Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9861
FIRST EMPIRE STATE CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385
(State of incorporation) (I.R.S. Employer Identification No.)
One M&T Plaza, Buffalo, New York 14240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716)842-5445
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par value American Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
8.234% Capital Securities of First Empire Capital Trust I
(and the Guarantee of First Empire State Corporation with respect thereto)
(Title of class)
8.234% Junior Subordinated Debentures of
First Empire State Corporation
(Title of class)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the Common Stock, $5 par value, held by non-affiliates
of the registrant, computed by reference to the closing price as of the close of
business on March 3, 1997: $1,539,636,841.
Number of shares of the Common Stock, $5 par value, outstanding as of the close
of business on March 3, 1997: 6,690,722 shares.
Documents Incorporated By Reference:
(1) Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
of First Empire State Corporation in Part III.
FIRST EMPIRE STATE CORPORATION
FORM 10-K
For the year ended December 31, 1996
CROSS-REFERENCE SHEET
Form
10-K
PART I Page
Item 1. Business 5
Statistical disclosure pursuant to Guide 3
I. Distribution of assets, liabilities, and stockholders'
equity; interest rates and interest differential
A. Average balance sheets 43-44
B. Interest income/expense and resulting yield or rate
on average interest-earning assets (including non-
accrual loans) and interest-bearing liabilities 43-44
C. Rate/volume variances 19
II. Investment portfolio
A. Year-end balances 16
B. Maturity schedule and weighted average yield 51
C. Aggregate carrying value of securities that exceed ten
percent of stockholders' equity 65
III. Loan portfolio
A. Year-end balances 16,67
B. Maturities and sensitivities to changes in interest rates 49
C. Risk elements
Nonaccrual, past-due and renegotiated loans 48
Actual and pro forma interest on certain loans 67
Nonaccrual policy 60
Loan concentrations 29
IV. Summary of loan loss experience
A. Charge-offs and recoveries 46
Factors influencing management's judgment concerning
the adequacy of the allowance and provision 60
B. Allocation of allowance for loan losses 47
V. Deposits
A. Average balances and rates 43-44
B. Maturity schedule of domestic time deposits with
balances of $100,000 or more 50
VI. Return on equity and assets, etc. 18,24,33
-2-
FIRST EMPIRE STATE CORPORATION
FORM 10-K
For the year ended December 31, 1996
CROSS-REFERENCE SHEET--continued Form
10-K
Page
PART I, continued
Item 1. Business, continued
VII. Short-term borrowings 70-71
Item 2. Properties 20,68-69
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Executive Officers of the Registrant 21-22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
A. Principal market 23
Market prices 37-38
B. Approximate number of holders at year-end 16
C. Frequency and amount of dividends declared 38
D. Restrictions on dividends 10,85
Item 6. Selected Financial Data
A. Selected consolidated year-end balances 16
B. Consolidated earnings, etc. 17-18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23-52
Item 8. Financial Statements and Supplementary Data
A. Report of Independent Accountants 54
B. Consolidated Balance Sheet -
December 31, 1996 and 1995 55
-3-
FIRST EMPIRE STATE CORPORATION
FORM 10-K
For the year ended December 31, 1996
CROSS-REFERENCE SHEET--continued Form
10-K
Page
PART II, continued
Item 8, continued
C. Consolidated Statement of Income -
Years ended December 31, 1996, 1995 and 1994 56
D. Consolidated Statement of Cash Flows -
Years ended December 31, 1996, 1995 and 1994 57
E. Consolidated Statement of Changes in
Stockholders' Equity - Years ended December 31,
1996, 1995 and 1994 58
F. Notes to Financial Statements 59-88
G. Quarterly Trends 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 89
PART III
Item 10. Directors and Executive Officers of the
Registrant 89
Item 11. Executive Compensation 89
Item 12. Security Ownership of Certain Beneficial
Owners and Management 89
Item 13. Certain Relationships and Related Transactions 89
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 90
Signatures 91-93
Exhibit Index 94-95
-4-
PART I
Item 1. Business.
---------
First Empire State Corporation ("Registrant" or "First Empire") is a New York
business corporation which is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended ("BHCA") and under Article III-A
of the New York Banking Law ("Banking Law"). The principal executive offices
of the Registrant are located at One M&T Plaza, Buffalo, New York 14240. The
Registrant was incorporated in November 1969. The Registrant and its direct
and indirect subsidiaries are collectively referred to herein as the
"Company". As of December 31, 1996, the Company had consolidated total
assets of $12.9 billion, deposits of $10.5 billion and stockholders' equity
of $906 million. The Company had 4,407 full-time and 773 part-time employees
as of December 31, 1996.
At December 31, 1996, the Registrant had three wholly owned bank
subsidiaries: Manufacturers and Traders Trust Company ("M&T Bank"), The East
New York Savings Bank ("East New York") and M&T Bank, National Association
("M&T Bank, N.A."). Collectively, the banks offer a wide range of commercial
banking, trust and investment services to their customers. The Registrant
currently is in the process of merging M&T Bank and East New York, and it is
anticipated that the merger will be completed during the first half of 1997.
At December 31, M&T Bank represented 86% of consolidated assets of the
Company and, after giving effect to the merger of M&T Bank and East New York,
would represent 97% of the consolidated total assets of the Company.
The Company from time to time considers acquiring banks, thrift institutions,
branch offices or other businesses within markets currently served or in other
nearby markets. The Company has pursued acquisition opportunities in the past,
currently continues to actively review different opportunities, including the
possibility of major acquisitions, and intends to continue this practice.
Subsidiaries
------------
M&T Bank is a banking corporation which is incorporated under the laws of the
State of New York. M&T Bank is a member of the Federal Reserve System, the
FDIC and the Federal Home Loan Bank System. First Empire acquired all of the
issued and outstanding shares of the capital stock of M&T Bank in December
1969. The stock of M&T Bank represents a major asset of First Empire. M&T
Bank operates under a charter granted by the State of New York in 1892, and
the continuity of its banking business is traced to the organization of the
Manufacturers and Traders Bank in 1856. The principal executive offices of
M&T Bank are located at One M&T Plaza, Buffalo, New York 14240. As of
December 31, 1996, M&T Bank had 161 banking offices located throughout New
York State plus a branch in Nassau, The Bahamas. As of December 31, 1996,
M&T Bank had consolidated total assets of $11.1 billion, deposits of $8.3
billion and stockholder's equity of $687 million. The deposit liabilities of
M&T Bank are insured by the FDIC through either its Bank Insurance Fund
("BIF") or its Savings Association Insurance Fund ("SAIF"). Of M&T Bank's
$8.2 billion in assessable deposits at December 31, 1996, 86% were assessed
as BIF-insured and the remainder as SAIF-insured deposits. As a commercial
bank, M&T Bank offers a broad range of financial services to a diverse base
of consumers, businesses, professional clients, governmental entities and
financial institutions located in its markets. Lending is largely focused on
consumers residing in New York State and on New York-based small and
medium-size businesses, however certain of M&T Bank's subsidiaries conduct
lending activities in markets outside of New York State. M&T Bank also
provides other financial services through its operating subsidiaries.
East New York was acquired by First Empire in December 1987. East New York,
originally organized in 1868, is a New York-chartered capital stock savings
bank and a member of the FDIC and of the Federal Home Loan Bank System. The
5
deposit liabilities of East New York are insured by the FDIC through the BIF.
The stock of East New York represents a major asset of First Empire. The
principal executive offices of East New York are located at 2644 Atlantic
Avenue, Brooklyn, New York 11207. Its banking business is conducted from 14
banking offices located in New York City and Nassau County, Long Island. As
of December 31, 1996, East New York had consolidated total assets of $2.0
billion, deposits of $1.8 billion and stockholder's equity of $149 million.
East New York takes deposits from, and offers other banking services to, a
diverse base of customers located in its markets. East New York concentrates
on marketing on behalf of the Company commercial mortgage loans that are
secured by income producing properties that are primarily located throughout
the metropolitan New York City area, especially apartment buildings and
cooperative apartments.
M&T Bank, N.A., a national bank and a member of the Federal Reserve System
and the FDIC, commenced operations on October 2, 1995. The deposit
liabilities of M&T Bank, N.A. are insured by the FDIC through the BIF. The
main office of M&T Bank, N.A. is located at 54 Main Street, Oakfield, New
York 14125. M&T Bank, N.A. offers selected deposit and loan products on a
nationwide basis, primarily through direct mail and telephone marketing
techniques. As of December 31, 1996, M&T Bank, N.A. had total assets of $510
million, deposits of $468 million and stockholder's equity of $34 million.
M&T Capital Corporation ("M&T Capital"), a wholly owned subsidiary of M&T
Bank, was incorporated as a New York business corporation in January 1968.
M&T Capital is a federally-licensed small business investment company
operating under the provisions of the Small Business Investment Act of 1958,
as amended ("SBIA"). M&T Capital provides equity capital and long-term
credit to "small-business concerns", as defined by the SBIA. M&T Capital had
assets of $5 million and stockholder's equity of $4 million as of December
31, 1996, and recorded approximately $1.8 million of revenues in 1996. The
headquarters of M&T Capital are located at One M&T Plaza, Buffalo, New York
14240.
M&T Credit Corporation ("M&T Credit"), a wholly owned subsidiary of M&T Bank,
was incorporated as a New York business corporation in April 1994. M&T
Credit is a consumer credit company with headquarters at One M&T Plaza,
Buffalo, New York 14240, and offices in Pennsylvania. As of December 31,
1996, M&T Credit had assets of $289 million and stockholder's equity of $0.8
million. M&T Credit recorded $17.1 million of revenues during 1996.
M&T Mortgage, the wholly owned mortgage banking subsidiary of M&T Bank, was
incorporated as a New York business corporation in November 1991. M&T
Mortgage's principal activities are comprised of the origination of
residential mortgage loans and providing residential mortgage loan servicing
to M&T Bank, East New York, M&T, N.A. and others. M&T Mortgage operates
throughout New York State, and also maintains branch offices in Arizona,
Colorado, Massachusetts, Ohio, Oregon, Utah and Washington. M&T Mortgage had
assets of $334 million and stockholder's equity of $88 million as of December
31, 1996, and recorded approximately $73.6 million of revenues during 1996.
Residential mortgage loans serviced by M&T Mortgage for non-affiliates
totaled $5.8 billion at December 31, 1996. The headquarters of M&T Mortgage
are located at M&T Center, One Fountain Plaza, Buffalo, New York 14203.
M&T Financial Corporation ("M&T Financial"), a New York business corporation,
is a wholly owned subsidiary of M&T Bank which specializes in
capital-equipment leasing. M&T Financial was formed in October 1985, had
assets of $81 million and stockholder's equity of $16 million as of December
31, 1996, and recorded approximately $0.7 million of revenues in 1996. The
headquarters of M&T Financial are located at One M&T Plaza, Buffalo, New York
14240.
M&T Real Estate, Inc.("M&T Real Estate"), is a subsidiary of M&T Bank which
was incorporated as a New York business corporation in August 1995. M&T Bank
6
owns all of the outstanding common and 87.3% of the preferred stock of M&T
Real Estate. The remaining 12.7% of M&T Real Estate's preferred stock is
owned by officers or former officers of the Company. M&T Real Estate engages
in commercial real estate lending and servicing activities. As of December
31, 1996, M&T Real Estate had assets and stockholder's equity of $3.5
billion. M&T Real Estate recorded $299 million of revenues in 1996. The
headquarters of M&T Real Estate are located at M&T Center, One Fountain
Plaza, Buffalo, New York 14203.
M&T Securities, Inc. ("M&T Securities") is a wholly owned subsidiary of M&T
Bank which was incorporated as a New York business corporation in November
1985. M&T Securities is registered as a broker/dealer under the Securities
Exchange Act of 1934, as amended, and as an investment advisor under the
Investment Advisors Act of 1940, as amended, and is licensed as an insurance
agent under the New York State Insurance Law. It provides securities
brokerage and investment advisory services. As of December 31, 1996, M&T
Securities had assets of $6 million and stockholder's equity of $.3 million.
M&T Securities recorded $15 million of revenues during 1996. The
headquarters of M&T Securities are located at One M&T Plaza, Buffalo, New
York 14240.
Highland Lease Corporation ("Highland Lease"), a wholly owned subsidiary of
M&T Bank, was incorporated as a New York business corporation in October
1994. Highland Lease is a consumer leasing company with headquarters at One
M&T Plaza, Buffalo, New York 14240. As of December 31, 1996, Highland Lease
had assets of $147 million and stockholder's equity of $8 million. Highland
Lease recorded $10 million of revenues during 1996.
The Registrant and its banking subsidiaries have a number of other
special-purpose or inactive subsidiaries. These other subsidiaries
represented, individually and collectively, an insignificant portion of the
Company's consolidated assets, net income and stockholders' equity at
December 31, 1996.
Lines of Business, Principal Services, Industry Segments
--------------------------------------------------------
and Foreign Operations
----------------------
Commercial and retail banking, with activities incidental thereto, represents
the sole significant line and/or segment of business of the Company. The
Company's international activities are discussed in note 15 of Notes to
Financial Statements filed herewith in Part II, Item 8, "Financial Statements
and Supplementary Data". The only activities that, as a class, contributed
10% or more of the sum of consolidated interest income and other income in
each of the last three years were lending and investment securities
transactions. The amount of income from such sources during those years is
set forth on the Company's Consolidated Statement of Income filed herewith in
Part II, Item 8, "Financial Statements and Supplementary Data".
Supervision and Regulation
--------------------------
The banking industry is subject to extensive state and federal regulation and
continues to undergo significant change. In 1991, the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") was enacted. FDICIA
substantially amended the Federal Deposit Insurance Act ("FDI Act") and
certain other statutes. Since FDICIA's enactment, the federal bank
regulatory agencies have adopted regulations to implement its statutory
provisions.
The following discussion summarizes certain aspects of the banking laws and
regulations that affect the Company. Proposals to change the laws and
regulations governing the banking industry are frequently raised in Congress,
in state legislatures, and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have
on the Company are impossible to determine with any certainty. A change in
applicable laws or regulations, or a change in the way such laws or
regulations are interpreted by regulatory agencies or courts, may have a
material impact on the business, operations and earnings of the Company. To
the extent that the following information describes statutory or regulatory
7
provisions, it is qualified entirely by reference to the particular statutory
or regulatory provision.
Bank Holding Company Regulation
-------------------------------
As a registered bank holding company, the Registrant and its nonbank
subsidiaries are subject to supervision and regulation under the BHCA by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board")
and the New York State Banking Superintendent ("Banking Superintendent").
The Federal Reserve Board requires regular reports from the Registrant and is
authorized by the BHCA to make regular examinations of the Registrant and its
subsidiaries.
Under the BHCA, the Registrant may not acquire direct or indirect ownership
or control of more than 5% of the voting shares of any company, including a
bank, without the prior approval of the Federal Reserve Board, except as
specifically authorized under the BHCA. The Registrant is also subject to
regulation under the Banking Law with respect to certain acquisitions of
domestic banks. Under the BHCA, the Registrant, subject to the approval of
the Federal Reserve Board, may acquire shares of non-banking corporations the
activities of which are deemed by the Federal Reserve Board to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto.
The Federal Reserve Board has enforcement powers over bank holding companies
and their non-banking subsidiaries, among other things, to interdict
activities that represent unsafe or unsound practices or constitute
violations of law, rule, regulation, administrative orders or written
agreements with a federal bank regulator. These powers may be exercised
through the issuance of cease-and-desist orders, civil money penalties or
other actions.
Under the Federal Reserve Board's statement of policy with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit all available resources to support such institutions in circumstances
where it might not do so absent such policy. Although this "source of
strength" policy has been challenged in litigation, the Federal Reserve Board
continues to take the position that it has authority to enforce it. For a
discussion of circumstances under which a bank holding company may be
required to guarantee the capital levels or performance of its subsidiary
banks, see Capital Adequacy, below. The Federal Reserve also has the
authority to terminate any activity of a bank holding company that
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution or to terminate its control of any bank or
nonbank subsidiaries.
On September 29, 1994, the Riegle-Neal Interstate Banking Efficiency Act of
1994 (the "Interstate Banking Act") was enacted into law. Generally, the
Interstate Banking Act permits bank holding companies to acquire banks in any
state as of September 29, 1995, and preempts all state laws restricting the
ownership by a bank holding company of banks in more than one state. The
Interstate Banking Act also permits, prior to June 1, 1997, a bank to merge
with an out-of-state bank and convert any offices into branches of the
resulting bank if the home states of both banks expressly permit interstate
bank mergers; permits, beginning June 1, 1997, a bank to merge with an
out-of-state bank and convert any offices into branches of the resulting bank
if both states have not opted out of interstate branching; permits a bank to
acquire branches from an out-of-state bank, beginning June 1, 1997, if the
law of the state where the branches are located permits the interstate branch
acquisition; and permits banks to establish and operate de novo interstate
branches whenever the host state opts-in to de novo branching. Bank holding
companies and banks seeking to engage in transactions authorized by the
Interstate Banking Act must be adequately capitalized and managed.
On January 29, 1996, New York State enacted into law an interstate branching
law which enables New York to "opt-in" early to interstate branching by
merger and acquisition, as permitted under the Interstate Banking Act. The
8
law adopted in New York (the "New York Interstate Branching Law") provides
for the immediate opt-in of branching by merger or acquisition on a
reciprocal basis until June 1, 1997, and is thereafter unrestricted. The New
York Interstate Branching Law permits the acquisition of a single branch on a
reciprocal basis until June 1, 1997, and thereafter without restriction, but
does not provide for de novo interstate branching.
Bank holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the
terms of the CRA, the Federal Reserve Board (or other appropriate bank
regulatory agency) is required, in connection with its examination of a bank,
to assess such bank's record in meeting the credit needs of the community
served by that bank, including low- and moderate-income neighborhoods.
Furthermore, such assessment is also required of any bank that has applied,
among other things, to merge or consolidate with or acquire the assets or
assume the liabilities of a federally-regulated financial institution, or to
open or relocate a branch office. In the case of a bank holding company
applying for approval to acquire a bank or bank holding company, the Federal
Reserve Board will assess the record of each subsidiary bank of the applicant
bank holding company in considering the application. The Banking Law
contains provisions similar to the CRA which are applicable to New
York-chartered banks.
Supervision and Regulation of Bank Subsidiaries
-----------------------------------------------
The Registrant's banking subsidiaries are subject to regulation, and are
examined regularly, by various bank regulatory agencies: M&T Bank by the
Federal Reserve Board and the Banking Superintendent; East New York by the
FDIC and the Banking Superintendent; and M&T Bank, N.A. by the Comptroller of
the Currency. The Registrant and its direct non-banking subsidiaries are
affiliates, within the meaning of the Federal Reserve Act, of the
Registrant's subsidiary banks and their subsidiaries. As a result, the
Registrant's subsidiary banks and their subsidiaries are subject to
restrictions on loans or extensions of credit to, purchases of assets from,
investments in, and transactions with the Registrant and its direct
non-banking subsidiaries and on certain other transactions with them or
involving their securities.
Under the "cross-guarantee" provisions of the FDI Act, insured depository
institutions under common control are required to reimburse the FDIC for any
loss suffered by either the BIF or SAIF of the FDIC as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. Thus, any insured depository institution
subsidiary of First Empire could incur liability to the FDIC in the event of
a default of another insured depository institution owned or controlled by
First Empire. The FDIC's claim under the cross-guarantee provisions is
superior to claims of stockholders of the insured depository institution or
its holding company and to most claims arising out of obligations or
liabilities owed to affiliates of the institution, but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The FDIC may decline to enforce the cross-guarantee provisions
if it determines that a waiver is in the best interest of the BIF or SAIF or
both.
Dividends from Bank Subsidiaries
--------------------------------
M&T Bank, East New York and M&T Bank, N.A. are subject, under one or more of the
banking laws, to restrictions on the amount and frequency (no more often than
quarterly) of dividend declarations. Future dividend payments to the Registrant
by its subsidiary banks will be dependent on a number of factors, including the
earnings and financial condition of each such bank, and are
9
subject to the limitations referred to in note 19 of Notes to Financial
Statements filed herewith in Part II, Item 8, "Financial Statements and
Supplementary Data," and to other statutory powers of bank regulatory
agencies.
Under FDICIA, an insured depository institution is prohibited from making any
capital distribution to its owner, including any dividend, if, after making
such distribution, the depository institution fails to meet the required
minimum level for any relevant capital measure, including the risk-based
capital adequacy and leverage standards discussed below.
Capital Adequacy
----------------
The Federal Reserve Board, the FDIC and the Office of the Comptroller of the
Currency ("OCC") have adopted risk-based capital adequacy guidelines for bank
holding companies and banks under their supervision. Under the guidelines
the so-called "Tier 1 capital" and "Total capital" as a percentage of
risk-weighted assets and certain off-balance sheet instruments must be at
least 4% and 8%, respectively.
The Federal Reserve Board, the FDIC and the OCC have also imposed a leverage
standard to supplement their risk-based ratios. This leverage standard
focuses on a banking institution's ratio of Tier 1 capital to average total
assets, adjusted for goodwill and certain other items. Under these
guidelines, banking institutions that meet certain criteria, including
excellent asset quality, high liquidity, low interest rate exposure and good
earnings, and that have received the highest regulatory rating must maintain
a ratio of Tier 1 capital to total adjusted average assets of at least 3%.
Institutions not meeting these criteria, as well as institutions with
supervisory, financial or operational weaknesses, along with those
experiencing or anticipating significant growth are expected to maintain a
Tier 1 capital to total adjusted average assets ratio equal to at least 4 to
5%.
As reflected in the following table, the risk-based capital ratios and
leverage ratios of the Registrant, M&T Bank, East New York and M&T Bank, N.A.
as of December 31, 1996 exceeded the required capital ratios for
classification as "well capitalized," the highest classification under the
regulatory capital guidelines.
Capital Components and Ratios at December 31, 1996
(dollars in millions)
Registrant M&T Bank
(Consolidated) M&T Bank East New York N.A.
------------- -------- ------------- --------
Capital Components
Tier 1 capital $ 889 $ 673 $ 149 $ 34
Total capital 1,198 966 164 37
Risk-weighted assets
and off-balance sheet
instruments $10,590 $9,301 $1,192 $222
Risk-based Capital Ratio
Tier 1 capital 8.40% 7.24% 12.50% 15.23%
Total capital 11.32 10.39 13.76 16.49
Leverage Ratio 6.99 6.22 7.47 6.59
10
FDICIA required each federal banking agency, including the Federal Reserve
Board, to revise its risk-based capital standards within 18 months of the
enactment of the statute into law on December 19, 1991 in order to ensure
that those standards take adequate account of interest rate risk,
concentration of credit risk and the risk of nontraditional activities, as
well as reflect the actual performance and expected risk of loss on certain
multifamily housing loans.
On December 29, 1993, the Federal Reserve Board amended the risk-based
capital guidelines, effective December 31, 1993, lowering from 100 percent to
50 percent the risk weight assigned to certain multifamily housing loans.
On December 7, 1994, the Federal Reserve Board adopted a final rule,
effective December 31, 1994, providing that institutions regulated by the
Federal Reserve Board could net for risk-based capital purposes the positive
and negative market values of interest and exchange rate contracts subject to
a qualifying, legally enforceable, bilateral netting contract to calculate
one current exposure for that netting contract.
On December 8, 1994, the Federal Reserve Board amended its risk-based capital
guidelines effective December 31, 1994, directing institutions to generally
not include in regulatory capital the "net unrealized holding gains (losses)
on securities available for sale", determined pursuant to the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," when preparing financial
statements in accordance with generally accepted accounting principles. Net
unrealized losses on marketable equity securities (i.e., equity securities
with readily determinable fair values), however, continue to be deducted from
Tier 1 capital. This rule has the general effect of valuing available for
sale securities at amortized cost (i.e., based on historical cost), rather
than at fair value (i.e., generally at market value), for purposes of
calculating the risk-based and leverage ratios.
On December 15, 1994, the Federal Reserve Board issued a final rule,
effective January 17, 1995, addressing concentration of credit risk and risks
of nontraditional activities. Accordingly, risk-based capital guidelines
were amended to explicitly cite concentrations of credit risk and an
institution's ability to monitor and control them as important factors in
assessing an institution's overall capital adequacy. Institutions identified
through the examination process as having significant exposure to
concentration of credit risk or as not adequately managing concentration risk
will be required to hold capital in excess of the regulatory minimums. The
risk-based capital guidelines were further amended to explicitly cite the
risks arising from nontraditional activities and management's ability to
monitor and control these risks as important factors to consider in assessing
an institution's overall capital adequacy. The rule requires that as banking
institutions begin to engage in, or significantly expand their participation
in, a nontraditional activity, the risks of that activity be promptly
analyzed and the activity given appropriate capital treatment by the agencies.
On December 22, 1994, the Federal Reserve Board revised its capital adequacy
guidelines, effective April 1, 1995, to establish a limitation on the amount
of certain deferred tax assets that may be included in (that is, not deducted
from) Tier 1 capital for purpose of risk-based capital and leverage ratios.
Under the revised guidelines, deferred tax assets that can only be realized
if an institution earns taxable income in the future are limited for
regulatory capital purposes to the amount that the institution expects to
realize, based on projections of taxable income, within one year of each
quarter-end report date or 10 percent of Tier 1 capital, whichever is less.
On August 2, 1995, the federal banking agencies issued final rules under which
exposure to interest rate risk will be measured as the effect that a change in
interest rates would have on the net economic value of a bank. This economic
perspective considers the effect that changing interest rates may have on the
value of a bank's assets, liabilities and off-balance sheet positions. Exposure
estimates collected through a new proposed supervisory measurement process, a
bank's historical financial performance, and it's earnings exposure to interest
11
rate movements will be quantitative factors used by examiners to determine
the adequacy of a bank's capital for interest rate risk. Examiners will also
consider qualitative factors, including the adequacy of a bank's internal
interest rate risk management. As a result, the final supervisory judgement
on a bank's capital adequacy may differ significantly from conclusions that
might be drawn solely from the level of the bank's risk-based capital ratio.
Bank regulators periodically propose amendments to the risk-based capital
guidelines and related regulatory framework. While the Company's management
studies such proposals, the timing of adoption, ultimate form and effect of
such proposed amendments on the Company's capital requirements and operations
cannot be predicted.
FDICIA requires the federal banking agencies to take "prompt corrective
action" in respect of depository institutions and their bank holding
companies that do not meet minimum capital requirements. FDICIA established
five capital tiers: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". A depository institution's capital tier, or that of its
bank holding company, depends upon where its capital levels are in relation
to various relevant capital measures, including a risk-based capital measure
and a leverage ratio capital measure, and certain other factors.
Under the implementing regulations adopted by the federal banking agencies, a
bank holding company or bank is considered "well capitalized" if it has (i) a
total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and
(iv) is not subject to any order or written directive to meet and maintain a
specific capital level for any capital measure. An "adequately capitalized"
bank holding company or bank is defined as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with a composite CAMEL rating of 1). A bank
holding company or bank is considered (A) "undercapitalized" if it has (i) a
total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based
capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or
3% in the case of a bank with a composite CAMEL rating of 1); (B)
"significantly undercapitalized" if the bank has (i) a total risk-based
capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital ratio of
less than 3% or (iii) a leverage ratio of less than 3% and (C)"critically
undercapitalized" if the bank has a ratio of tangible equity to total assets
equal to or less than 2%. The Federal Reserve Board may reclassify a "well
capitalized" bank holding company or bank as "adequately capitalized" or
subject an "adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower capital category if it
determines that the bank holding company or bank is in an unsafe or unsound
condition or deems the bank holding company or bank to be engaged in an
unsafe or unsound practice and not to have corrected the deficiency. First
Empire, M&T Bank, East New York and M&T Bank, N.A. currently meet the
definition of "well capitalized" institutions.
"Undercapitalized" depository institutions, among other things, are subject
to growth limitations, are prohibited, with certain exceptions, from making
capital distributions, are limited in their ability to obtain funding from a
Federal Reserve Bank and are required to submit a capital restoration plan.
The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must
guarantee that the institution will comply with such capital restoration plan
and provide appropriate assurances of performance. If a depository
institution fails to submit an acceptable plan, including if the holding
company refuses or is unable to make the guarantee described in the previous
sentence, it is treated as if it is "significantly undercapitalized". Failure
to submit or implement an acceptable capital plan also is grounds for the
appointment of a conservator or a receiver. "Significantly undercapitalized"
depository institutions may be subject to a number of additional requirements
and
12
restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. Moreover, the parent holding
company of a significantly undercapitalized depository institution may be
ordered to divest itself of the institution or of nonbank subsidiaries of the
holding company. "Critically undercapitalized" institutions, among other
things, are prohibited from making any payments of principal and interest on
subordinated debt, and are subject to the appointment of a receiver or
conservator.
FDICIA directs, among other things, that each federal banking agency
prescribe standards for depository institutions and depository institution
holding companies relating to internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, a maximum ratio of classified
assets to capital, minimum earnings sufficient to absorb losses, a minimum
ratio of market value to book value for publicly traded shares and other
standards as they deem appropriate. The Federal Reserve Board adopted such
standards in 1993.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, limitations
on the amount of capitalized mortgage servicing rights and purchased credit
card relationships includable in Tier 1 capital, and the requirement that a
depository institution give prior notice to customers and regulatory
authorities before closing any branch. FDICIA also contains a prohibition on
the acceptance or renewal of brokered deposits by depository institutions
that are not "well capitalized" or are "adequately capitalized" and have not
received a waiver from the FDIC.
FDIC Deposit Insurance Assessments
----------------------------------
As institutions with deposits insured by the BIF and the SAIF, M&T Bank, East
New York and M&T Bank, N.A. are subject to FDIC deposit insurance
assessments. Under current law the regular insurance assessments to be paid
by BIF-insured and SAIF-insured institutions are specified in schedules
issued by the FDIC that specify, at semiannual intervals, target reserve
ratios designed to maintain the reserve ratios of each of those insurance
funds at 1.25% of their estimated insured deposits. The FDIC is also
authorized to impose one or more special assessments.
The FDIC has implemented a risk-based deposit premium assessment system under
which each depository institution is placed in one of nine assessment
categories based on the institution's capital classification under the prompt
corrective action provisions described above, and whether such institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. The adjusted assessment rates for both BIF-insured and
SAIF-insured institutions under the current system range from .00% to .31%
depending upon the assessment category into which the insured institution is
placed. None of the Company's banking subsidiaries paid regular insurance
assessments to the FDIC in 1996. However, the FDIC retains the ability to
increase regular BIF and SAIF assessments and to levy special additional
assessments.
On September 30, 1996, President Clinton signed into law legislation that
required the FDIC to impose a one-time special assessment to recapitalize the
SAIF and increase its reserve ratio to 1.25% of estimated insured deposits.
As a result, for the quarter ended September 30, 1996, the Company recorded a
pre-tax charge of $7.0 million for this assessment that was related to the
SAIF-insured deposits of M&T Bank.
In addition to deposit insurance fund assessments, in 1997 the FDIC will
assess BIF-assessable and SAIF-assessable deposits to fund the repayment of
debt obligations of the Financing Corporation ("FICO"). FICO is a government
agency-sponsored entity that was formed to borrow the money necessary to
carry out the closing and ultimate disposition of failed thrift institutions
by the Resolution Trust Corporation. Under the September 1996 legislation,
the FDIC is required to
13
set FICO assessments for BIF-assessable deposits at one-fifth the amount for
SAIF-assessable deposits. The current annualized rates established by the FDIC
for BIF-assessable and SAIF-assessable deposits are 1.30 basis points and 6.48
basis points, respectively.
Any significant increases in assessment rates or additional special
assessments by the FDIC could have an adverse impact on the results of
operations and capital of M&T Bank, East New York or M&T Bank, N.A.
Governmental Policies
---------------------
The earnings of the Company are significantly affected by the monetary and
fiscal policies of governmental authorities, including the Federal Reserve
Board. Among the instruments of monetary policy used by the Federal Reserve
Board to implement these objectives are open-market operations in U.S.
Government securities and Federal funds, changes in the discount rate on
member bank borrowings and changes in reserve requirements against member
bank deposits. These instruments of monetary policy are used in varying
combinations to influence the overall level of bank loans, investments and
deposits, and the interest rates charged on loans and paid for deposits. The
Federal Reserve Board frequently uses these instruments of monetary policy,
especially its open-market operations and the discount rate, to influence the
level of interest rates and to affect the strength of the economy, the level
of inflation or the price of the dollar in foreign exchange markets. The
monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of banking institutions in the past and are expected
to continue to do so in the future. It is not possible to predict the nature
of future changes in monetary and fiscal policies, or the effect which they
may have on the Company's business and earnings.
Competition
-----------
The Company competes in offering commercial and personal financial services
with other banking institutions and with firms in a number of other
industries, such as thrift institutions, credit unions, personal loan
companies, sales finance companies, leasing companies, securities brokers and
dealers, insurance companies and retail merchandising organizations.
Furthermore, diversified financial services companies are able to offer a
combination of these services to their customers on a nationwide basis.
Compared to less extensively regulated financial services companies, the
Company's operations are significantly impacted by state and federal
regulations applicable to the banking industry. Moreover, the provisions of
the Interstate Banking Act and the New York State Interstate Branching Law
may further ease entry into New York State by out-of-state banking
institutions. As a result, the number of banking organizations with which
the Registrant's subsidiary banks compete may grow in the future.
Other Legislative Initiatives
-----------------------------
From time to time, various proposals are introduced in the United States
Congress and in the New York Legislature and before various bank regulatory
authorities which would alter the powers of, and restrictions on, different
types of banking organizations and which would restructure part or all of the
existing regulatory framework for banks, bank holding companies and other
financial institutions.
Moreover, a number of other bills have been introduced in Congress which
would further regulate, deregulate or restructure the financial services
industry. It is not possible to predict whether these or any other proposals
will be enacted into law or, even if enacted, the effect which they may have
on the Company's business and earnings.
14
Statistical Disclosure Pursuant to Guide 3
------------------------------------------
See cross-reference sheet for disclosures incorporated elsewhere in this Annual
Report on Form 10-K. Additional information is included in the following
tables.
15
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 1
SELECTED CONSOLIDATED YEAR-END BALANCES
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- -------------------------------------------- ------------ ------------ ------------ ------------ ----------
Money-market assets
Interest-bearing deposits at banks......... $ 47,325 125,500 143 55,044 110,041
Federal funds sold and resell agreements... 125,326 1,000 3,080 329,429 312,461
Trading account............................ 37,317 9,709 5,438 9,815 53,515
------------ ------------ ------------ ------------ ----------
Total money-market assets................. 209,968 136,209 8,661 394,288 476,017
------------ ------------ ------------ ------------ ----------
Investment securities
U.S. Treasury and federal agencies......... 1,023,038 1,087,005 999,407 1,387,395 916,621
Obligations of states and political
subdivisions.............................. 41,445 35,250 55,787 49,230 53,789
Other...................................... 507,215 647,040 735,846 992,527 750,154
------------ ------------ ------------ ------------ ----------
Total investment securities............... 1,571,698 1,769,295 1,791,040 2,429,152 1,720,564
Loans and leases
Commercial, financial, leasing, etc........ 2,206,282 2,013,937 1,680,415 1,510,205 1,478,555
Real estate--construction.................. 90,563 77,604 53,535 51,384 35,831
Real estate--mortgage...................... 6,199,931 5,648,590 5,046,937 4,540,177 4,422,730
Consumer................................... 2,623,445 2,133,592 1,666,230 1,337,293 1,211,401
------------ ------------ ------------ ------------ ----------
Total loans and leases.................... 11,120,221 9,873,723 8,447,117 7,439,059 7,148,517
Unearned discount.......................... (398,098) (317,874) (229,824) (177,960) (164,713)
Allowance for possible credit losses....... (270,466) (262,344) (243,332) (195,878) (151,690)
------------ ------------ ------------ ------------ ----------
Loans and leases, net..................... 10,451,657 9,293,505 7,973,961 7,065,221 6,832,114
Other real estate owned..................... 8,523 7,295 10,065 12,222 16,694
Total assets................................ 12,943,915 11,955,902 10,528,644 10,364,958 9,587,931
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
Demand deposits............................. 1,352,929 1,184,359 1,087,102 1,052,258 1,078,690
NOW accounts................................ 334,787 768,559 748,199 764,690 770,618
Savings deposits............................ 3,280,788 2,765,301 3,098,438 3,364,983 3,573,717
Time deposits............................... 5,352,749 4,596,053 3,106,723 1,982,272 2,536,309
Deposits at foreign office.................. 193,236 155,303 202,611 189,058 117,776
------------ ------------ ------------ ------------ ----------
Total deposits............................ 10,514,489 9,469,575 8,243,073 7,353,261 8,077,110
Short-term borrowings....................... 1,150,187 1,273,206 1,364,850 2,101,667 692,691
Long-term borrowings........................ 178,002 192,791 96,187 75,590 75,685
Total liabilities........................... 12,038,256 11,109,649 9,807,648 9,640,964 8,961,136
------------ ------------ ------------ ------------ ----------
Stockholders' equity........................ 905,659 846,253 720,996 723,994 626,795
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
STOCKHOLDERS, EMPLOYEES AND OFFICES
NUMBER AT YEAR-END 1996 1995 1994 1993 1992
- --------------------------------------------------------- --------- --------- --------- --------- --------
Stockholders............................................. 3,654 3,787 3,981 3,985 4,157
Employees................................................ 5,180 4,889 4,505 4,400 4,275
Banking offices.......................................... 202 181 168 145 151
------- ------- ------- ------- -------
------- ------- ------- ------- -------
16
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 2
CONSOLIDATED EARNINGS
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- ---------------------------------------------------------- ---------- --------- --------- --------- ---------
Interest income
Loans and leases, including fees.......................... $ 881,002 794,181 633,077 608,473 602,932
Money-market assets
Deposits at banks........................................ 2,413 8,181 2,212 6,740 1,083
Federal funds sold and resell agreements................. 2,985 3,007 4,751 20,403 18,100
Trading account.......................................... 980 1,234 361 1,242 2,927
Investment securities
Fully taxable............................................ 107,415 118,791 104,185 101,187 125,529
Exempt from federal taxes................................ 2,637 2,760 2,760 2,584 5,906
---------- ------- ------- ------- -------
Total interest income................................... 997,432 928,154 747,346 740,629 756,477
---------- ------- ------- ------- -------
Interest expense
NOW accounts.............................................. 9,430 11,902 11,286 13,113 16,544
Savings deposits.......................................... 84,822 87,612 84,804 90,392 110,142
Time deposits............................................. 286,088 239,882 97,067 98,508 153,588
Deposits at foreign office................................ 12,399 6,952 5,894 3,243 4,348
Short-term borrowings..................................... 59,442 84,225 73,868 58,459 38,386
Long-term borrowings...................................... 14,227 11,157 6,287 6,158 590
---------- --------- --------- --------- ---------
Total interest expense.................................. 466,408 441,730 279,206 269,873 323,598
---------- --------- --------- --------- ---------
Net interest income....................................... 531,024 486,424 468,140 470,756 432,879
Provision for possible credit losses...................... 43,325 40,350 60,536 79,958 84,989
---------- --------- --------- --------- ---------
Net interest income after provision for possible credit
losses.................................................. 487,699 446,074 407,604 390,798 347,890
---------- --------- --------- --------- ---------
Other income
Mortgage banking revenues................................. 44,484 37,142 16,002 12,776 10,943
Service charges on deposit accounts....................... 40,659 38,290 35,016 32,291 28,372
Trust income.............................................. 27,672 25,477 22,574 23,865 16,905
Merchant discount and other credit card fees.............. 18,266 10,675 8,705 7,932 6,728
Trading account and foreign exchange gains................ 2,421 2,783 738 3,518 5,391
Gain (loss) on sales of bank investment securities........ (37) 4,479 128 870 28,050
Gain on sales of venture capital investments.............. 3,175 2,619 802 2,896 3,230
Other revenues from operations............................ 33,608 28,073 39,774 26,396 26,607
---------- --------- --------- --------- ---------
Total other income...................................... 170,248 149,538 123,739 110,544 126,226
---------- --------- --------- --------- ---------
Other expense
Salaries and employee benefits............................ 208,342 188,222 161,221 154,340 130,751
Equipment and net occupancy............................... 51,346 50,526 49,132 47,823 41,659
Printing, postage and supplies............................ 15,167 14,442 13,516 13,021 13,111
Deposit insurance......................................... 9,337 14,675 16,442 17,684 17,783
Other costs of operations................................. 124,786 106,574 96,551 94,951 108,034
---------- --------- --------- --------- ---------
Total other expense..................................... 408,978 374,439 336,862 327,819 311,338
---------- --------- --------- --------- ---------
Income before income taxes................................ 248,969 221,173 194,481 173,523 162,778
Income taxes.............................................. 97,866 90,137 77,186 71,531 64,841
---------- --------- --------- --------- ---------
Net income................................................ $ 151,103 131,036 117,295 101,992 97,937
---------- --------- --------- --------- ---------
Dividends declared
Common................................................... $ 18,617 16,224 14,743 13,054 10,780
Preferred................................................ 900 3,600 3,600 3,600 3,600
---------- --------- --------- --------- ---------
17
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 3
COMMON SHAREHOLDER DATA
DOLLARS IN THOUSANDS 1996 1995 1994 1993 1992
- ---------------------------------------------------------- --------- --------- --------- --------- ---------
Per Share
Net income............................................... $ 21.31 18.79 16.35 13.87 13.41
Cash dividends declared.................................. 2.80 2.50 2.20 1.90 1.60
Stockholders' equity at year-end......................... 135.45 125.33 103.02 99.43 85.79
Dividend payout ratio..................................... 12.39% 12.73% 12.97% 13.27% 11.43%
-------- ------ ------ --------- -----
18
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Item 1, Table 4
CHANGES IN INTEREST INCOME AND EXPENSE*
1996 COMPARED WITH 1995 1995 COMPARED WITH 1994
----------------------------- -------------------------------
RESULTING FROM RESULTING FROM
CHANGES IN: CHANGES IN:
TOTAL -------------------- TOTAL --------------------
INCREASE (DECREASE) IN THOUSANDS CHANGE VOLUME RATE CHANGE VOLUME RATE
- --------------------------------------------------------- --------- --------- --------- ---------- --------- ---------
Interest income
Loans and leases, including fees......................... $ 86,509 110,121 (23,612) $161,336 127,303 34,033
Money-market assets
Deposits at banks....................................... (5,768) (4,669) (1,099) 5,969 4,005 1,964
Federal funds sold and agreements to resell securities.. (22) 409 (431) (1,744) (3,335) 1,591
Trading account......................................... (239) 107 (346) 840 952 (112)
Investment securities
U.S. Treasury and federal agencies...................... (225) (2,555) 2,330 17,563 3,841 13,722
Obligations of states and political subdivisions........ (742) (584) (158) 348 (227) 575
Other................................................... (10,390) (11,194) 804 (2,945) (6,562) 3,617
--------- --------
Total interest income.................................. $ 69,123 $181,367
--------- --------
Interest expense
Interest-bearing deposits
NOW accounts............................................ $ (2,472) (1,523) (949) $ 616 237 379
Savings deposits........................................ (2,790) 1,016 (3,806) 2,808 (9,704) 12,512
Time deposits........................................... 46,206 57,335 (11,129) 142,815 105,852 36,963
Deposits at foreign office.............................. 5,447 5,500 (53) 1,058 (953) 2,011
Short-term borrowings.................................... (24,783) (15,953) (8,830) 10,357 (16,495) 26,852
Long-term borrowings..................................... 3,070 3,262 (192) 4,870 5,272 (402)
-------- --------
Total interest expense................................. $ 24,678 $162,524
-------- --------
- ------------------------
* Interest income data are on a taxable-equivalent basis. The apportionment of
changes resulting from the combined effect of both volume and rate was based
on the separately determined volume and rate changes.
19
Item 2. Properties.
-----------
Both First Empire and M&T Bank maintain their executive offices at One M&T
Plaza in Buffalo, New York. This twenty-one story headquarters building,
containing approximately 276,000 rentable square feet of space, is owned in
fee by M&T Bank, and was completed in 1967 at a cost of approximately $17
million. First Empire, M&T Bank and their subsidiaries occupy approximately
73% of the building and the remainder is leased to non-affiliated tenants.
At December 31, 1996, the cost of this property, net of accumulated
depreciation, was $9.7 million.
In September 1992, M&T Bank acquired an additional facility in Buffalo, New
York with approximately 365,000 rentable square feet of space at a cost of
approximately $12 million. Approximately 84% of this facility, known as M&T
Center, is occupied by M&T Bank and its subsidiaries, with the remainder
leased to non-affiliated tenants. At December 31, 1996, the cost of this
building, including improvements made subsequent to acquisition and net of
accumulated depreciation, was $15.8 million.
M&T Bank also owns and occupies two separate facilities in the Buffalo area
which support certain back-office and operations functions of the Company.
The total square footage of these facilities approximates 223,000 square feet
and their combined cost, net of accumulated depreciation, was $12.5 million.
The cost, net of accumulated depreciation and amortization, of the Company's
premises and equipment is detailed in note 6 of Notes to Financial Statements
filed herewith in Part II, Item 8, "Financial Statements and Supplementary
Data". Of the 175 domestic banking offices of the Registrant's subsidiary
banks, 56 are owned in fee and 119 are leased.
Item 3. Legal Proceedings.
-----------------
M&T Bank, N.A., is party to a co-branded credit card agreement with Giant of
Maryland, Inc. ("Giant"). In October 1996, M&T Bank, N.A. notified Giant of
its intent to terminate the agreement under its termination provisions. In
December 1996, Giant filed a complaint against M&T Bank, N.A. in the United
States District Court for the District of Maryland alleging that M&T Bank,
N.A. breached the agreement by attempting to terminate and that M&T Bank,
N.A. negligently misrepresented certain information provided to Giant. The
complaint sought interlocutory and permanent injunctive relief, specific
performance for the five-year term of the agreement, and damages for breach
of contract and negligent misrepresentation in the amount of $40 million.
Subsequent to filing of the complaint, Giant withdrew its request for
injunctive relief, agreed to dismiss the litigation, and consented to
arbitration of the claims of M&T Bank, N.A. and Giant against each other.
Management believes that M&T Bank, N.A. has meritorious defenses to Giant's
claims and is vigorously defending against them.
First Empire and its subsidiaries are subject in the normal course of
business to various other pending and threatened legal proceedings in which
claims for monetary damages are asserted. Management, after consultation
with legal counsel, does not anticipate that the aggregate ultimate
liability, if any, arising out of litigation pending against First Empire or
its subsidiaries will be material to First Empire's consolidated financial
position, but at the present time is not in a position to determine whether
such litigation will have a material adverse effect on First Empire's
consolidated results of operations in any future reporting period.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
----------------------------------------------------
20
Executive Officers of the Registrant
------------------------------------
Information concerning the Registrant's executive officers is presented below
as of March 3, 1997. Shown parenthetically is the year since which the
officer has held the indicated position with the Registrant or its
subsidiaries. In the case of each such corporation, officers' terms run
until the first meeting of the board of directors after such corporation's
annual meeting, and until their successors are elected and qualified.
Robert G. Wilmers, age 62, is chairman of the board (1994),
president (1988), chief executive officer (1983) and a
director (1982) of the Registrant. He is chairman of the
board, chief executive officer (1983) and a director (1982)
of M&T Bank, and served as president of M&T Bank from March
1984 to June 1996. Mr. Wilmers is a director of East New
York (1988) and M&T Financial (1985). He is chairman of the
board and a director of M&T Bank, N.A.(1995).
Atwood Collins, III, age 50, is president, chief executive
officer and a director (1995) of East New York. Previously,
Mr. Collins served as executive vice president and chief
operating officer of East New York (1988). Mr. Collins is
an executive vice president of the Registrant (1997) and of
M&T Bank (1996). He is a director of M&T Real Estate
(1995). Mr. Collins held a number of management positions
with Morgan Guaranty Trust Company of New York from 1972 to
1988, including the position of senior vice president and
manager of treasury operations which he held immediately
prior to joining East New York.
Mark J. Czarnecki, age 41, is an executive vice president of M&T Bank
(1997) and is in charge of M&T Bank's Trust and Investment
Services Division. Mr. Czarnecki is president of M&T Securities,
Inc. (1996). Mr. Czarnecki has held a number of management
positions with M&T Bank since 1977, most recently as senior vice
president of the private client services group of the Trust and
Investment Services Division (1994) and prior thereto as an
administrative vice president and regional manager for the Retail
Banking Division.
Brian E. Hickey, age 44, is president (1994) of the Rochester
Division of M&T Bank and is an executive vice president of
the Registrant (1997) and of M&T Bank (1996). In addition
to managing all of M&T Bank's business segments in the
Rochester market, Mr. Hickey has responsibility for managing
the Company's Western New York Commercial Banking Division.
Before joining M&T Bank, Mr. Hickey served as regional
president, Rochester/Southern Region of Marine Midland Bank,
which he joined as a regional executive in 1989. Mr. Hickey
is a director of M&T Financial (1996).
James L. Hoffman, age 57, is president (1992) of the Hudson
Valley Division of M&T Bank, and is an executive vice
president of the Registrant (1997) and of M&T Bank (1996).
Mr. Hoffman served as chairman of the board, president,
chief executive officer and a director (1983) of The First
National Bank of Highland, which had been a wholly owned
subsidiary of the Registrant prior to its merger with and
into M&T Bank on February 29, 1992. He served as an
executive vice president of M&T Bank from 1974 to 1984.
21
Barbara L. Laughlin, age 52, is an executive vice president of
the Registrant (1993) and of M&T Bank (1990), and is in
charge of the Company's Technology and Banking Operations
Division. Ms. Laughlin is an executive vice president and a
director of M&T Bank, N.A.(1995). Ms. Laughlin was
executive vice president of retail banking and technology at
The Seamen's Bank for Savings from June 1986 to April 1990
before joining M&T Bank.
John L. Pett, age 49, is an executive vice president (1997) and
chief credit officer (1995) of the Registrant and is an
executive vice president and chief credit officer of
M&T Bank (1996). Mr. Pett is chairman of the board and
a director of Highland Lease(1997) and M&T Credit
(1997). He is a director of M&T Bank, N.A. (1996).
Mr. Pett served as senior vice president of the
Registrant from 1991 to 1997.
Michael P. Pinto, age 41, is an executive vice president and
chief financial officer of the Registrant (1997) and M&T
Bank (1996), and is in charge of the Company's Finance
Division. Mr. Pinto is a director of M&T Capital (1996),
M&T Financial (1996), M&T Mortgage (1996) and M&T Real
Estate (1996). He is an executive vice president and chief
financial officer of M&T Bank, N.A. (1996). Mr. Pinto
served as senior vice president and controller of the
Registrant from 1993 to 1997.
William C. Rappolt, age 51, is an executive vice president and
treasurer of the Registrant (1993) and M&T Bank (1984), and
executive vice president of East New York (1994). Mr.
Rappolt is in charge of the Company's Treasury Division.
Mr. Rappolt is a director of M&T Financial (1985), M&T
Securities (1985), and is an executive vice president and a
director of M&T Bank, N.A.(1995).
Robert E. Sadler, Jr., age 51, is an executive vice president of
the Registrant (1990), president and a director of M&T Bank
(1996), and executive vice president of East New York
(1996), and is in charge of the Company's Commercial Banking
Division. Mr. Sadler is chairman of the board (1987) and a
director of M&T Capital (1983); chairman of the board (1989)
and a director of M&T Financial (1985); chairman of the
board and a director of M&T Mortgage (1991); chairman of the
board and a director of M&T Securities (1994); president,
chief executive officer and a director of M&T Bank,
N.A.(1995); and chairman of the board, president and a
director of M&T Real Estate (1995).
Harry R. Stainrook, age 60, is an executive vice president of the
Registrant (1993) and of M&T Bank (1985), and was in charge
of M&T Bank's Trust and Investment Services Division from
1985 until February 1997. Mr. Stainrook is a director of
M&T Securities (1994), and is an executive vice president of
M&T Bank, N.A. (1996). Mr. Stainrook has announced his
retirement from the Registrant and all of its subsidiaries,
effective March 31, 1997.
22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
The Registrant's common stock is traded under the symbol FES on the
American Stock Exchange. See cross-reference sheet for disclosures
incorporated elsewhere in this Annual Report on Form 10-K for market
prices of the Registrant's common stock, approximate number of common
stockholders at year-end, frequency and amounts of dividends on common
stock and restrictions on the payment of dividends.
Item 6. Selected Financial Data. See cross-reference sheet for disclosures
-----------------------
incorporated elsewhere in this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
Corporate Profile and Significant Developments
First Empire State Corporation ("First Empire") is a bank holding company
headquartered in Buffalo, New York with consolidated assets of $12.9 billion at
December 31, 1996. First Empire and its consolidated subsidiaries are
hereinafter referred to collectively as "the Company." First Empire's banking
subsidiaries are Manufacturers and Traders Trust Company ("M&T Bank"), The East
New York Savings Bank ("East New York") and M&T Bank, National Association ("M&T
Bank, N.A."), all of which are wholly owned. M&T Bank, with total assets of
$11.1 billion at December 31, 1996, is a New York-chartered commercial bank with
161 offices throughout New York State and an office in Nassau, The Bahamas.
East New York, with $2.0 billion in assets at December 31, 1996, is a New
York-chartered savings bank with 14 offices in metropolitan New York City. M&T
Bank, N.A., with $510 million in assets at December 31, 1996, is a national bank
with an office in Oakfield, New York.
M&T Bank's subsidiaries include M&T Mortgage Corporation, a
residential mortgage banking company; M&T Securities, Inc., a broker/dealer; M&T
Real Estate, Inc., a commercial mortgage lender; M&T Financial Corporation, a
commercial leasing company; M&T Capital Corporation, a venture capital company;
M&T Credit Corporation, a consumer credit company; and Highland Lease
Corporation, a consumer leasing company.
On March 29, 1996, National Indemnity Company, a subsidiary of
Berkshire Hathaway Inc., the holder of all outstanding shares of First Empire's
9% convertible preferred stock, converted such shares into 506,930 shares of
First Empire common stock. The 40,000 shares of preferred stock had been issued
on March 15, 1991 for $40 million and were converted into shares of common stock
at a contractual price of $78.90625 per share. As of December 31, 1996, common
shares outstanding totaled 6,686,186, up from 6,433,166 and 6,610,503 at
December 31, 1995 and 1994, respectively.
In December 1996, First Empire announced plans to merge East New York
with and into M&T Bank. The merger is subject to regulatory approvals and is
expected to be completed in the second quarter of 1997. Following the merger,
East New York's business activities will operate as the New York City Division
of M&T Bank.
During 1996 M&T Bank opened 20 branches in supermarkets, bringing the
total number of supermarket branches opened in 1996 and 1995 to 27. Supermarket
banking provides convenient access for customers to the banking services of M&T
Bank.
-23-
Overview
Net income in 1996 was $151.1 million or $21.31 per common share, increases of
15% and 13%, respectively, from $131.0 million or $18.79 per common share in
1995. Fully diluted earnings per common share rose 18% to $20.97 in 1996 from
$17.78 in 1995. In 1994, net income was $117.3 million while primary and fully
diluted earnings per common share were $16.35 and $15.71, respectively. The
1995 results include $4.5 million of gains from sales of investment securities.
The impact from sales of securities in 1996 and 1994 was negligible. Excluding
the after-tax impact of gains from sales of investment securities, net income
for 1995 was $128.4 million, representing primary and fully diluted earnings per
share of $18.41 and $17.43, respectively.
The Company achieved a return on average assets in 1996 of 1.21%, compared
with 1.14% in 1995 and 1.17% in 1994. The return on average common
stockholders' equity was 17.60% in 1996, 17.16% in 1995 and 16.64% in 1994.
Excluding the effects of the 1995 securities gains, the return on average assets
in 1995 was 1.12% and the return on average common stockholders' equity was
16.81%.
Taxable-equivalent net interest income increased 9% in 1996 to $536 million
from $491 million in 1995. The chief factor contributing to improved net
interest income was 14% growth in average loans, which resulted in a 9% increase
in average earning assets from 1995 to 1996. A 15% increase in average earning
assets, primarily loans, in 1995 was also the most significant factor for the
rise in that year's net interest income from $472 million in 1994. Average
earning assets totaled $12.0 billion in 1996, up from $11.1 billion in 1995 and
$9.7 billion in 1994. Net interest margin, or taxable-equivalent net interest
income expressed as a percentage of average earning assets, in 1996 was 4.45%,
little changed from 4.43% in 1995, but down 44 basis points (hundredths of one
percent) from 4.89% in 1994.
The provision for possible credit losses was $43.3 million in 1996,
compared with $40.4 million in 1995 and $60.5 million in 1994. Net charge-offs
in 1996 were $35.2 million, compared with $21.3 million in 1995 and $16.6
million in 1994. The increase from prior years reflects a higher level of
consumer loan charge-offs.
In December 1994, First Empire transferred appreciated investment
securities with a fair value of $15.7 million to an affiliated, tax-exempt
charitable foundation. As a result of the transfer, in 1994 the Company
recognized charitable contributions expense and tax-exempt other income of $13.8
million and $10.4 million, respectively, resulting in an after-tax increase in
1994 net income of $2.4 million.
Noninterest income for 1996 totaled $170 million, 17% above the $145
million in 1995 (excluding gains from sales of investment securities) and 50%
above the $113 million in 1994 (excluding $10.4 million related to the December
1994 transfer of securities to the affiliated foundation). Higher revenues
associated with mortgage banking and credit card activities were significant
factors contributing to the growth of noninterest income. Noninterest expense
was $409 million in 1996, up 9% from $374 million in 1995 and 27% from $323
million in 1994 (excluding $13.8 million related to the December 1994 transfer
of investment securities). Expenses associated with expansion of businesses
providing mortgage banking services, indirect automobile loans, credit cards and
the sale of mutual funds and annuities, as well as the impact of acquisitions
completed in 1995 and 1994, contributed to the rise in noninterest expense.
-24-
Net Interest Income/Lending and Funding Activities
Growth in average earning assets, which rose $966 million or 9% to $12.0 billion
in 1996, was the primary factor contributing to a corresponding 9% increase in
taxable-equivalent net interest income to $536 million in 1996 from $491 million
in 1995. Taxable-equivalent net interest income and average earning assets in
1994 were $472 million and $9.7 billion, respectively. The growth in average
earning assets in 1996 and 1995 was predominately attributable to increased
demand for loans offered by the Company, including the effects of expansion of
the Company's businesses which provide residential mortgage loans, indirect
automobile loans and credit cards. The accompanying table summarizes average
loans and leases outstanding in 1996 and percentage changes in the major
components of the loan and lease portfolio over the past two years.
Loans secured by real estate, excluding $610 million of outstanding home
equity loans and lines of credit which are classified as consumer loans,
represented approximately 58% of the loan and lease portfolio during 1996, down
from 60% in 1995 and 61% in 1994. At December 31, 1996, the Company held
approximately $4.0 billion of commercial real estate loans and $2.2 billion of
consumer real estate loans.
Commercial real estate loans originated by the Company are predominately
secured by properties in the New York City metropolitan area, including areas in
neighboring states generally considered to be within commuting distance of New
York City, and Western New York, which includes Buffalo, Niagara Falls,
Rochester and surrounding areas. Commercial real estate loans are also
originated in the Hudson Valley and Southern Tier regions of New York State.
Most commercial real estate loans originated by the Company are fixed-rate
instruments with monthly payments and a balloon payment of the remaining
principal at maturity, usually five years after loan origination. For borrowers
in good standing, the customer may extend the terms of the loan agreement for an
additional five years at the then-current market rate of interest. The
accompanying table presents commercial real estate loans at December 31, 1996 by
geographic area, type of collateral and size of the loans outstanding. Of the
$2.1 billion of commercial real estate loans in the New York City metropolitan
area, approximately 60% were secured by multi-family residential properties, 13%
by office space and 15% by retail space. The Company's experience has been that
office space and retail properties tend to demonstrate more volatile
fluctuations in value through economic cycles and changing economic conditions
than do multi-family residential properties. Approximately 52% of the aggregate
dollar amount of New York City area loans were for $3 million or less, while
loans of more than $10 million were approximately 13% of the total. Commercial
real estate loans secured by properties elsewhere in New York State, mostly in
Western New York, tend to have a greater diversity of collateral types and
include a significant amount of lending to customers who use the mortgaged
property in their trade or business. Approximately 70% of the aggregate dollar
amount of loans in this segment of the portfolio were for $3 million or less.
Commercial real estate loans secured by properties located outside of New York
State and outside of areas of neighboring states considered to be part of the
New York City metropolitan area comprised less than 5% of total commercial real
estate loans.
The Company normally refrains from commercial construction lending, except
when the borrower has obtained a commitment for permanent financing upon project
completion. As a result, the portfolio of commercial construction loans for
which the Company has not committed to provide permanent financing totaled only
$51 million, or .5% of total loans and leases at December 31, 1996.
The Company's portfolio of real estate loans secured by one-to-four family
residential properties totaled $2.0 billion at December 31, 1996, approximately
70% of which were secured by properties located in New York
-25-
State. In addition, the Company's mortgage banking subsidiary, M&T Mortgage
Corporation, had $194 million of residential real estate loans held for sale at
December 31, 1996.
Consumer loans and leases represented approximately 22% of the loan
portfolio during 1996, compared with 20% in 1995 and 19% in 1994. Beginning in
1994 and, to a greater extent, continuing in 1995 and 1996, the Company began
to market automobile loans and leases and credit cards in areas outside of New
York State. At December 31, 1996, 28% of the automobile loan portfolio was to
borrowers outside of New York State, primarily in Pennsylvania. Automobile
loans and leases are generally originated through dealers, however, all
applications submitted by dealers are subject to the Company's normal
underwriting and loan approval procedures. During 1996, automobile loans and
leases represented approximately 10% of the Company's average loan portfolio,
while no other consumer loan product represented more than 6%. Credit card
accounts are marketed through mail campaigns and co-branding initiatives. Such
initiatives involve developing relationships with retailers and other
enterprises and issuing co-branded credit cards that provide cardholders the
ability to earn rebates on purchases made with the cards. The Company bears the
cost of these rebates. At December 31, 1996, 46% of outstanding credit card
balances were with customers outside of New York State.
The Company's portfolio of investment securities averaged $1.8 billion in
1996, $2.0 billion in 1995 and $2.1 billion in 1994. Factors influencing the
size of the investment securities portfolio include demand for loans, which
generally yield more than investment securities, ongoing repayments, the level
of deposits, and management of balance sheet size and resulting capital ratios.
The investment securities portfolio is largely comprised of adjustable-rate
mortgage-backed securities, collateralized mortgage obligations, and
shorter-term U.S. Treasury notes. When purchasing investment securities, the
Company considers its overall interest-rate risk profile as well as the adequacy
of expected returns relative to prepayment and other risks assumed. As a result
of changes in interest rates, actual or anticipated prepayments, or credit risk
associated with a particular security, the Company occasionally sells investment
securities. Realized gains or losses from sales of investment securities were
negligible in 1996 and 1994, but during 1995, the Company realized a pre-tax
gain of approximately $4.5 million from sales of approximately $445 million of
investment securities. Furthermore, to enhance flexibility in managing the
investment securities portfolio, and as allowed by the Financial Accounting
Standards Board ("FASB"), in December 1995 the Company transferred approximately
$220 million of U.S. Treasury notes from "held-to-maturity" to "available for
sale" classification. No gain or loss was realized at the time of such
transfer.
Money-market assets, which are comprised of interest-bearing deposits at
banks, trading account assets, Federal funds sold and agreements to resell
securities, averaged $124 million in 1996, compared with $186 million in 1995
and $166 million in 1994. The decline in money market assets from 1995 and 1994
resulted largely from increased demand for loans.
Core deposits represent a significant source of funding to the Company and
generally carry lower interest rates than wholesale funds of comparable
maturities. Such deposits include noninterest-bearing demand deposits,
interest-bearing transaction accounts, savings deposits and nonbrokered domestic
time deposits under $100,000. The principal source of core deposits for the
Company is its New York State branch network. Certificates of deposit under
$100,000 generated on a nationwide basis by M&T Bank, N.A. are also included in
core deposits. In 1996, average core deposits rose to $8.0 billion from $7.4
billion in 1995. Core deposits averaged $6.8 billion in 1994. Average core
deposits of M&T Bank, N.A., which began operations in the
-26-
fourth quarter of 1995, were $261 million in 1996 and $3 million in 1995.
Funding provided by core deposits totaled 66% of average earning assets in 1996,
compared with 67% in 1995 and 70% in 1994. An analysis of changes in the
components of core deposits is presented in the accompanying table.
The Company also obtains funding through domestic time deposits of $100,000
or more, deposits originated through the Company's offshore branch office, and
brokered certificates of deposit. Domestic time deposits over $100,000,
excluding brokered certificates of deposit, averaged $892 million in 1996
compared with $625 million in 1995 and $357 million in 1994. Offshore deposits,
comprised primarily of accounts with balances of $100,000 or more, averaged $239
million in 1996, compared with $133 million and $156 million in 1995 and 1994,
respectively. Brokered deposits averaged $1.1 billion in 1996, $874 million in
1995, and $45 million in 1994, and totaled $1.1 billion at December 31, 1996.
Brokered deposits are used to reduce short-term borrowings and lengthen the
average maturity of interest-bearing liabilities. The weighted-average
remaining term to maturity of brokered deposits as of December 31, 1996 was 1.5
years. Additional amounts of brokered deposits may be solicited in the future
depending on market conditions and the cost of funds available from alternative
sources at the time.
In addition to deposits, the Company uses short-term borrowings from banks,
securities dealers, the Federal Home Loan Bank of New York ("FHLB") and others
as sources of funding. Short-term borrowings averaged $1.1 billion in 1996,
$1.4 billion in 1995 and $1.8 billion in 1994. In general, short-term
borrowings have been used to fund the Company's discretionary investments in
money-market assets and investment securities, and, if necessary, to replace
deposit outflows. Additionally, M&T Bank has issued $175 million of
subordinated capital notes, of which $75 million mature in 2002 and $100 million
mature in 2005. Although issued primarily to enhance regulatory capital ratios,
such notes also provided funding to the Company.
Net interest income is impacted by changes in the composition of the
Company's earning assets and interest-bearing liabilities, as described herein,
as well as changes in interest rates and spreads. Net interest spread, or the
difference between the yield on earning assets and the rate paid on
interest-bearing liabilities, was 3.80% in 1996, compared with 3.77% in 1995.
A greater proportion of loans, which typically yield more than money-market
assets and investment securities, in the composition of the earning asset
portfolio somewhat mitigated a general decrease in market interest rates in 1996
compared with 1995. As a result, the yield on earning assets decreased
slightly to 8.32% in 1996 from 8.42% in 1995. Similarly, the cost of
interest-bearing liabilities also declined, to 4.52% in 1996 from 4.65% in 1995.
The net interest spread, yield on earning assets and rate paid on
interest-bearing liabilities in 1994 were 4.37%, 7.77% and 3.40%, respectively.
In 1995, the increase in net interest income resulting from growth in average
earning assets was partially offset by the narrowing of the net interest spread.
Rising market interest rates throughout much of 1995 and 1994 had the effect of
increasing the cost of the Company's interest-bearing liabilities more than the
yield on earning assets. Largely due to the changes in the net interest spread
described herein, the Company's net interest margin was 4.45% in 1996, compared
with 4.43% in 1995 and 4.89% in 1994.
The contribution to net interest margin of interest-free funds, consisting
largely of noninterest-bearing demand deposits and stockholders' equity, was
.65% in 1996, .66% in 1995 and .52% in 1994. The improvement from 1994 resulted
largely from increases in the average rate paid on interest-bearing liabilities
used to value these funds, supplemented by increases in average interest-free
funds. Average interest-free funds were $1.7 billion in 1996, $1.6 billion in
1995 and $1.5 billion in 1994.
-27-
Changing interest rates and spreads affect the Company's net interest
income and net interest margin. Management believes that future changes in
market interest rates or the composition of the Company's portfolios of earning
assets and interest-bearing liabilities that result in reductions in spreads
could adversely impact the Company's net interest margin and net interest
income. Management assesses the potential impact of future changes in interest
rates and spreads by projecting net interest income under a number of different
interest rate scenarios. As part of the management of interest rate risk, the
Company utilizes interest rate swap agreements to modify the repricing
characteristics of certain portions of the loan and deposit portfolios. Revenue
and expense arising from these agreements are reflected in either the yields
earned on loans or, as appropriate, the rates paid on interest-bearing deposits.
The notional amount of interest rate swaps entered into for interest rate risk
management purposes as of December 31, 1996 was approximately $2.4 billion. In
general, under the terms of these swaps, the Company receives payments based on
the outstanding notional amount of the swaps at a fixed rate of interest and
makes payments at a variable rate. However, under terms of a $34 million swap,
the Company pays a fixed rate of interest and receives a variable rate. The
effect of interest rate swaps on the Company's net interest income and margin as
well as average notional amounts and rates are presented in the accompanying
table.
The Company estimates that as of December 31, 1996 it would have received
approximately $5.5 million if all interest rate swap agreements entered into for
interest rate risk management purposes were terminated. This estimated fair
value of the interest rate swap portfolio results from the effects of changing
interest rates and should be considered in the context of the entire balance
sheet and the Company's overall interest rate risk profile. Changes in the
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes are not reflected in the consolidated financial statements.
Additional information about interest rate swaps is included in note 16 of Notes
to Financial Statements.
During 1996, the FASB issued a Proposed Statement of Financial Accounting
Standards that would significantly change generally accepted accounting for
interest rate swaps, other derivative financial instruments and hedging
activities. While it is not possible to predict the ultimate outcome of the
FASB deliberations regarding the proposal, it is possible that changes in
generally accepted accounting principles for these types of transactions and
activities could have a material impact on the Company's consolidated balance
sheet and consolidated statement of income in future years.
Provision for Possible Credit Losses
The provision for possible credit losses was $43.3 million in 1996, compared
with $40.4 million in 1995 and $60.5 million in 1994. Net charge-offs in 1996
were $35.2 million, compared with $21.3 million in 1995 and $16.6 million in
1994. Net charge-offs as a percentage of average loans outstanding were .35% in
1996, .24% in 1995 and .22% in 1994. Nonaccrual loans totaled $58.2 million or
.54% of loans outstanding at December 31, 1996, compared with $75.2 million or
.79% a year earlier and $62.8 million or .76% at December 31, 1994. Loans past
due ninety days or more and accruing interest totaled $39.7 million at December
31, 1996, up from $17.8 million a year earlier and $11.8 million at December 31,
1994. The increase in such past due loans from 1995 to 1996 resulted primarily
from the inclusion at December 31, 1996 of $16.3 million of one-to-four family
residential mortgage loans serviced by the Company and repurchased during 1996
from the Government National Mortgage Association. These loans are covered by
guarantees of government agencies. The costs associated with servicing these
loans were reduced as a result of the repurchases. The total of all
nonperforming loan categories was $97.9 million or .91% of loans outstanding at
December 31,
-28-
1996, compared with $93.1 million or .97% a year earlier and $77.5 million
or .94% at December 31, 1994. The allowance for possible credit losses was
$270.5 million or 2.52% of net loans and leases at the end of 1996, compared
with $262.3 million or 2.75% at December 31, 1995 and $243.3 million or 2.96%
at December 31, 1994. The ratio of the allowance to nonperforming loans was
276%, 282% and 314% at year-end 1996, 1995 and 1994, respectively.
Management regularly assesses the adequacy of the allowance for possible
credit losses and records a provision to replenish or build the allowance to a
level necessary to maintain an adequate reserve position. In making such
assessment, management performs 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. Based upon the results of such review,
management believes that the allowance for possible credit losses at December
31, 1996 was adequate to absorb credit losses from existing loans and leases.
A comparative allocation of the allowance for possible credit losses for
each of the past five year-ends is presented in the accompanying table. Amounts
were allocated to specific loan categories based upon management's
classification of loans under the Company's internal loan grading system and
estimates of potential charge-offs inherent in each category. However, as the
total reserve is available to absorb losses from any loan category, amounts
assigned do not necessarily indicate future losses within these categories. The
unallocated portion of the reserve represents management's assessment of the
overall level of credit risk inherent in the loan and lease portfolio over a
longer time frame.
The Company's credit loss experience is influenced by many factors,
including overall economic conditions, in general, and, due to the size of the
Company's commercial real estate loan portfolio, real estate valuations, in
particular. Nonperforming commercial real estate loans totaled $27.1 million,
$42.3 million and $47.5 million at December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, $10.3 million of nonperforming commercial
real estate loans were secured by properties located in the New York City
metropolitan area, compared with $16.8 million and $27.1 million at December 31,
1995 and 1994, respectively. Net charge-offs of commercial real estate loans
were $1.5 million in 1996, $6.6 million in 1995 and $12.8 million in 1994.
Included in these totals are net charge-offs of commercial real estate loans
secured by properties in the New York City metropolitan area of $.6 million,
$3.2 million and $11.1 million in 1996, 1995 and 1994, respectively.
Net charge-offs of consumer loans in 1996 were $28.5 million, or 1.30% of
average consumer loans outstanding, compared with $11.3 million or .65% in 1995
and $5.6 million or .40% in 1994. Higher charge-offs of credit card balances
and indirect automobile loans were the most significant factors contributing to
the increased level of consumer loan charge-offs in 1996 and 1995. Net credit
card and indirect automobile loan charge-offs in 1996 were $15.9 million and
$9.6 million, respectively, compared with $6.1 million and $3.1 million,
respectively, in 1995. In 1994, net credit card and indirect automobile loan
charge-offs totaled $3.1 million and $1.5 million, respectively. Nonperforming
consumer loans totaled $17.6 million or .73% of outstanding consumer loans at
December 31, 1996, compared with $13.7 million or .70% at December 31, 1995 and
$8.4 million or .54% at December 31, 1994.
Commercial real estate loans secured by multi-family properties in the New
York City metropolitan area were 12% of loans outstanding at December 31, 1996.
The Company, however, had no concentrations of credit extended to any specific
industry that exceeded 10% of total loans outstanding at December 31, 1996.
Furthermore, the Company had no exposure to less developed countries and only $2
million of foreign loans in total.
-29-
Assets taken in foreclosure of defaulted loans totaled $8.5 million at
December 31, 1996, compared with $7.3 million and $10.1 million at the end of
1995 and 1994, respectively.
Other Income
Excluding the effect from sales of bank investment securities, other income
increased 17% to $170 million in 1996 from $145 million in 1995 and 50% from
$113 million (excluding the previously noted $10.4 million of tax-exempt income
resulting from the transfer of appreciated investment securities to an
affiliated, tax-exempt charitable foundation) in 1994.
Mortgage banking revenues, which consist of residential mortgage loan
servicing fee income, gains from sales of residential mortgage loans and loan
servicing rights, and other residential mortgage loan-related fees, increased to
$44.5 million in 1996 from $37.1 million in 1995 and $16.0 million in 1994.
Revenues from servicing residential mortgage loans for others were $20.9 million
in 1996, $19.3 million in 1995 and $13.6 million in 1994. Gains from sales of
residential mortgage loans and loan servicing rights increased to $21.6 million
in 1996, compared with $16.4 million and $1.4 million in 1995 and 1994,
respectively. The $21.1 million improvement in mortgage banking revenue in 1995
from 1994 was attributable to growth in the Company's residential mortgage
servicing business, as well as the January 1, 1995 adoption of Statement of
Financial Accounting Standards ("SFAS") No. 122 "Accounting for Mortgage
Servicing Rights." The effect of implementing SFAS No. 122 was to increase 1995
mortgage banking revenue and noninterest expense by $10.0 million and $1.8
million, respectively. The Company originates residential mortgage loans in New
York State, as well as in Arizona, Colorado, Massachusetts, Ohio, Oregon, Utah
and Washington. Residential mortgage loans serviced for others totaled $5.8
billion, $5.7 billion and $4.0 billion at December 31, 1996, 1995 and 1994,
respectively. Capitalized mortgage servicing rights and excess servicing
receivables were $37.8 million and $6.5 million, respectively, at December 31,
1996, compared with $34.5 million and $6.9 million, respectively, at December
31, 1995 and $10.0 million and $7.6 million, respectively, at December 31,
1994.
Service charges on deposit accounts increased 6% to $40.7 million in 1996
from $38.3 million in 1995, and 16% from $35.0 million in 1994. Trust income of
$27.7 million increased 9% from $25.5 million in 1995, and 23% from $22.6
million in 1994. Merchant discount and other credit card fees in 1996 totaled
$18.3 million, compared with $10.7 million in 1995 and $8.7 million in 1994.
Expansion of the Company's credit card business was the primary factor in the
improvement. Trading account and foreign exchange activity resulted in gains of
$2.4 million in 1996, $2.8 million in 1995 and $.7 million in 1994. Other
revenues from operations totaled $36.8 million in 1996, compared with $30.7
million in 1995 and $30.2 million in 1994 (excluding the $10.4 million of
tax-exempt income related to the 1994 transfer of securities to the affiliated
foundation). Such amounts include revenues from the sales of mutual funds and
annuities of $13.0 million, $9.4 million and $6.2 million in 1996, 1995 and
1994, respectively.
Other Expense
Other expense totaled $409 million in 1996, compared with $374 million in 1995
and $337 million in 1994.
Salaries and employee benefits expenses were $208 million in 1996, an
increase of $20 million or 11% from $188 million in 1995. Factors contributing
to the higher personnel expenses were merit salary increases, costs associated
with the opening of 27 supermarket banking locations in 1996 and the second half
of 1995, and the expansion of subsidiaries providing residential mortgage
banking services, indirect automobile loans and sales of
-30-
mutual funds and annuities. Personnel costs in 1995 increased $27 million or
17% from $161 million in 1994. Such increase was due largely to
acquisitions, expansion of the residential mortgage banking and securities
businesses, and incentive-based compensation arrangements. The number of
full-time equivalent employees was 4,832 at December 31, 1996, up from 4,546
and 4,149 at December 31, 1995 and 1994, respectively.
Nonpersonnel expenses for 1996 totaled $201 million, up 8% from $186
million in 1995. The increase was largely caused by higher expenses associated
with the expansion of businesses providing mortgage banking services, indirect
automobile loans, credit cards and the sale of mutual funds and annuities,
partially offset by lower deposit insurance expense.
During 1995, the assessment to the Company from the Federal Deposit
Insurance Corporation ("FDIC") for deposit insurance provided by the Bank
Insurance Fund ("BIF") was reduced and effective January 1, 1996 was
substantially eliminated. Changes in the federal deposit insurance laws were
enacted in 1996 that required the FDIC to impose a one-time special assessment
to recapitalize the Savings Association Insurance Fund ("SAIF") of the FDIC on
SAIF members. Although First Empire's bank subsidiaries are BIF-insured
institutions, the Company has approximately $1.1 billion of deposits obtained in
so-called "Oakar" acquisitions for which deposit insurance premiums are paid to
the SAIF. Included in nonpersonnel expense in 1996 is a $7.0 million charge for
the special assessment to recapitalize the SAIF. Following the
recapitalization, the FDIC established the SAIF's 1997 assessment rates, which
are currently the same as the rates established for BIF members. In addition to
deposit insurance fund assessments, in 1997 the FDIC will assess BIF- and
SAIF-assessable deposits to fund the repayment of debt obligations of the
Financing Corporation ("FICO"). FICO is a government agency-sponsored entity
that was formed to borrow the money necessary to carry out the closing and
ultimate disposition of failed thrift institutions by the Resolution Trust
Corporation. Under the law, the FDIC is required to set FICO assessments for
BIF-assessable deposits at one-fifth the amount for SAIF-assessable deposits.
The annualized rates established by the FDIC for the first half of 1997 for BIF-
and SAIF-assessable deposits are 1.30 basis points and 6.48 basis points,
respectively.
As previously noted, during 1994 the Company incurred $13.8 million of
charitable contributions expense related to the transfer of securities to a
charitable foundation affiliated with the Company. Excluding the impact of such
contributions expense, which is included in 1994's other costs of operations,
nonpersonnel expenses in 1995 increased $24.3 million from 1994. Higher
mortgage banking-related expenses and expenses associated with operating
entities acquired in late-1994 and 1995 contributed to the increase.
Additionally, in February 1995, the Company wrote off $2.3 million of
non-marketable securities of Nationar, a bank that provided services to
financial institutions, which was seized by banking regulators.
Income Taxes
The provision for income taxes in 1996 was $97.9 million, up from $90.1 million
in 1995 and $77.2 million in 1994. The effective tax rates were 39% in 1996,
41% in 1995, 40% in 1994. A reconciliation of income tax expense to the amount
computed by applying the statutory federal income tax rate to pre-tax income is
provided in note 13 of Notes to Financial Statements.
International Activities
The Company's investment in international assets was $55 million and $87 million
at December 31, 1996 and 1995, respectively. Total offshore deposits
-31-
were $193 million and $155 million at December 31, 1996 and 1995, respectively.
Liquidity and Interest Rate Sensitivity
As a financial intermediary, the Company is exposed to liquidity risk whenever
the maturities of financial instruments included in assets and liabilities
differ. Accordingly, a critical element in managing a financial institution is
ensuring that sufficient cash flow and liquid assets are available to satisfy
demands for loans and deposit withdrawals, to fund operating expenses, and to be
used for other corporate purposes. The Company's core deposits have
historically provided a significant source of funds. Such deposits are
generated from a large base of consumer, corporate and institutional customers,
which over the past several years has become more geographically diverse as a
result of acquisitions and expansion of the Company's businesses. Nevertheless,
in recent years the Company has faced increased competition in offering services
and products from a large array of financial market participants, including
banks, thrifts, mutual funds, securities dealers and others. As a result, and
consistent with banking industry experience in general, the Company has
experienced a reduction in the percentage of average earning assets funded by
core deposits. Core deposits financed 65% of the Company's earning assets at
December 31, 1996, compared with 67% and 71% at December 31, 1995 and 1994,
respectively.
The Company supplements funding from core deposits with various wholesale
borrowings, such as Federal funds purchased and securities sold under agreements
to repurchase, and brokered certificates of deposit. Additionally, M&T Bank
and East New York have credit facilities with the FHLB aggregating $942 million,
with any borrowings secured by loans and investment securities. Borrowings
outstanding under such credit facilities totaled $2 million at December 31, 1996
and $17 million at December 31, 1995. Although informal and sometimes
reciprocal, sources of funding are also available to the Company through various
arrangements for unsecured short-term borrowings from a wide group of banks and
other financial institutio