading account
|
15 | 155 | 4.05 | 41 | 662 | 6.38 | ||||||||||||||||||||
Total money-market assets
|
31 | 425 | 5.32 | 213 | 3,509 | 6.63 | ||||||||||||||||||||
Investment securities**
|
||||||||||||||||||||||||||
U.S. Treasury and federal agencies
|
1,865 | 30,936 | 6.60 | 1,488 | 24,063 | 6.50 | ||||||||||||||||||||
Obligations of states and political subdivisions
|
80 | 1,360 | 6.82 | 86 | 1,393 | 6.51 | ||||||||||||||||||||
Other
|
959 | 17,012 | 7.05 | 1,008 | 17,573 | 7.01 | ||||||||||||||||||||
Total investment securities
|
2,904 | 49,308 | 6.76 | 2,582 | 43,029 | 6.70 | ||||||||||||||||||||
Total earning assets
|
20,098 | 424,212 | 8.40 | 19,976 | 409,710 | 8.25 | ||||||||||||||||||||
Allowance for credit losses
|
(322 | ) | (320 | ) | ||||||||||||||||||||||
Cash and due from banks
|
494 | 474 | ||||||||||||||||||||||||
Other assets
|
1,553 | 1,721 | ||||||||||||||||||||||||
Total assets
|
$ | 21,823 | 21,851 | |||||||||||||||||||||||
Liabilities and stockholders equity
|
||||||||||||||||||||||||||
Interest-bearing liabilities
|
||||||||||||||||||||||||||
Interest-bearing deposits
|
||||||||||||||||||||||||||
NOW accounts
|
$ | 402 | 1,235 | 1.22 | 413 | 1,252 | 1.22 | |||||||||||||||||||
Savings deposits
|
5,194 | 30,375 | 2.33 | 5,299 | 30,770 | 2.34 | ||||||||||||||||||||
Time deposits
|
6,893 | 103,107 | 5.95 | 7,067 | 100,281 | 5.71 | ||||||||||||||||||||
Deposits at foreign office
|
259 | 4,075 | 6.28 | 252 | 3,754 | 5.98 | ||||||||||||||||||||
Total interest-bearing deposits
|
12,748 | 138,792 | 4.33 | 13,031 | 136,057 | 4.20 | ||||||||||||||||||||
Short-term borrowings
|
2,952 | 49,221 | 6.63 | 2,669 | 42,226 | 6.36 | ||||||||||||||||||||
Long-term borrowings
|
1,763 | 31,609 | 7.13 | 1,775 | 30,423 | 6.89 | ||||||||||||||||||||
Total interest-bearing liabilities
|
17,463 | 219,622 | 5.00 | 17,475 | 208,706 | 4.80 | ||||||||||||||||||||
Noninterest-bearing deposits
|
2,232 | 2,175 | ||||||||||||||||||||||||
Other liabilities
|
235 | 375 | ||||||||||||||||||||||||
Total liabilities
|
19,930 | 20,025 | ||||||||||||||||||||||||
Stockholders equity
|
1,893 | 1,826 | ||||||||||||||||||||||||
Total liabilities and stockholders equity
|
$ | 21,823 | 21,851 | |||||||||||||||||||||||
Net interest spread
|
3.40 | 3.45 | ||||||||||||||||||||||||
Contribution of interest-free funds
|
.65 | .60 | ||||||||||||||||||||||||
Net interest income/margin on earning assets
|
$ | 204,590 | 4.05 | % | 201,004 | 4.05 | % | |||||||||||||||||||
* | Includes nonaccrual loans. |
** | Includes available for sale securities at amortized cost. |
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QUARTERLY TRENDS
2001 Quarters | 2000 Quarters | |||||||||||||||||||||||||
Second | First | Fourth | Third | Second | First | |||||||||||||||||||||
Earnings and dividends | ||||||||||||||||||||||||||
Amounts in thousands, except per share | ||||||||||||||||||||||||||
Interest income (taxable-equivalent basis)
|
$ | 544,424 | 552,965 | 548,345 | 424,212 | 409,710 | 401,064 | |||||||||||||||||||
Interest expense
|
252,477 | 276,597 | 286,538 | 219,622 | 208,706 | 203,731 | ||||||||||||||||||||
Net interest income
|
291,947 | 276,368 | 261,807 | 204,590 | 201,004 | 197,333 | ||||||||||||||||||||
Less: provision for credit losses
|
24,000 | 18,500 | 14,000 | 9,000 | 6,000 | 9,000 | ||||||||||||||||||||
Other income
|
117,836 | 111,727 | 102,778 | 76,514 | 73,382 | 71,998 | ||||||||||||||||||||
Less: other expense
|
233,012 | 234,801 | 234,187 | 153,959 | 155,710 | 150,597 | ||||||||||||||||||||
Income before income taxes
|
152,771 | 134,794 | 116,398 | 118,145 | 112,676 | 109,734 | ||||||||||||||||||||
Applicable income taxes
|
53,164 | 46,741 | 40,672 | 41,397 | 38,888 | 39,293 | ||||||||||||||||||||
Taxable-equivalent adjustment
|
4,799 | 4,387 | 3,759 | 2,332 | 2,250 | 2,206 | ||||||||||||||||||||
Net income
|
$ | 94,808 | 83,666 | 71,967 | 74,416 | 71,538 | 68,235 | |||||||||||||||||||
Per common share data
|
||||||||||||||||||||||||||
Basic earnings
|
$ | .98 | .88 | .78 | .97 | .93 | .89 | |||||||||||||||||||
Diluted earnings
|
.94 | .85 | .76 | .94 | .91 | .86 | ||||||||||||||||||||
Cash dividends
|
$ | .25 | .25 | .25 | .125 | .125 | .125 | |||||||||||||||||||
Average common shares outstanding
|
||||||||||||||||||||||||||
Basic
|
97,125 | 95,427 | 91,987 | 76,748 | 76,631 | 77,112 | ||||||||||||||||||||
Diluted
|
100,722 | 98,605 | 95,088 | 79,417 | 78,876 | 79,222 | ||||||||||||||||||||
Performance ratios, annualized
|
||||||||||||||||||||||||||
Return on
|
||||||||||||||||||||||||||
Average assets
|
1.23 | % | 1.14 | % | 1.01 | % | 1.36 | % | 1.32 | % | 1.22 | % | ||||||||||||||
Average common stockholders' equity
|
12.61 | % | 11.84 | % | 11.03 | % | 15.64 | % | 15.75 | % | 15.14 | % | ||||||||||||||
Net interest margin on average earning assets
|
||||||||||||||||||||||||||
(taxable-equivalent basis)
|
4.18 | % | 4.16 | % | 4.05 | % | 4.05 | % | 4.05 | % | 3.94 | % | ||||||||||||||
Nonperforming assets to total assets,
|
||||||||||||||||||||||||||
at end of quarter
|
.55 | % | .56 | % | .43 | % | .32 | % | .33 | % | .33 | % | ||||||||||||||
Efficiency ratio (a)
|
57.08 | % | 58.45 | % | 57.61 | % | 53.49 | % | 56.75 | % | 55.92 | % | ||||||||||||||
Cash (tangible) operating results (b)
|
||||||||||||||||||||||||||
Net income (in thousands)
|
$ | 119,899 | 112,391 | 108,100 | 87,758 | 82,937 | 79,844 | |||||||||||||||||||
Diluted net income per common share
|
1.19 | 1.14 | 1.14 | 1.11 | 1.05 | 1.00 | ||||||||||||||||||||
Annualized return on
|
||||||||||||||||||||||||||
Average tangible assets
|
1.62 | % | 1.59 | % | 1.57 | % | 1.64 | % | 1.57 | % | 1.47 | % | ||||||||||||||
Average tangible common stockholders' equity
|
27.99 | % | 27.93 | % | 28.93 | % | 26.98 | % | 27.46 | % | 26.95 | % | ||||||||||||||
Efficiency ratio (a)
|
49.45 | % | 50.77 | % | 50.20 | % | 48.57 | % | 51.61 | % | 50.57 | % | ||||||||||||||
Balance sheet data
|
||||||||||||||||||||||||||
In millions, except per share
|
||||||||||||||||||||||||||
Average balances
|
||||||||||||||||||||||||||
Total assets
|
$ | 31,017 | 29,878 | 28,487 | 21,823 | 21,851 | 22,438 | |||||||||||||||||||
Earning assets
|
27,993 | 26,937 | 25,746 | 20,098 | 19,976 | 20,147 | ||||||||||||||||||||
Investment securities
|
3,502 | 3,470 | 3,559 | 2,904 | 2,582 | 1,977 | ||||||||||||||||||||
Loans and leases, net of unearned discount
|
24,460 | 23,392 | 22,141 | 17,163 | 17,181 | 17,501 | ||||||||||||||||||||
Deposits
|
20,590 | 20,734 | 19,900 | 14,980 | 15,206 | 15,257 | ||||||||||||||||||||
Stockholders' equity
|
3,015 | 2,866 | 2,596 | 1,893 | 1,826 | 1,813 | ||||||||||||||||||||
At end of quarter
|
||||||||||||||||||||||||||
Total assets
|
$ | 31,202 | 30,925 | 28,949 | 22,009 | 21,746 | 22,762 | |||||||||||||||||||
Earning assets
|
28,200 | 27,895 | 26,089 | 20,143 | 19,893 | 20,389 | ||||||||||||||||||||
Investment securities
|
3,377 | 3,705 | 3,310 | 2,799 | 2,865 | 2,079 | ||||||||||||||||||||
Loans and leases, net of unearned discount
|
24,774 | 24,168 | 22,743 | 17,324 | 16,949 | 17,703 | ||||||||||||||||||||
Deposits
|
20,041 | 20,978 | 20,233 | 14,682 | 15,223 | 15,151 | ||||||||||||||||||||
Stockholders' equity
|
2,987 | 2,992 | 2,700 | 1,940 | 1,852 | 1,832 | ||||||||||||||||||||
Equity per common share
|
31.00 | 30.84 | 28.93 | 25.22 | 24.18 | 23.83 | ||||||||||||||||||||
Tangible equity per common share
|
17.68 | 17.33 | 16.74 | 17.52 | 16.28 | 15.79 | ||||||||||||||||||||
Market price per common share
|
||||||||||||||||||||||||||
High
|
$ | 79.00 | 69.99 | 68.42 | 52.29 | 47.50 | 45.81 | |||||||||||||||||||
Low
|
66.55 | 59.80 | 46.67 | 44.50 | 39.95 | 35.70 | ||||||||||||||||||||
Closing
|
75.50 | 69.90 | 68.00 | 51.00 | 45.00 | 44.65 | ||||||||||||||||||||
(a) | Excludes impact of nonrecurring merger-related expenses and net securities transactions. |
(b) | Excludes amortization and balances related to goodwill and core deposit intangible and nonrecurring merger-related expenses which, except in the calculation of the efficiency ratio, are net of applicable income tax effects. |
-34-
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, Managements Discussion and Analysis of Financial Condition and Results of Operations.
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&Ts 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&Ts 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.
Information concerning the matters submitted to a vote of stockholders at M&T Bank Corporations Annual Meeting of Stockholders held on April 17, 2001 was previously reported in response to Item 4 of Part II of M&Ts Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
Item 5. Other Information.
(None)
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is filed as a part of this report.
Exhibit | ||||
No. | ||||
10.1 | Keystone Financial, Inc. 1992 Director Fee Plan. Incorporated by reference to Exhibit 10.11 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1999 (File No. 000-11460). |
(b) Reports on Form 8-K. The following Current Report on Form 8-K was filed with the Securities and Exchange Commission during the quarterly period ended June 30, 2001:
On June 25, 2001, a Current Report on Form 8-K dated June 25, 2001 was filed to announce that the Registrants Board of Directors had authorized the Registrant to repurchase up to 3,500,000 shares of its common stock, and disclosed that a previously reported repurchase program authorized in November 1999 had been completed on June 22, 2001, with the repurchase of an aggregate of 1,904,650 shares of common stock.
-35-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
M&T BANK CORPORATION | ||||
Date: August 13, 2001 | By: | /s/ Michael P. Pinto | ||
|
||||
Michael P. Pinto | ||||
Executive Vice President | ||||
and Chief Financial Officer |
-36-
EXHIBIT INDEX
Exhibit | ||||
No. | ||||
10.1 | Keystone Financial, Inc. 1992 Director Fee Plan. Incorporated by reference to Exhibit 10.11 to the Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1999 (File No. 000-11460). |
-37-