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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, 1995
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: None
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 4, 1996: $1,048,221,974.
Number of shares of the Common Stock, $5 par value, outstanding as of the close
of business on March 4, 1996: 6,350,518 shares.
Documents Incorporated By Reference:
(1) Portions of the Proxy Statement for the 1996 Annual Meeting of
Stockholders of First Empire State Corporation in Part III.
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FIRST EMPIRE STATE CORPORATION
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FORM 10-K
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For the fiscal year ended December 31, 1995
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CROSS-REFERENCE SHEET Form
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PART I Page
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Item 1. Business 5
Statistical disclosure pursuant to Guide 3
I. Distribution of assets, liabilities, and stockholders'
equity; interest rates and interest rate differential
A. Average balance sheets 42-43
B. Interest income/expense and resulting yield or rate
on average interest-earning assets (including non-
accrual loans) and interest-bearing liabilities 42-43
C. Rate/volume variances 19
II. Investment portfolio
A. Year-end balances 64-65
B. Maturity schedule and weighted average yield 50
III. Loan portfolio
A. Year-end balances 67
B. Maturities and sensitivities to changes in interest rates 48,51
C. Risk elements
Nonaccrual, past-due and renegotiated loans 47
Actual and pro forma interest on certain loans 67
Nonaccrual policy 60
Foreign outstandings 30
IV. Summary of loan loss experience
A. Charge-offs and recoveries 45
Factors influencing management's judgment concerning
the adequacy of the allowance and provision 60
B. Allocation of allowance for loan losses 46
V. Deposits
A. Average balances and rates 42-43
B. Maturity schedule of domestic time deposits with
balances of $100,000 or more 49
VI. Return on equity and assets, etc. 18,24,33
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FIRST EMPIRE STATE CORPORATION
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FORM 10-K
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For the fiscal year ended December 31, 1995
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CROSS-REFERENCE SHEET--continued Form
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Page
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PART I, continued
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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 20-22
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
A. Principal market 23
Market prices 36-37
B. Approximate number of holders at year-end 16
C. Frequency and amount of dividends declared 37
D. Restrictions on dividends 10-11,83
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, 1995 and 1994 55
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FIRST EMPIRE STATE CORPORATION
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FORM 10-K
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For the fiscal year ended December 31, 1995
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CROSS-REFERENCE SHEET--continued Form
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Page
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PART II, continued
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Item 8, continued
C. Consolidated Statement of Income -
Years ended December 31, 1995, 1994 and 1993 56
D. Consolidated Statement of Cash Flows -
Years ended December 31, 1995, 1994 and 1993 57
E. Consolidated Statement of Changes in
Stockholders' Equity - Years ended December 31, 58
1995, 1994 and 1993
F. Notes to Financial Statements 59-85
G. Quarterly Trends 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 86
PART III
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Item 10. Directors and Executive Officers of the
Registrant 86
Item 11. Executive Compensation 86
Item 12. Security Ownership of Certain Beneficial
Owners and Management 86
Item 13. Certain Relationships and Related Transactions 86
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 87
Signatures 88-90
Exhibit Index 91-92
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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, 1995, the Company had consolidated total assets of $12.0 billion,
deposits of $9.5 billion and stockholders' equity of $846 million. The Company
had 4,148 full-time and 741 part-time employees as of December 31, 1995.
At December 31, 1995, 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.").
Since the beginning of 1990, the Company has experienced significant growth
through federally-assisted acquisitions of assets and liabilities of failed
thrift institutions and through unassisted acquisition transactions involving
commercial banks, thrift institutions and mortgage banking companies. In January
and September 1990, respectively, M&T Bank, in two federally-assisted
transactions, purchased selected assets and assumed selected liabilities of
Monroe Savings Bank, FSB, Rochester, New York, and Empire Federal Savings Bank
of America, Buffalo, New York, two institutions that had been placed in
receivership. In May 1991, M&T Bank and East New York similarly purchased
certain assets and assumed certain liabilities of Goldome, a Buffalo, New York
savings bank, from the Federal Deposit Insurance Corporation ("FDIC"), as
receiver. In July 1992, Central Trust Company and Endicott Trust Company, two
banks located in Rochester and Endicott, New York, respectively, were acquired
and merged with and into M&T Bank. In December 1994, First Empire acquired
Ithaca Bancorp, Inc. ("Ithaca Bancorp"), Ithaca, New York, and simultaneously
merged Ithaca Bancorp's savings bank subsidiary, Citizens Savings Bank, F.S.B.,
into M&T Bank. Also, in December 1994, M&T Bank acquired from Chemical Bank
selected assets and liabilities associated with seven banking offices in New
York State's Hudson Valley region. In July 1995, M&T Bank acquired from The
Chase Manhattan Bank, N.A., selected assets and liabilities associated with four
banking offices, three of which were located in New York State's Hudson Valley
region, and one of which was located in Western New York.
The following table summarizes the loans and deposits acquired by the Company in
the bank acquisition transactions described above at the time those transactions
were consummated:
Recent Bank Acquisitions and Mergers
Loans Deposits
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(In billions of dollars)
Monroe Savings Bank, FSB $0.4 $0.5
Empire Federal Savings Bank of America 0.5 1.2
Goldome 1.0 2.2
Central Trust Company 0.8 1.0
Endicott Trust Company 0.2 0.3
Ithaca Bancorp, Inc. 0.4 0.3
Acquisition of banking offices - 1994 - 0.1
Acquisition of banking offices - 1995 - 0.1
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On March 6, 1995, M&T Bank's mortgage banking subsidiary, M&T Mortgage
Corporation ("M&T Mortgage"), acquired Statewide Funding Corporation
("Statewide"), a privately-owned mortgage banking company based near Albany, New
York. Statewide had a mortgage servicing portfolio of approximately $1.0 billion
as of the acquisition date. Statewide was merged with and into M&T Mortgage on
the same date. On October 2, 1995, M&T Mortgage acquired the mortgage servicing
rights and origination franchise of Exchange Mortgage Corporation ("Exchange"),
a mortgage banking company based in Huntington Station, New York. As of the
acquisition date, Exchange serviced residential mortgage loans owned by other
investors having an outstanding principal balance of approximately $370 million.
The Company from time to time considers acquiring additional banks, thrift
institutions, branch offices or other businesses, generally within markets
currently served or in other nearby markets. The Company has pursued such
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, 1995, M&T Bank had
146 banking offices located throughout New York State, including 121 in Western
New York and in the Southern Tier of New York State, principally in Buffalo,
Rochester, Ithaca and Binghamton, 22 banking offices in the Hudson Valley region
and one in New York City, plus a branch in Nassau, The Bahamas and a
representative office in Syracuse. As of December 31, 1995, M&T Bank had
consolidated total assets of $10.2 billion, deposits of $7.8 billion and
stockholder's equity of $669 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 $7.4 billion in
assessable deposits at December 31, 1995, 82% 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 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 16 banking
offices located in New York City and Nassau County, Long Island. As of December
31, 1995, East New York had consolidated total assets of $1.8 billion, deposits
of $1.6 billion and stockholder's equity of $134 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.
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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, 1995,
M&T Bank, N.A. had total assets of $246 million, deposits of $69 million and
stockholder's equity of $25 million. Credit card receivables of $211 million
were transferred to M&T Bank, N.A. by M&T Bank during 1995.
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 $8 million and
stockholder's equity of $7 million as of December 31, 1995, and recorded
approximately $3.8 million of revenues in 1995. 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, 1995, M&T Credit had
assets of $102 million and stockholder's equity of $0.6 million. M&T Credit
recorded $4.7 million of revenues during 1995.
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 and others. M&T Mortgage operates throughout New York State, and also
maintains branch offices in Colorado, Massachusetts, Ohio, Oregon, Pennsylvania,
Utah and Washington. M&T Mortgage had assets of $293 million and stockholder's
equity of $76 million as of December 31, 1995, and recorded approximately $56.6
million of revenues during 1995. 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 $83 million and
stockholder's equity of $15 million as of December 31, 1995, and recorded
approximately $0.9 million of revenues in 1995. 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 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 of the Company. M&T Real Estate engages in commercial real estate
lending and servicing activities. During August 1995, M&T Bank contributed $1.9
billion of commercial mortgage loans, representing substantially all of its
commercial real estate loan portfolio, to M&T Real Estate. In addition,
substantially all of East New York's commercial real estate loan portfolio of
approximately $1.2 billion was transferred to M&T Bank, which in turn
contributed such loans to M&T Real Estate. In consideration for the transfer of
commercial real estate loans, East New York received from M&T Bank a portfolio
of residential mortgage and home equity loans with an aggregate estimated market
value comparable to that of the net
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assets transferred by East New York to M&T Bank. As of December 31, 1995, M&T
Real Estate had assets of $3.2 billion and stockholder's equity of $3.1 billion.
M&T Real Estate recorded $122 million of revenues in 1995. 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 provides securities brokerage and investment advisory
services. As of December 31, 1995, M&T Securities had assets of $4.1 million and
stockholder's equity of $(81) thousand. M&T Securities recorded $8.6 million of
revenues during 1995. 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, 1995, Highland Lease had assets of
$108 million and stockholder's equity of $7.3 million. Highland Lease recorded
$4.9 million of revenues during 1995.
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, 1995.
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 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
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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 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
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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 subject to the
limitations referred to in note 18 of Notes to Financial Statements filed
herewith in Part II, Item 8, "Financial Statements and
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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 and the FDIC 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 and the FDIC 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 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 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, 1995 exceeded the risk-based capital adequacy guidelines and the
leverage standard.
Capital Components and Ratios at December 31, 1995
(dollars in millions)
Registrant M&T Bank,
(Consolidated) M&T Bank East New York N.A.
-------------- -------- ------------- ----
Capital Components
Tier 1 capital $ 821 $ 646 $ 133 $ 22
Total capital 1,118 927 148 25
Risk-weighted assets
and off-balance sheet
instruments $ 9,624 $8,392 $1,168 $235
Risk-based Capital Ratio
Tier 1 capital 8.53% 7.70% 11.41% 9.46%
Total capital 11.62 11.05 12.68 10.76
Leverage Ratio 6.91 6.38 7.33 10.08
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
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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.
In August 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
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. Although the
final rule did not codify a measurement framework, the federal banking agencies
also intend to adopt a measurement framework which can be incorporated into
risk-based capital standards.
-12-
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 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
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 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 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
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 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 is in an unsafe or unsound condition or deems the bank to be engaged in an
unsafe or unsound practice and not to have corrected the deficiency. 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 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.
-13-
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 90 days' 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 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 insurance assessment to be paid by BIF-insured institutions shall be
specified in a schedule required to be issued by the FDIC that specifies, at
semiannual intervals, target reserve ratios designed to increase the reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) no later than 2006. The FDIC is
also authorized to impose one or more special assessments in any amounts deemed
necessary to enable repayment of amounts borrowed by the FDIC from the Treasury
Department. On September 15, 1992, the FDIC approved the implementation of 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
assessment rates under the system range from .23% to .31% depending upon the
assessment category into which the insured institution is placed. The risk-based
assessment system became effective January 1, 1993. In September 1995, the FDIC
announced that the BIF was fully capitalized at the end of May 1995. As a
result, the BIF assessments from the FDIC for M&T Bank and East New York were
reduced to .04%, retroactive to June 1, 1995. In addition, effective January 1,
1996, such assessment was reduced to a nominal level for M&T Bank, East New York
and M&T Bank, N.A. The FDIC retains the ability to increase BIF assessments and
to levy special additional assessments.
With respect to deposit insurance assessments on SAIF-insured deposits at M&T
Bank (which represent approximately 18% of its total assessed deposit
liabilities), under current law such assessments must be the greater of .15% of
M&T Bank's average assessment base (as defined) or such rate as the FDIC at its
sole discretion determines to be appropriate to increase (or maintain) the
reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as
the FDIC may determine in accordance with the statute) within a reasonable
period of time. From January 1, 1994 through December 31, 1997 the assessment
rate must not be less than .18% of the institution's average assessment base.
The assessment rate may be higher if the FDIC, in its sole discretion,
determines such higher rate to be appropriate. Effective January 1, 1993, the
risk-based deposit premium assessment system described above was made applicable
to SAIF-insured deposits. However, unlike assessments for BIF-insured deposits,
the FDIC has not reduced the 1995 or 1996 assessment rates for SAIF-insured
deposits. Furthermore, in 1995 congressional committees considered proposals
that would require a one-time special assessment related to deposits insured by
the SAIF. Although final legislation has yet to be enacted, management believes
that it is likely that a special assessment will ultimately be levied against
M&T Bank on its SAIF insured deposits.
-14-
A significant increase in the assessment rate or a special additional assessment
with respect to insured deposits 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.
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 1995 1994 1993 1992 1991
- ------------------------------------------------- ----------- ---------- ---------- --------- ----------
Money-market assets
Interest-bearing deposits at banks $ 125,500 143 55,044 110,041 -
Federal funds sold and resell agreements 1,000 3,080 329,429 312,461 67,351
Trading account 9,709 5,438 9,815 53,515 42,957
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total money-market assets 136,209 8,661 394,288 476,017 110,308
Investment securities
U.S. Treasury and federal agencies 1,087,005 999,407 1,387,395 916,621 1,725,604
Obligations of states and political subdivisions 35,250 55,787 49,230 53,789 128,409
Other 647,040 735,846 992,527 750,154 731,973
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total investment securities 1,769,295 1,791,040 2,429,152 1,720,564 2,585,986
Loans and leases
Commercial, financial, leasing, etc. 2,013,937 1,680,415 1,510,205 1,478,555 1,068,606
Real estate - construction 77,604 53,535 51,384 35,831 30,895
Real estate - mortgage 5,648,590 5,046,937 4,540,177 4,422,730 4,091,414
Consumer 2,133,592 1,666,230 1,337,293 1,211,401 1,015,722
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total loans and leases 9,873,723 8,447,117 7,439,059 7,148,517 6,206,637
Unearned discount (317,874) (229,824) (177,960) (164,713) (160,083)
Allowance for possible credit losses (262,344) (243,332) (195,878) (151,690) (100,265)
- ------------------------------------------------- ------------ ---------- ---------- --------- ---------
Loans and leases, net 9,293,505 7,973,961 7,065,221 6,832,114 5,946,289
Other real estate owned 7,295 10,065 12,222 16,694 10,354
Total assets 11,955,902 10,528,644 10,364,958 9,587,931 9,171,066
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Demand deposits 1,184,359 1,087,102 1,052,258 1,078,690 655,876
NOW accounts 768,559 748,199 764,690 770,618 683,732
Savings deposits 2,765,301 3,098,438 3,364,983 3,573,717 2,841,590
Time deposits 4,596,053 3,106,723 1,982,272 2,536,309 3,066,897
Deposits at foreign office 155,303 202,611 189,058 117,776 226,229
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total deposits 9,469,575 8,243,073 7,353,261 8,077,110 7,474,324
Short-term borrowings 1,273,206 1,364,850 2,101,667 692,691 1,022,430
Long-term borrowings 192,791 96,187 75,590 75,685 9,477
Total liabilities 11,109,649 9,807,648 9,640,964 8,961,136 8,635,291
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Stockholders' equity 846,253 720,996 723,994 626,795 535,775
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
STOCKHOLDERS, EMPLOYEES AND OFFICES
Number at year-end 1995 1994 1993 1992 1991
- ------------------------------------------------- ----------- ---------- ---------- ---------- ---------
Stockholders 3,787 3,981 3,985 4,157 4,346
Employees 4,889 4,505 4,400 4,275 3,338
Banking offices 181 168 145 151 115
- ------------------------------------------------- ----------- ---------- ---------- ---------- ---------
-16-
- ---------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------
Item 1, Table 2
CONSOLIDATED EARNINGS
Dollars in thousands 1995 1994 1993 1992 1991
- -------------------------------------------- --------- ------- ------- ------- -------
Interest income
Loans and leases, including fees $ 794,181 633,077 608,473 602,932 592,395
Money-market assets
Deposits at banks 8,181 2,212 6,740 1,083 7,864
Federal funds sold and resell agreements 3,007 4,751 20,403 18,100 5,322
Trading account 1,234 361 1,242 2,927 15,716
Investment securities
Fully taxable 118,791 104,185 101,187 125,529 138,808
Exempt from federal taxes 2,760 2,760 2,584 5,906 9,292
- -------------------------------------------- --------- ------- ------- ------- -------
Total interest income 928,154 747,346 740,629 756,477 769,397
- -------------------------------------------- --------- ------- ------- ------- -------
Interest expense
NOW accounts 11,902 11,286 13,113 16,544 27,418
Savings deposits 87,612 84,804 90,392 110,142 123,468
Time deposits 239,882 97,067 98,508 153,588 242,684
Deposits at foreign office 6,952 5,894 3,243 4,348 9,014
Short-term borrowings 84,225 73,868 58,459 38,386 36,972
Long-term borrowings 11,157 6,287 6,158 590 659
- -------------------------------------------- --------- ------- ------- ------- -------
Total interest expense 441,730 279,206 269,873 323,598 440,215
- -------------------------------------------- --------- ------- ------- ------- -------
Net interest income 486,424 468,140 470,756 432,879 329,182
Provision for possible credit losses 40,350 60,536 79,958 84,989 63,412
- -------------------------------------------- --------- ------- ------- ------- -------
Net interest income after provision
for possible credit losses 446,074 407,604 390,798 347,890 265,770
- -------------------------------------------- --------- ------- ------- ------- -------
Other income
Trust income 25,477 22,574 23,865 16,905 11,847
Service charges on deposit accounts 38,290 35,016 32,291 28,372 20,688
Merchant discount and other credit card fees 10,675 8,705 7,932 6,728 5,776
Trading account gains 1,151 700 2,702 1,684 5,015
Gain on sales of bank investment securities 4,479 128 870 28,050 450
Mortgage banking revenues 37,142 16,002 12,776 10,943 8,548
Gain on sales of venture capital investments 2,619 802 2,896 3,230 2,064
Other revenues from operations 29,705 39,812 27,212 30,314 23,298
- -------------------------------------------- --------- ------- ------- ------- -------
Total other income 149,538 123,739 110,544 126,226 77,686
- -------------------------------------------- --------- ------- ------- ------- -------
Other expense
Salaries and employee benefits 188,222 161,221 154,340 130,751 103,201
Equipment and net occupancy 50,526 49,132 47,823 41,659 33,350
Printing, postage and supplies 14,442 13,516 13,021 13,111 10,727
Deposit insurance 14,675 16,442 17,684 17,783 15,222
Other costs of operations 106,574 96,551 94,951 108,034 66,161
- -------------------------------------------- --------- ------- ------- ------- -------
Total other expense 374,439 336,862 327,819 311,338 228,661
- -------------------------------------------- --------- ------- ------- ------- -------
Income before income taxes 221,173 194,481 173,523 162,778 114,795
Income taxes 90,137 77,186 71,531 64,841 47,601
- -------------------------------------------- --------- ------- ------- ------- -------
Net income $ 131,036 117,295 101,992 97,937 67,194
============================================ ========= ======= ======= ======= =======
Dividends declared
Common $ 16,224 14,743 13,054 10,780 9,344
Preferred 3,600 3,600 3,600 3,600 2,860
============================================ ========= ======= ======= ======= =======
-17-
- ----------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------
Item 1, Table 3
COMMON SHAREHOLDER DATA
1995 1994 1993 1992 1991
- -------------------------------------------- ------ ------ ----- ----- -----
Per Share
Net income $18.79 16.35 13.87 13.41 9.32
Cash dividends declared 2.50 2.20 1.90 1.60 1.40
Stockholders' equity at year-end 125.33 103.02 99.43 85.79 73.91
Dividend payout ratio 12.73% 12.97% 13.27% 11.43% 14.52%
============================================ ====== ====== ===== ===== =====
-18-
- -----------------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------
Item 1, Table 4
CHANGES IN INTEREST INCOME AND EXPENSE*
1995 compared with 1994 1994 compared with 1993
----------------------- -----------------------
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 $ 161,336 127,303 34,033 $ 24,416 38,266 (13,850)
Money-market assets
Deposits at banks 5,969 4,005 1,964 (4,528) (6,055) 1,527
Federal funds sold and agreements to resell securities (1,744) (3,335) 1,591 (15,652) (20,432) 4,780
Trading account 840 952 (112) (935) (1,083) 148
Investment securities
U.S. Treasury and federal agencies 17,563 3,841 13,722 (5,735) (6,451) 716
Obligations of states and political subdivisions 348 (227) 575 472 747 (275)
Other (2,945) (6,562) 3,617 8,682 972 7,710
- --------------------------------------------------------- --------- ---------
Total interest income $ 181,367 $ 6,720
========================================================= ========= =========
Interest expense
Interest-bearing deposits
NOW accounts $ 616 237 379 $ (1,827) (28) (1,799)
Savings deposits 2,808 (9,704) 12,512 (5,588) (5,848) 260
Time deposits 142,815 105,852 36,963 (1,441) (3,099) 1,658
Deposits at foreign office 1,058 (953) 2,011 2,651 1,146 1,505
Short-term borrowings 10,357 (16,495) 26,852 15,409 (4,856) 20,265
Long-term borrowings 4,870 5,272 (402) 129 135 (6)
- --------------------------------------------------------- --------- ---------
Total interest expense $ 162,524 $ 9,333
========================================================= ========= =========
* 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 68% of the building
and the remainder is leased to non-affiliated tenants. At December 31, 1995, the
cost of this property, net of accumulated depreciation, was $10.2 million.
In September 1992, M&T Bank acquired an additional facility in Buffalo, New York
with approximately 346,000 rentable square feet of space at a cost of
approximately $12 million. Approximately 83% 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, 1995, the cost of this building,
including improvements made subsequent to acquisition and net of accumulated
depreciation, was $16.3 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 161 domestic banking offices of the Registrant's subsidiary banks,
57 are owned in fee and 104 are leased.
Item 3. Legal Proceedings.
A number of lawsuits were pending against the Registrant and its subsidiaries at
December 31, 1995. In the opinion of management, the potential liabilities, if
any, arising from such litigation will not have a materially adverse impact on
the Company's consolidated financial condition. Moreover, management believes
that the Company has substantial defenses in such litigation, but there can be
no assurance that the potential liabilities, if any, arising from such
litigation will not have a materially adverse impact on the Company's
consolidated results of operations in the future.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable
Executive Officers of the Registrant
Information concerning the Registrant's executive officers is presented below as
of March 4, 1996. 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 61, 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, president and chief executive
officer (1983) and a director (1982) of M&T Bank. 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).
William A. Buckingham, age 53, is an executive vice president (1990) of
the Registrant and of M&T Bank and is in charge of the Company's Retail
Banking Division. Mr. Buckingham is a director of M&T Securities. He is
an executive vice president and a director of M&T Bank, N.A.(1995). Mr.
Buckingham is chairman of the board and a director of M&T Credit
(1995); chairman of the board and a director of Highland Lease (1995);
-20-
and a director of M&T Securities (1995). Mr. Buckingham held a number
of management positions with Manufacturers Hanover Trust Company from
1973 to 1990, including the position of executive vice president of its
branch banking division which he held immediately prior to joining the
Registrant and M&T Bank.
Atwood Collins, III, age 49, is the 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 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.
Brian E. Hickey, age 43, is president (1994) of the Rochester Division of
M&T Bank and has responsibility for managing all of M&T Bank's business
segments in the Rochester market. 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.
James L. Hoffman, age 56, is president (1992) of the Hudson Valley
Division of M&T Bank. 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. Mr. Hoffman is a director of M&T Financial (1986). He served
as an executive vice president of M&T Bank from 1974 to 1984.
Barbara L. Laughlin, age 51, 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.
William C. Rappolt, age 50, 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 50, is an executive vice president of the
Registrant (1990) and of M&T Bank (1983), 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 59, is an executive vice president of the
Registrant (1993) and of M&T Bank (1985), and is in charge of M&T
Bank's Trust and Investment Services Division. Mr. Stainrook is a
director of M&T Securities (1994).
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James L. Vardon, age 54, is an executive vice president and chief
financial officer (1984) of the Registrant and of M&T Bank, and is in
charge of the Company's Finance Division. Mr. Vardon is a director of
M&T Capital (1984), M&T Financial (1985) and M&T Real Estate (1995). He
is an executive vice president and chief financial officer of M&T Bank,
N.A.(1995).
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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 $12.0 billion at
December 31, 1995. 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
$10.2 billion at December 31, 1995, is a New York-chartered commercial bank
with 121 offices throughout Western New York State and New York's Southern Tier,
22 offices in New York's Hudson Valley region and offices in New York City,
Albany, Syracuse and Nassau, The Bahamas. East New York, with $1.8 billion in
assets at December 31, 1995, is a New York-chartered savings bank with 16
offices in metropolitan New York City. M&T Bank, N.A., with $246 million in
assets at December 31, 1995, is a national bank headquartered in Oakfield, New
York that commenced operations on October 2, 1995. M&T Bank, N.A. is currently
offering consumer banking products, primarily credit cards and home equity loans
and lines of credit. Additionally, M&T Bank, N.A. markets certificates of
deposit nationwide.
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 real estate lending company; M&T Financial
Corporation, an equipment 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 6, 1995, M&T Mortgage Corporation acquired Statewide Funding
Corporation ("Statewide"), a privately-owned mortgage banking company based near
Albany, New York. Statewide had a mortgage servicing portfolio of approximately
$1.0 billion at the acquisition date and originated more than $400 million of
mortgage loans in 1994. Through this acquisition, several New York State offices
were retained, as was an origination office in Massachusetts. On October 2,
1995, M&T Mortgage Corporation acquired the mortgage servicing rights and
origination franchise of Exchange Mortgage Corporation ("Exchange"), a mortgage
banking company based in Huntington Station, New York. Exchange had total
mortgage originations of approximately $177 million in 1994 and serviced a
portfolio of approximately $370 million as of the acquisition date. M&T Mortgage
Corporation has also continued to expand its out-of-state network of residential
mortgage origination offices. During 1995, offices were opened in Colorado,
Oregon, Utah and Washington.
On July 21, 1995, the Company acquired four banking offices from The Chase
-23-
Manhattan Bank, N.A., including approximately $84 million in deposits, and on
December 10, 1994 purchased approximately $146 million of deposits from Chemical
Bank, along with seven banking offices in the Hudson Valley region of New York
State. Additionally, on December 1, 1994 First Empire acquired Ithaca Bancorp,
Inc. ("Ithaca Bancorp"), Ithaca, New York, with total assets of $470 million,
including $369 million of loans, and liabilities of $425 million, including $330
million of deposits, along with twelve banking offices in the Southern Tier of
New York State.
The acquisitions noted herein were consummated for cash and have been
accounted for as purchase transactions. Accordingly, the operating results of
the acquired entities have been included in the consolidated results of
operations of the Company since the respective acquisition dates.
Overview
The Company's net income was $131.0 million or $18.79 per common share in 1995,
increases of 12% and 15%, respectively, from $117.3 million or $16.35 per common
share in 1994. Fully diluted earnings per common share, which assumes the full
conversion of outstanding preferred stock into common, was $17.78 in 1995 and
$15.71 in 1994, an increase of 13%. In 1993, net income was $102.0 million while
primary and fully diluted earnings per common share were $13.87 and $13.42,
respectively. Excluding the after-tax effect of securities transactions, net
income and earnings per common share were $128.4 million and $18.41,
respectively, in 1995 compared with $117.2 million and $16.34 in 1994 and $101.5
million and $13.81 in 1993. On the same basis, fully diluted earnings per common
share were $17.43, $15.70 and $13.36 in 1995, 1994 and 1993, respectively.
The Company achieved a return on average assets in 1995 of 1.14%, compared
with 1.17% in 1994 and .98% in 1993. The return on average common stockholders'
equity was 17.16% in 1995, 16.64% in 1994 and 15.61% in 1993. Excluding the
after-tax effect of securities transactions, the return on average assets was
1.12%, while the return on average common stockholders' equity was 16.81% in
1995, compared with 1.17% and 16.63% in 1994 and .98% and 15.53% in 1993,
respectively.
Growth in average earning assets, primarily in loans, was the most
significant factor contributing to a rise in taxable-equivalent net interest
income to $491.1 million in 1995 from $472.2 million in 1994. Average earning
assets totaled $11.1 billion in 1995, a 15% increase from $9.7 billion in 1994.
The beneficial impact on net interest income of growth in earning assets
exceeded the effect of a narrowing of the spread between yields on earning
assets and rates paid on interest-bearing liabilities. As a result of such
narrowing, net interest margin, or taxable-equivalent net interest income
expressed as a percentage of average earning assets, decreased 46 basis points
(hundredths of one percent) in 1995 to 4.43% from 4.89% in 1994.
Taxable-equivalent net interest income was $474.8 million in 1993 when average
earning assets and net interest margin were $10.0 billion and 4.76%,
respectively.
Reflecting generally stable economic conditions in market areas served by
the Company, the provision for possible credit losses decreased to $40.4 million
in 1995, compared with $60.5 million in 1994 and $80.0 million in 1993. Net
charge-offs in 1995 were $21.3 million, compared with $16.6 million in 1994 and
$35.8 million in 1993. Nonperforming loans totaled $93.1 million at December 31,
1995, up from $77.5 million at December 31, 1994 and $82.3 million at year-end
1993.
In December 1994, First Empire transferred appreciated investment securities
with a fair value of $15.7 million to an affiliated, tax-exempt charitable
foundation. Such securities had been previously classified by First Empire as
available for sale. As a result of the transfer, the Company
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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.
Excluding the impact of securities gains and the December 1994 transfer of
investment securities to the affiliated foundation, noninterest income for 1995
totaled $145.1 million, 28% above the $113.2 million in 1994 and 32% above the
$109.7 million in 1993. Noninterest expense was $374.4 million in 1995, up 16%
from $323.1 million in 1994 (excluding $13.8 million related to the December
1994 transfer of investment securities) and 14% from $327.8 million in 1993.
As described in note 1 of Notes to Financial Statements, during the second
quarter of 1995 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights", retroactive to
January 1, 1995. The effect of implementing SFAS No. 122 was to increase 1995
noninterest income and noninterest expense by $10.0 million and $1.8 million,
respectively, and, as a result, net income increased by $4.8 million for the
year-ended December 31, 1995.
Net Interest Income/Lending and Funding Activities
Taxable-equivalent net interest income rose to $491.1 million in 1995 from
$472.2 million in 1994. A $1.4 billion increase in average earning assets to
$11.1 billion in 1995 from $9.7 billion in 1994 was the major factor for the
rise. Taxable-equivalent net interest income and average earning assets in 1993
were $474.8 million and $10.0 billion, respectively. The growth in average
earning assets in 1995 was predominately attributable to increased demand for
loans offered by the Company and the impact of the December 1994 acquisition of
$369 million of loans of Ithaca Bancorp. Average loans outstanding grew to $8.9
billion in 1995 from $7.4 billion in 1994 and $7.0 billion in 1993. The
acquisition of Ithaca Bancorp did not substantially impact average loans in
1994.
The increase in net interest income resulting from growth in average earnings
assets was partially offset by a narrowing of the net interest spread, or the
difference between the yield on earning assets and the rate paid on
interest-bearing liabilities. The net interest spread in 1995 was 3.77%,
compared with 4.37% in 1994 and 4.33% in 1993. A combination of higher market
interest rates, in general, and a greater proportion of loans, which typically
yield more than money-market assets and investment securities, in the
composition of the portfolio of earning assets resulted in a 65 basis point
increase in 1995 to 8.42% in the yield on earning assets, from 7.77% in 1994.
However, 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. As a result, the cost of interest-bearing
liabilities increased 125 basis points to 4.65% in 1995 from 3.40% in 1994. The
yield on earning assets and the rate paid on interest-bearing liabilities in
1993 were 7.46% and 3.13%, respectively. In 1994, the benefit obtained from
increased holdings of loans as compared with 1993 was offset by a rise in
interest expense on deposits and short-term borrowings.
The contribution to net interest margin of interest-free funds, which consist
primarily of noninterest-bearing demand deposits and stockholders' equity, rose
to .66% in 1995 from .52% in 1994 and .43% in 1993. The improvement in 1995 from
1994 resulted largely from the 125 basis point increase to 4.65% in the rate
paid on interest-bearing liabilities used to value these funds, supplemented by
an 8% increase in average interest-free funds. The 9 basis point addition to the
contribution of interest-free funds in 1994 from 1993 was a reflection of the 27
basis point increase in the rate paid on interest-bearing liabilities from 3.13%
coupled with a 7% increase in average interest-free balances. Average
interest-free funds were $1.6
-25-
billion in 1995, $1.5 billion in 1994 and $1.4 billion in 1993.
Changing interest rates and spreads affect the Company's net interest income
and net interest margin. As a result of the changes described herein, the
Company's net interest margin declined to 4.43% in 1995 from 4.89% in 1994 and
4.76% in 1993. Management believes that further changes in market interest rates
or reductions in spreads could adversely impact the Company's net interest
margin and net interest income. Although not necessarily indicative of future
results, the Company's net interest spread declined in each quarter of 1995.
Accordingly, the net interest spread in the fourth quarter of 1995 of 3.67% was
below that achieved in any other quarter of 1995.
Management analyzes the Company's exposure to changing 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, rates paid on interest-bearing deposits. In general, under
the terms of swaps in effect through December 31, 1995, 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.
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 table 4.
The Company estimates that as of December 31, 1995 it would have received
approximately $37.0 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.
As previously noted, average loans and leases grew to $8.9 billion in 1995
from $7.4 billion in 1994 and $7.0 billion in 1993, due, in large part, to
improved economic conditions, the December 1994 acquisition of Ithaca Bancorp
and expansion of the Company's consumer lending business. Table 5 summarizes by
type, average loans and leases outstanding in 1995 and percentage changes in
average loans over the past two years.
Loans secured by real estate, excluding $587 million of outstanding home
equity lines of credit which are classified as consumer loans, represented
approximately 60% of the loan portfolio during 1995, compared with 61% in 1994
and 63% in 1993. At December 31, 1995, the Company held approximately $3.6
billion of commercial real estate loans and $2.0 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. In
general, 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
-26-
agreement for an additional five years at the then-current market rate of
interest. Table 6 presents commercial real estate loans at December 31, 1995 by
geographic area, type of collateral and size of the loans outstanding.
Approximately 60% of the $1.9 billion of commercial real estate loans in the New
York City metropolitan area were secured by multi-family residential properties,
23% by office space and 8% 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 55% of the aggregate
dollar amount of New York City area loans were for $3 million or less.
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. Most 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 then
4% of total commercial real estate loans.
The Company normally refrains from construction lending, except when the
borrower has obtained a commitment for permanent financing upon project
completion. As a result, the commercial construction loan portfolio totaled only
$41.6 million, or .4% of total loans at December 31, 1995.
Excluding $185.0 million of loans held for sale, the Company's portfolio of
real estate loans secured by one-to-four family residential properties totaled
$1.8 billion at December 31, 1995, approximately 70% of which were secured by
properties located in New York State. The Company originates residential
mortgage loans in New York State, as well as in Colorado, Massachusetts, Ohio,
Oregon, Pennsylvania, Utah and Washington.
As a percentage of average loans, consumer loans and leases were 20% in 1995,
19% in 1994 and 17% in 1993, however, no consumer loan product type exceeded ten
percent of the Company's average loan portfolio. Beginning in 1994 and, to a
greater extent, continuing in 1995, the Company began to market automobile loans
and leases and credit cards in areas outside of New York State. 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. Credit card accounts are marketed through mail campaigns
and co-branding initiatives.
The Company's portfolio of investment securities averaged $2.0 billion in
1995, $2.1 billion in 1994 and $2.2 billion in 1993. The level of the investment
securities portfolio is influenced by such factors as management of balance
sheet size and resulting capital ratios, demand for loans, which generally yield
more than investment securities, ongoing repayments, and the level of deposits.
The investment securities portfolio is largely comprised of collateralized
mortgage obligations, other adjustable rate mortgage-backed securities 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. During 1995,
the Company sold approximately $445 million of investment securities for a
pre-tax gain of approximately $4.5 million. Included in the securities sold was
a municipal bond with a carrying value of $1.0 million that had been classified
as "held to maturity". Such bond was sold for a modest loss immediately
following the downgrading of the municipality's credit rating by several rating
agencies. Gains realized from sales of bank investment securities were $.1
million and $.9 million in 1994 and 1993, respectively. To enhance flexibility
in managing the investment securities portfolio, and as allowed by the Financial
Accounting Standards Board, 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 as a result of
such transfer.
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The average balance of money-market assets, which are comprised of
interest-bearing deposits at banks, trading account assets, Federal funds sold
and agreements to resell securities, was $186 million in 1995, compared with
$166 million in 1994 and $826 million in 1993. The lower level of such assets in
1995 and 1994 largely reflects increased demand for loans, the Company's
decision to limit the amount of short-term borrowings, which had been used to
fund money-market assets, and, in 1994, reduction of the size of the balance
sheet in order to strengthen capital ratios in anticipation of the December
acquisitions.
Core deposits represent a significant source of funding to the Company. Core
deposits are commonly generated through the branch network at generally lower
interest rates than are available on wholesale funds of similar maturities, and
include noninterest-bearing demand deposits, interest-bearing transaction
accounts, savings deposits and domestic time deposits under $100,000. In 1995,
average core deposits rose to $7.4 billion from $6.8 billion in 1994. Increases
in interest rates paid on deposits in response to higher money-market rates and
the December 1994 and July 1995 acquisitions of $442 million and $76 million,
respectively, of core deposits contributed to this rise. Higher interest rates
also contributed to a shift into time deposits from more liquid deposit
accounts. Core deposits averaged $7.2 billion in 1993. Funding provided by core
deposits totaled 67% of average earning assets in 1995, compared with 70% in
1994 and 72% in 1993. An analysis of changes in the components of core deposits
is presented in table 8.
In addition to core deposits, the Company obtains funding through domestic
time deposits of $100,000 or more, offshore deposits originated through the
Company's international office, and brokered certificates of deposit. Domestic
time deposits over $100,000, excluding brokered certificates of deposit,
averaged $625 million in 1995 compared with $357 million in 1994 and $294
million in 1993. Offshore deposits, comprised primarily of accounts with
balances of $100,000 or more, averaged $133 million in 1995, compared with $156
million and $120 million in 1994 and 1993, respectively. Brokered deposits
averaged $874 million in 1995 and $45 million in 1994, and totaled $922 million
at December 31, 1995. The weighted-average remaining term to maturity of
brokered deposits as of December 31, 1995 was 1.7 years. Additional amounts of
brokered deposits may be solicited from time to time depending on such factors
as current market conditions and the cost of funds available from alternative
sources.
The Company also 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 $1.4 billion in 1995, $1.8 billion in
1994 and $1.9 billion in 1993. 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.
Provision for Possible Credit Losses
The purpose of the provision is to replenish and build the Company's allowance
for possible credit losses to a level necessary to maintain an adequate reserve
position. In assessing the adequacy of the allowance for possible credit losses,
management performs an ongoing evaluation of the loan portfolio and other credit
commitments, including such factors as the differing economic risks associated
with each loan category, the current financial condition of specific borrowers,
the economic environment in which borrowers operate, the level of delinquent
loans and the value of any collateral. Based upon the results of such review,
management believes that
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the allowance for possible credit losses at December 31, 1995 was adequate to
absorb credit losses from existing loans, leases and credit commitments.
Reflecting generally stable economic conditions in market areas served by the
Company throughout much of 1995, the provision for possible credit losses was
reduced to $40.4 million from $60.5 million in 1994. The provision was $80.0
million in 1993 when there was concern by management about unsettled commercial
real estate markets, in particular in the New York City metropolitan area, and
the timing and sustainability of economic recovery in market areas served by the
Company in general. Net charge-offs in 1995 were $21.3 million, compared with
$16.6 million in 1994 and $35.8 million in 1993. Net charge-offs as a percentage
of average loans outstanding were .24% in 1995, .22% in 1994 and .51% in 1993.
Nonperforming loans totaled $93.1 million or .97% of loans outstanding at
December 31, 1995, compared with $77.5 million or .94% a year earlier and $82.3
million or 1.13% at December 31, 1993. The allowance for possible credit losses
was $262.3 million or 2.75% of net loans and leases at the end of 1995, compared
with $243.3 million or 2.96% at December 31, 1994 and $195.9 million or 2.70% at
December 31, 1993. The ratio of the allowance to nonperforming loans was 282%,
314% and 238% at year-end 1995, 1994 and 1993, respectively.
A comparative allocation of the allowance for possible credit losses for each
of the past five year-ends is presented in table 10. 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 increase in the
allocated portion of the reserve since 1993 compared with prior years is not
indicative of a deterioration of credit quality within the loan portfolio, but
rather reflects certain revisions to the assumptions used to calculate the
allocated portion of the allowance for possible credit losses. Nevertheless, the
unallocated portion of the reserve represents management's assessment of the
overall level of credit risk inherent in the loan 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 $42.3 million, $47.5 million
and $48.3 million at December 31, 1995, 1994 and 1993, respectively. At December
31, 1995, $16.8 million of nonperforming commercial real estate loans were
secured by properties located in the New York City metropolitan area, compared
with $27.1 million and $29.7 million at December 31, 1994 and 1993,
respectively. Net charge-offs of commercial real estate loans were $6.6 million
in 1995, $12.8 million in 1994 and $19.2 million in 1993. Included in these
totals are net charge-offs of commercial real estate loans secured by properties
in the New York City metropolitan area of $3.2 million, $11.1 million and $14.2
million in 1995, 1994 and 1993, respectively.
Net charge-offs of consumer loans were $11.3 million in 1995, or .65% of
average consumer loans outstanding during the year, compared with $5.6 million
or .40% in 1994 and $6.0 million or .51% in 1993. Higher charge-offs of credit
card balances were the principal factor contributing to the increase in consumer
loan charge-offs in 1995. Net credit card charge-offs were $6.1 million in 1995,
compared with $3.1 million and $3.3 million in 1994 and 1993, respectively.
Nonperforming consumer loans totaled $13.7 million or .70% of outstanding
consumer loans at December 31, 1995, compared with $8.4 million or .54% at
December 31, 1994 and $5.9 million or .48% at December 31, 1993.
The Company has limited exposure to possible credit losses originating from
concentrations of credit extended to any specific industry. No such
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concentration exceeded 10% of total loans outstanding at December 31, 1995.
Furthermore, the Company had no exposure to less developed countries, and only
$1.1 million of foreign loans in total.
Repossessed assets taken in foreclosure of defaulted loans totaled $7.3
million at December 31, 1995, compared with $10.1 million and $12.2 million at
the end of 1994 and 1993, respectively.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan", in the first quarter of 1995. As amended, SFAS No. 114 requires that
creditors measure certain impaired loans based on the present value of expected
future cash flows discounted at the loan's effective interest rate or at the
loan's observable value or the fair value of underlying collateral, if the loan
is collateral-dependent. A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In general, the Company places loans considered to be impaired on
nonaccrual status. The adoption of SFAS No. 114 had no impact on the Company's
results of operations or on its loan classification policies.
Other Income
Other income in 1994 included $10.4 million of tax-exempt income resulting from
the transfer of appreciated investment securities to an affiliated, tax-exempt
charitable foundation. Excluding the effect of such income, as well as gains
from sales of bank investment securities, other income increased 28% to $145.1
million in 1995 from $113.2 million in 1994 and 32% from $109.7 million in 1993.
Including the impact of deposit accounts associated with the franchises acquired
in late-1994 and 1995, service charges on deposit accounts increased 9% to $38.3
million in 1995 from $35.0 million in 1994, and 19% from $32.3 million in 1993.
Merchant discount and other credit card fees in 1995 totaled $10.7 million,
compared with $8.7 million in 1994 and $7.9 million in 1993. Trust income of
$25.5 million increased 13% from $22.6 million in 1994, and 7% from $23.9
million in 1993. The increases in trust revenues were attributable, in large
part, to enhanced earnings from mutual fund management fees and from personal
and corporate trust business. Trading account gains increased to $1.2 million in
1995 from $.7 million in 1994, but decreased from $2.7 million in 1993. Other
revenues from operations totaled $32.3 million in 1995, compared with $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) and $30.1 million in
1993.
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-related fees, increased to
$37.1 million in 1995 from $16.0 million in 1994 and $12.8 million in 1993. Fees
earned in 1995 for servicing residential mortgage loans for others increased
$5.7 million from a year earlier, while gains from sales of residential mortgage
loans increased $8.4 million, including $10.0 million resulting from the
previously noted adoption of SFAS No. 122. Additionally, in 1995 the Company
realized $6.6 million of gains from sales of rights to service approximately
$630 million of residential mortgage loans. The $3.2 million improvement in
mortgage banking revenues in 1994 from 1993 was also largely attributable to
growth in the Company's residential mortgage servicing business. Residential
mortgage loans serviced for others totaled $5.7 billion, $4.0 billion and $2.9
billion at December 31, 1995, 1994 and 1993, respectively. Revenues from
servicing residential mortgage loans for others were $19.3 million in 1995,
$13.6 million in 1994 and $10.8 million in 1993.
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Other Expense
Other expense totaled $374.4 million in 1995, compared with $336.9 million in
1994 and $327.8 million in 1993.
Salaries and employee benefits expenses were $188.2 million in 1995, an
increase of $27.0 million or 17% from $161.2 million in 1994. Factors
contributing to the higher personnel expenses were acquisitions, expansion of
the Company's residential mortgage banking and securities businesses, and
incentive-based compensation arrangements, including an increase of $5.6 million
in expenses related to stock appreciation rights granted to employees in 1990
and 1991. Personnel costs in 1994 increased $6.9 million or 4% from $154.3
million in 1993. Such increase was due largely to merit salary increases and
higher pension and other benefits costs. The number of full-time equivalent
employees was 4,546 at December 31, 1995, up from 4,149 and 4,028 at December
31, 1994 and 1993, 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 totaled $186.2 million in 1995, up from $161.9 million in
1994 and $173.5 million in 1993. Higher mortgage banking-related expenses and
expenses associated with operating the entities acquired in late-1994 and 1995
contributed to the increases. 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. 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. Although First Empire's banking subsidiaries are
BIF-insured institutions, the Company has approximately $1.4 billion of deposits
obtained in so-called "Oakar" acquisitions for which deposit insurance premiums
are paid to the Savings Association Insurance Fund ("SAIF") of the FDIC. The
FDIC has not reduced the assessment rate for SAIF-insured deposits. Furthermore,
in 1995, congressional committees considered proposals that would require a
one-time special assessment related to deposits insured by the SAIF. Although
final legislation has yet to be enacted, management believes that it is likely
that a special assessment will ultimately be levied against the Company on its
SAIF-insured Oakar deposits. The amount of any such special assessment cannot be
precisely predicted at this time.
The $11.6 million decline in nonpersonnel expenses to $161.9 million in 1994
from $173.5 million in 1993, as cited above, was due, in part, to a combined
$7.9 million reduction in expenses for professional services and other real
estate owned and a reduction in the amount of write-downs in the carrying value
of excess servicing receivables and capitalized mortgage servicing rights
associated with residential mortgage loans serviced for others. Such write-downs
totaled $.5 million in 1994 and $4.7 million in 1993. There were no write-downs
of excess servicing receivables or capitalized mortgage servicing rights in
1995, however, an impairment allowance of $1.1 million for declines in value of
capitalized mortgage servicing rights was recorded. At December 31, 1995, excess
servicing receivables and capitalized mortgage servicing rights were $6.9
million and $34.5 million, respectively, compared with $7.6 million and $10.0
million, respectively, at December 31, 1994.
Income Taxes
The provision for income taxes in 1995 was $90.1 million, up from $77.2 million
in 1994 and $71.5 million in 1993. The effective tax rates were 41% in 1995 and
1993, and 40% in 1994. A reconciliation of income tax expense to
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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 $87 million at December 31,
1995, consisting largely of Eurodollar placements, and $7 million at December
31, 1994. Total offshore deposits were $155 million and $203 million at December
31, 1995 and 1994, respectively.
Liquidity and Interest Rate Sensitivity
As part of its ongoing operations, 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 banking
institution is ensuring that sufficient cash flow and liquid assets are
available to satisfy demands for loans, deposit withdrawals, operating expenses
and other corporate purposes. The Company's core deposits have historically
provided a large 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 an