Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9861
M&T BANK CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385
(State of incorporation) (I.R.S. Employer Identification No.)
One M&T Plaza, Buffalo, New York 14203
(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 New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
8.234% Capital Securities of First Empire Capital Trust I
(and the Guarantee of M&T Bank Corporation with respect thereto)
(Title of class)
8.234% Junior Subordinated Debentures of
M&T Bank Corporation
(Title of class)
8.277% Capital Securities of First Empire Capital Trust II
(and the Guarantee of M&T Bank Corporation with respect thereto)
(Title of class)
8.277% Junior Subordinated Debentures of
M&T Bank Corporation
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 1, 1999: $2,939,991,477.
Number of shares of the Common Stock, $5 par value, outstanding as of the close
of business on March 1, 1999: 7,725,294 shares.
Documents Incorporated By Reference:
(1) Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders of M&T Bank Corporation in Part III.
M&T BANK CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
CROSS-REFERENCE SHEET Form
10-K
PART I Page
- ------ ----
Item 1. Business. 5
Statistical disclosure pursuant to Guide 3
I. Distribution of assets, liabilities, and stockholders'
equity; interest rates and interest differential
A. Average balance sheets 49-50
B. Interest income/expense and resulting yield or rate
on average interest-earning assets (including non-
accrual loans) and interest-bearing liabilities 49-50
C. Rate/volume variances 19
II. Investment portfolio
A. Year-end balances 16
B. Maturity schedule and weighted average yield 61
C. Aggregate carrying value of securities that exceed ten
percent of stockholders' equity 75
III. Loan portfolio
A. Year-end balances 16,76
B. Maturities and sensitivities to changes in interest rates 58
C. Risk elements
Nonaccrual, past-due and renegotiated loans 56
Actual and pro forma interest on certain loans 76
Nonaccrual policy 69
Loan concentrations 32
IV. Summary of loan loss experience
A. Analysis of the allowance for loan losses 54
Factors influencing management's judgment concerning
the adequacy of the allowance and provision 31-32,69
B. Allocation of the allowance for loan losses 55
V. Deposits
A. Average balances and rates 49-50
B. Maturity schedule of domestic time deposits with
balances of $100,000 or more 57
VI. Return on equity and assets 18,25,37-38
VII. Short-term borrowings 79-80
2
M&T BANK CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
CROSS-REFERENCE SHEET--continued Form
10-K
Page
PART I, continued
Item 2. Properties. 20,77-78
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
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 23
A. Principal market 23
Market prices 46
B. Approximate number of holders at year-end 16
C. Frequency and amount of dividends declared 17,18,46
D. Restrictions on dividends 11,104-105
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. 23-61
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk. 35-37,59
Item 8. Financial Statements and Supplementary Data.
A. Report of Independent Accountants 63
B. Consolidated Balance Sheet -
December 31, 1998 and 1997 64
C. Consolidated Statement of Income -
Years ended December 31, 1998, 1997 and 1996 65
D. Consolidated Statement of Cash Flows -
Years ended December 31, 1998, 1997 and 1996 66
E. Consolidated Statement of Changes in
Stockholders' Equity - Years ended December 31,
1998, 1997 and 1996 67
3
M&T BANK CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
CROSS-REFERENCE SHEET--continued Form
10-K
Page
PART II, continued
Item 8, Financial Statements and Supplementary Data, continued
F. Notes to Financial Statements 68-108
G. Quarterly Trends 46
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 109
PART III
Item 10. Directors and Executive Officers of the
Registrant. 109
Item 11. Executive Compensation. 109
Item 12. Security Ownership of Certain Beneficial
Owners and Management. 109
Item 13. Certain Relationships and Related Transactions. 109
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. 110
Signatures 111-113
Exhibit Index 114-116
4
PART I
Item 1. BUSINESS.
M&T Bank Corporation ("Registrant" or "M&T") 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 14203. 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, 1998, the
Company had consolidated total assets of $20.6 billion, deposits of $14.7
billion and stockholders' equity of $1.6 billion. The Company had 5,485
full-time and 982 part-time employees as of December 31, 1998.
At December 31, 1998, the Registrant had two wholly owned bank subsidiaries:
Manufacturers and Traders Trust Company ("M&T Bank") and M&T Bank, National
Association ("M&T Bank, N.A."). The banks collectively offer a wide range of
commercial banking, trust and investment services to their customers. At
December 31, 1998, M&T Bank represented 98% of consolidated assets of the
Company.
On April 1, 1998, M&T completed the acquisition of ONBANCorp, Inc.
("ONBANCorp"), a bank holding company headquartered in Syracuse, New York.
Immediately after the acquisition, ONBANCorp's two banking subsidiaries, OnBank
& Trust Co. in Syracuse, which operated 59 offices in upstate New York, and
Franklin First Savings Bank in Wilkes-Barre, Pennsylvania, which operated 19
offices in northeastern Pennsylvania, were merged with and into M&T Bank. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the operations acquired from ONBANCorp have been included in the
financial results of the Company since the acquisition date. ONBANCorp's
stockholders received $266.3 million in cash and 1,429,998 shares of M&T common
stock in exchange for ONBANCorp shares outstanding at the time of acquisition. A
summary of assets acquired and liabilities assumed on April 1, 1998 in
connection with the ONBANCorp transaction follows (in thousands):
Assets
Investment securities $1,576,604
Loans and leases, net of unearned discount 2,970,306
Allowance for possible credit losses (27,905)
----------
Loans and leases, net 2,942,401
Goodwill and core deposit intangible 562,533
Other assets 411,727
----------
Total assets $5,493,265
----------
----------
Liabilities
Deposits $3,767,729
Short-term borrowings 541,689
Long-term borrowings 268,617
Other liabilities 41,680
----------
Total liabilities $4,619,715
----------
----------
In connection with the acquisition, the Company recorded approximately $563
million of goodwill and core deposit intangible, and incurred nonrecurring
expenses related to systems conversions and other costs of integrating and
conforming the acquired operations with and into the operations of M&T Bank.
Such expenses totaled $21.3 million ($14.0 million after-tax) during the year
ended December 31, 1998.
On December 9, 1998, M&T entered into a definitive agreement with FNB Rochester
Corp. ("FNB"), a bank holding company headquartered in Rochester,
5
New York, providing for a merger between the two companies. FNB, with total
assets of $588 million as of December 31, 1998, is the parent company of the
First National Bank of Rochester, which has 19 offices in western and central
New York State. Under the terms of the merger agreement, stockholders of FNB
may elect to receive .06766 of a share of M&T common stock (and cash in lieu
of any fractional share) or $33.00 in cash for each outstanding share of FNB
common stock. Subject to certain adjustments set forth in the merger
agreements, 50% of the 3,625,806 shares of FNB common stock outstanding on
December 9, 1998 will be exchanged for shares of M&T common stock and the
remaining shares will be converted for cash. The elections of FNB's
stockholders will be subject to allocation and proration if either portion of
the merger consideration is oversubscribed. The merger, which will be
accounted for as a purchase, has been approved by the boards of directors of
each company, and is subject to certain conditions, including regulatory
approvals and approval of FNB's stockholders. It is anticipated that the
merger will take place during the second quarter of 1999.
The Company from time to time considers acquiring banks, thrift institutions,
branch offices or other businesses within markets currently served or in other
nearby markets. The Company has pursued acquisition opportunities in the past,
continues to review different opportunities, including the possibility of major
acquisitions, and intends to continue this practice.
SUBSIDIARIES
Olympia Financial Corp. ("Olympia"), a wholly owned subsidiary of M&T, is a
Delaware corporation that holds the stock of M&T Bank and is registered as a
bank holding company under the Bank Holding Company Act. Its registered office
is located at 1209 Orange Street, Wilmington, Delaware 19801.
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 and the
Federal Home Loan Bank System, and its deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to applicable limits. M&T 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 M&T. 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 14203. As of December 31,
1998, M&T Bank had 228 banking offices located throughout New York State, 19
offices in northeastern Pennsylvania, plus a branch in Nassau, The Bahamas. As
of December 31, 1998, M&T Bank had consolidated total assets of $20.1 billion,
deposits of $14.3 billion and stockholder's equity of $1.8 billion. 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 $14.3 billion in assessable deposits at December 31, 1998, 84% 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 northeastern Pennsylvania,
and on small and medium-size businesses based in those areas. In addition, the
Company conducts lending activities in other states through various
subsidiaries. M&T Bank and certain of its subsidiaries also offer commercial
mortgage loans secured by income producing properties or properties used by
borrowers in a trade or business. Other financial services are also provided
through operating subsidiaries.
M&T Bank, N.A., a national banking association and a member of the Federal
Reserve System and the FDIC, commenced operations on
October 2, 1995. The
6
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 48 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. M&T Bank, N.A. is also a licensed insurance agency, and offers
insurance products primarily through the banking offices of M&T Bank. As of
December 31, 1998, M&T Bank, N.A. had total assets of $629 million, deposits of
$421 million and stockholder's equity of $49 million.
M&T Capital Corporation ("M&T Capital"), a wholly owned subsidiary of M&T Bank,
was incorporated as a New York business corporation in January 1968. M&T Capital
is a federally-licensed small business investment company operating under the
provisions of the Small Business Investment Act of 1958, as amended. During
1998, the Corporation's strategy was to continue the liquidation of its
investments, while managing the remainder of its existing investment portfolio.
Upon liquidation of its only significant remaining portfolio investment, it is
the Company's current intention to surrender its license to the Small Business
Administration. M&T Capital had assets and stockholder's equity of approximately
$2 million as of December 31, 1998, and recorded approximately $65 thousand of
revenues in 1998. The headquarters of M&T Capital are located at One M&T Plaza,
Buffalo, New York 14203.
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
14203, and offices in Pennsylvania. As of December 31, 1998, M&T Credit had
assets of $482 million and stockholder's equity of $25 million. M&T Credit
recorded $30 million of revenues during 1998.
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 $101 million
and stockholder's equity of $18 million as of December 31, 1998, and recorded
approximately $2 million of revenues in 1998. The headquarters of M&T Financial
are located at One M&T Plaza, Buffalo, New York 14203.
M&T Mortgage Corporation ("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, M&T Bank, N.A. and others. M&T Mortgage operates
throughout New York State, and also maintains branch offices in Arizona,
Colorado, Idaho, Massachusetts, Ohio, Oregon, Pennsylvania, Utah and Washington.
M&T Mortgage had assets of $711 million and stockholder's equity of $122 million
as of December 31, 1998, and recorded approximately $113 million of revenues
during 1998. Residential mortgage loans serviced by M&T Mortgage for
non-affiliates totaled $7.3 billion at December 31, 1998. The headquarters of
M&T Mortgage are located at M&T Center, One Fountain Plaza, Buffalo, New York
14203.
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 stock and 87.5% of the preferred stock of M&T Real
Estate. The remaining 12.5% of M&T Real Estate's preferred stock is owned by
officers or former officers of the Company. M&T Real Estate engages in
commercial real estate lending and servicing activities. As of December 31,
1998, M&T Real Estate had assets of $4.9 billion and stockholder's equity of
$4.8 billion. M&T Real Estate recorded $393 million of revenues in 1998. 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
that was incorporated as a New York business corporation in November 1985. M&T
Securities is registered as a broker/dealer under the Securities
7
Exchange Act of 1934, as amended, as an investment advisor under the Investment
Advisors Act of 1940, as amended, and is licensed as an insurance agent. It
provides securities brokerage, investment advisory, and insurance services. As
of December 31, 1998, M&T Securities had assets of $9 million and stockholder's
equity of $4 million. M&T Securities recorded $22 million of revenues during
1998. The headquarters of M&T Securities are located at One M&T Plaza, Buffalo,
New York 14203.
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, 1998, Highland Lease had assets of
$419 million and stockholder's equity of $37 million. Highland Lease recorded
$23 million of revenues during 1998.
During 1997, the Company formed two Delaware business trusts and ONBANCorp
formed one Delaware business trust to issue preferred capital securities
("Capital Securities"). First Empire Capital Trust I ("Trust I") issued $150
million of 8.234% Capital Securities on January 17, 1997, and First Empire
Capital Trust II ("Trust II") issued $100 million of 8.277% Capital
Securities on May 30, 1997. On February 4, 1997, OnBank Capital Trust I
("OnBank Trust I" and, together with Trust I and Trust II, the "Trusts")
issued $60 million of 9.25% preferred capital securities. As a result of the
ONBANCorp acquisition, the Company assumed responsibility for the ONBANCorp
Capital Securities. The common securities ("Common Securities") of Trust I
and Trust II are wholly owned by M&T and the common securities of OnBank
Trust I are wholly owned by Olympia. The common securities of each Trust are
the only class of each Trust's securities possessing general voting powers.
The Capital Securities represent preferred undivided interests in the assets
of the corresponding Trust and are classified in the Company's consolidated
balance sheet as long-term borrowings, with accumulated distributions on such
securities included in interest expense. Under the Federal Reserve Board's
current risk-based capital guidelines, the Capital Securities are includable
in M&T's Tier 1 capital. The proceeds from the issuances of the Capital
Securities and the Common Securities were used by the Trusts to purchase
junior subordinated deferrable interest debentures issued by M&T in the case
of Trust I and Trust II and Olympia in the case of OnBank Trust I. The junior
subordinated debentures represent the sole assets of each Trust and payments
under the junior subordinated debentures are the sole source of cash flow for
each Trust. As of December 31, 1998, Trust I had assets of $160 million and
stockholders' equity of $155 million, and during 1998 Trust I recorded $13
million of revenues. Trust II had assets of $104 million and stockholders'
equity of $103 million at December 31, 1998, and during 1998 Trust II
recorded $9 million of revenues. OnBank Trust I had assets of $73 million and
stockholders' equity of $62 million at December 31, 1998, and during 1998
OnBank Trust I recorded $4 million of revenues.
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, 1998.
8
SEGMENT INFORMATION, PRINCIPAL PRODUCTS/SERVICES
AND FOREIGN OPERATIONS
Information about the Registrant's business segments is included in note 21 of
Notes to Financial Statements filed herewith in Part II, Item 8, "Financial
Statements and Supplementary Data" and is further discussed in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The Company's international activities are discussed in note 16 of
Notes to Financial Statements filed herewith in Part II, Item 8, "Financial
Statements and Supplementary Data".
The Registrant's reportable segments have been determined based upon its
internal profitability reporting system, which is organized by strategic
business unit. Certain strategic business units have been combined for segment
information reporting purposes where the nature of the products and services,
the type of customer and the distribution of those products and services are
similar. The reportable segments are Commercial Banking, Commercial Real Estate,
Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.
The 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
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
9
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.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the "Interstate Banking Act") generally permits bank holding companies
to acquire banks in any state, 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 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 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. The 19 branches of Franklin First Savings Bank, a wholly owned
subsidiary of ONBANCorp, were merged into M&T Bank on April 1, 1998 as a part of
M&T's acquisition of ONBANCorp under the interstate banking authority of the
Interstate Banking Act.
The Banking Law authorizes interstate branching by merger or acquisition on a
reciprocal basis, and permits the acquisition of a single branch 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 communities 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.
10
SUPERVISION AND REGULATION OF BANK SUBSIDIARIES
The Registrant's banking subsidiaries are subject to supervision and regulation,
and are examined regularly, by various bank regulatory agencies: M&T Bank by the
Federal Reserve Board and the Banking Superintendent; and M&T Bank, N.A. by the
Comptroller of the Currency (the "OCC"). 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 M&T
could incur liability to the FDIC in the event of a default of another insured
depository institution owned or controlled by M&T. 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 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 22 of Notes to Financial Statements filed
herewith in Part II, Item 8, "Financial Statements and Supplementary Data," and
to other statutory powers of bank regulatory agencies.
Under FDICIA, an insured depository institution is prohibited from making any
capital distribution to its owner, including any dividend, if, after making such
distribution, the depository institution fails to meet the required minimum
level for any relevant capital measure, including the risk-based capital
adequacy and leverage standards discussed below.
CAPITAL ADEQUACY
The Federal Reserve Board, the FDIC and the OCC have adopted risk-based capital
adequacy guidelines for bank holding companies and banks under their
supervision. Under these guidelines, the so-called "Tier 1 capital" and "Total
capital" as a percentage of risk-weighted assets and certain off-balance sheet
instruments must be at least 4% and 8%, respectively.
The Federal Reserve Board, the FDIC and the OCC have also imposed a leverage
standard to supplement their risk-based ratios. This leverage standard focuses
on a banking institution's ratio of Tier 1 capital to average total assets,
adjusted for goodwill and certain other items. Under these guidelines, banking
institutions that meet certain criteria, including excellent asset quality, high
liquidity, low interest rate exposure and good earnings, and that have received
the highest regulatory rating must maintain
11
a ratio of Tier 1 capital to total adjusted average assets of at least 3%.
Institutions not meeting these criteria, as well as institutions with
supervisory, financial or operational weaknesses, along with those experiencing
or anticipating significant growth are expected to maintain a
Tier 1 capital to total adjusted average assets ratio equal to at least 4 to 5%.
As reflected in the following table, the risk-based capital ratios and leverage
ratios of the Registrant, M&T Bank and M&T Bank, N.A. as of December 31, 1998
exceeded the required capital ratios for classification as "well capitalized,"
the highest classification under the regulatory capital guidelines.
Capital Components and Ratios at December 31, 1998
(dollars in millions)
Registrant M&T Bank,
(Consolidated) M&T Bank N.A.
-------------- -------- --------
Capital Components
Tier 1 capital $ 1,372 $ 1,293 $ 46
Total capital 1,725 1,640 51
Risk-weighted assets
and off-balance sheet
instruments $16,335 $16,032 $317
Risk-based Capital Ratio
Tier 1 capital 8.40% 8.07% 14.54%
Total capital 10.56% 10.24% 16.25%
Leverage Ratio 7.02% 6.80% 7.81%
FDICIA required the federal banking agencies, including the Federal Reserve
Board and the OCC, to revise their risk-based capital standards 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.
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 any
such proposed amendments on the Company's capital requirements and operations
cannot be predicted. During 1998 the Federal Reserve and OCC amended their
risk-based capital guidelines to permit the inclusion of up to 45% of unrealized
gains on certain equity securities in Tier 2 capital, and raised the Tier 1
capital limitation for mortgage servicing assets from 50 to 100 percent of Tier
1 capital.
FDICIA requires the federal banking agencies to take "prompt corrective action"
in respect of depository institutions and their bank holding companies that do
not meet minimum capital requirements. FDICIA established five capital tiers:
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". A depository institution's
capital tier, or that of its bank holding company, depends upon where its
capital levels are in relation to various relevant capital measures, including a
risk-based capital measure and a leverage ratio capital measure, and certain
other factors.
Under the implementing regulations adopted by the federal banking agencies, a
bank holding company or bank is considered "well capitalized" if it has (i) a
total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and
12
(iv) is not subject to any order or written directive to meet and maintain a
specific capital level for any capital measure. An "adequately capitalized" bank
holding company or bank is defined as one that has (i) a total risk-based
capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or
greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the
case of a bank with a composite CAMELS rating of 1). A bank holding company or
bank is considered (A) "undercapitalized" if it has (i) a total risk-based
capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less
than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank
with a composite CAMELS rating of 1); (B) "significantly undercapitalized" if
the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a
Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of
less than 3% and (C)"critically undercapitalized" if the bank has a ratio of
tangible equity to total assets equal to or less than 2%. The Federal Reserve
Board may reclassify a "well capitalized" bank holding company or bank as
"adequately capitalized" or subject an "adequately capitalized" or
"undercapitalized" institution to the supervisory actions applicable to the next
lower capital category if it determines that the bank holding company or bank is
in an unsafe or unsound condition or deems the bank holding company or bank to
be engaged in an unsafe or unsound practice and not to have corrected the
deficiency. M&T, Olympia, M&T Bank 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.
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 and OCC have adopted such standards.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company, including new reporting requirements, regulatory
13
standards for real estate lending, "truth in savings" provisions, limitations on
the amount of capitalized mortgage servicing rights and purchased credit card
relationships includable in Tier 1 capital, and the requirement that a
depository institution give prior notice to customers and regulatory authorities
before closing any branch. FDICIA also contains a prohibition on the acceptance
or renewal of brokered deposits by depository institutions that are not "well
capitalized" or are "adequately capitalized" and have not received a waiver from
the FDIC.
FDIC DEPOSIT INSURANCE ASSESSMENTS
As institutions with deposits insured by the BIF and the SAIF, M&T Bank and M&T
Bank, N.A. are subject to FDIC deposit insurance assessments. Under current law
the regular insurance assessments to be paid by BIF-insured and SAIF-insured
institutions are specified in schedules issued by the FDIC that specify, at
semiannual intervals, target reserve ratios designed to maintain the reserve
ratios of each of those insurance funds at 1.25% of their estimated insured
deposits. The FDIC is also authorized to impose one or more special assessments.
The FDIC has implemented a risk-based deposit premium assessment system under
which each depository institution is placed in one of nine assessment categories
based on the institution's capital classification under the prompt corrective
action provisions described above, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns.
The adjusted assessment rates for both BIF-insured and SAIF-insured institutions
under the current system range from .00% to .31% depending upon the assessment
category into which the insured institution is placed. Neither of the Company's
banking subsidiaries paid regular insurance assessments to the FDIC in 1998.
However, the FDIC retains the ability to increase regular BIF and SAIF
assessments and to levy special additional assessments.
In addition to deposit insurance fund assessments, beginning in 1997 the FDIC
assessed BIF-assessable and SAIF-assessable deposits to fund the repayment of
debt obligations of the Financing Corporation ("FICO"). FICO is a government
agency-sponsored entity that was formed to borrow the money necessary to carry
out the closing and ultimate disposition of failed thrift institutions by the
Resolution Trust Corporation. The FDIC is required to set FICO assessments for
BIF-assessable deposits at one-fifth the amount for SAIF-assessable deposits.
The current annualized rates established by the FDIC for BIF-assessable and
SAIF-assessable deposits are 1.22 basis points and 6.10 basis points,
respectively.
Any significant increases in assessment rates or additional special assessments
by the FDIC could have an adverse impact on the results of operations and
capital of M&T Bank 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
14
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 Banking 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
- --------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 1, Table 1
SELECTED CONSOLIDATED YEAR-END BALANCES
DOLLARS IN THOUSANDS 1998 1997 1996 1995 1994
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Money-market assets
Interest-bearing deposits at banks $ 674 668 47,325 125,500 143
Federal funds sold and resell agreements 229,066 53,087 125,326 1,000 3,080
Trading account 173,122 57,291 37,317 9,709 5,438
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Total money-market assets 402,862 111,046 209,968 136,209 8,661
Investment securities
U.S. Treasury and federal agencies 1,321,000 1,081,247 1,023,038 1,087,005 999,407
Obligations of states and political subdivisions 73,789 38,018 41,445 35,250 55,787
Other 1,390,775 605,953 507,215 647,040 735,846
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Total investment securities 2,785,564 1,725,218 1,571,698 1,769,295 1,791,040
Loans and leases
Commercial, financial, leasing, etc 3,270,840 2,406,640 2,206,282 2,013,937 1,680,415
Real estate - construction 489,112 254,434 90,563 77,604 53,535
Real estate - mortgage 9,289,521 6,765,408 6,199,931 5,648,590 5,046,937
Consumer 2,956,228 2,339,051 2,623,445 2,133,592 1,666,230
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Total loans and leases 16,005,701 11,765,533 11,120,221 9,873,723 8,447,117
Unearned discount (214,171) (268,965) (398,098) (317,874) (229,824)
Allowance for possible credit losses (306,347) (274,656) (270,466) (262,344) (243,332)
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Loans and leases, net 15,485,183 11,221,912 10,451,657 9,293,505 7,973,961
Goodwill and core deposit intangible 546,036 17,288 18,923 28,234 23,514
Real estate and other assets owned 11,129 8,413 8,523 7,295 10,065
Total assets 20,583,891 14,002,935 12,943,915 11,955,902 10,528,644
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Noninterest-bearing deposits 2,066,814 1,458,241 1,352,929 1,184,359 1,087,102
NOW accounts 509,307 346,795 334,787 768,559 748,199
Savings deposits 4,830,678 3,344,697 3,280,788 2,765,301 3,098,438
Time deposits 7,027,083 5,762,497 5,352,749 4,596,053 3,106,723
Deposits at foreign office 303,270 250,928 193,236 155,303 202,611
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Total deposits 14,737,152 11,163,158 10,514,489 9,469,575 8,243,073
Short-term borrowings 2,229,976 1,050,918 1,127,900 1,270,022 1,363,161
Long-term borrowings 1,567,543 427,819 178,002 192,791 96,187
Total liabilities 18,981,525 12,972,669 12,038,256 11,109,649 9,807,648
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
Stockholders' equity 1,602,366 1,030,266 905,659 846,253 720,996
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
STOCKHOLDERS, EMPLOYEES AND OFFICES
NUMBER AT YEAR-END 1998 1997 1996 1995 1994
- ------------------ ----- ----- ----- ----- -----
Stockholders 5,207 3,449 3,654 3,787 3,981
Employees 6,467 5,083 5,180 4,889 4,505
Offices 283 210 202 181 168
----- ----- ----- ----- -----
16
- --------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 1, Table 2
CONSOLIDATED EARNINGS
Dollars in thousands 1998 1997 1996 1995 1994
- --------------------------------------------- ---------- --------- ------- ------- -------
INTEREST INCOME
Loans and leases, including fees $1,190,983 952,436 881,002 794,181 633,077
Money-market assets
Deposits at banks 400 2,475 2,413 8,181 2,212
Federal funds sold and resell agreements 8,293 2,989 2,985 3,007 4,751
Trading account 4,403 1,781 980 1,234 361
Investment securities
Fully taxable 139,731 99,640 107,415 118,791 104,185
Exempt from federal taxes 7,984 5,640 2,637 2,760 2,760
- --------------------------------------------- ---------- --------- ------- ------- -------
Total interest income 1,351,794 1,064,961 997,432 928,154 747,346
- --------------------------------------------- ---------- --------- ------- ------- -------
INTEREST EXPENSE
NOW accounts 4,851 3,455 9,430 11,902 11,286
Savings deposits 115,345 90,907 84,822 87,612 84,804
Time deposits 388,185 327,611 286,088 239,882 97,067
Deposits at foreign office 14,973 12,160 12,399 6,952 5,894
Short-term borrowings 105,582 44,341 59,442 84,225 73,868
Long-term borrowings 58,567 29,619 14,227 11,157 6,287
- --------------------------------------------- ---------- --------- ------- ------- -------
Total interest expense 687,503 508,093 466,408 441,730 279,206
- --------------------------------------------- ---------- --------- ------- ------- -------
NET INTEREST INCOME 664,291 556,868 531,024 486,424 468,140
Provision for possible credit losses 43,200 46,000 43,325 40,350 60,536
- --------------------------------------------- ---------- --------- ------- ------- -------
Net interest income after provision
for possible credit losses 621,091 510,868 487,699 446,074 407,604
- --------------------------------------------- ---------- --------- ------- ------- -------
OTHER INCOME
Mortgage banking revenues 65,646 51,547 44,484 37,142 16,002
Service charges on deposit accounts 57,357 43,377 40,659 38,290 35,016
Trust income 38,211 30,688 27,672 25,477 22,574
Merchant discount and other credit card fees 12,436 19,395 18,266 10,675 8,705
Trading account and foreign exchange gains 3,963 3,690 2,421 2,783 738
Gain (loss) on sales of bank investment securities 1,761 (280) (37) 4,479 128
Gain on sales of venture capital investments -- 2,677 3,175 2,619 802
Other revenues from operations 91,221 41,973 33,608 28,073 39,774
- --------------------------------------------- ---------- --------- ------- ------- -------
Total other income 270,595 193,067 170,248 149,538 123,739
- --------------------------------------------- ---------- --------- ------- ------- -------
OTHER EXPENSE
Salaries and employee benefits 259,487 220,017 208,342 188,222 161,221
Equipment and net occupancy 66,553 53,299 51,346 50,526 49,132
Printing, postage and supplies 17,603 13,747 15,167 14,442 13,516
Amortization of goodwill and core deposit intangible 34,487 7,291 6,292 6,293 358
Deposit insurance 2,710 1,935 9,337 14,675 16,442
Other costs of operations 185,283 125,487 118,494 100,281 96,193
- --------------------------------------------- ---------- --------- ------- ------- -------
Total other expense 566,123 421,776 408,978 374,439 336,862
- --------------------------------------------- ---------- --------- ------- ------- -------
Income before income taxes 325,563 282,159 248,969 221,173 194,481
Income taxes 117,589 105,918 97,866 90,137 77,186
- --------------------------------------------- ---------- --------- ------- ------- -------
NET INCOME $ 207,974 176,241 151,103 131,036 117,295
- --------------------------------------------- ---------- --------- ------- ------- -------
- --------------------------------------------- ---------- --------- ------- ------- -------
DIVIDENDS DECLARED
Common $ 28,977 21,207 18,617 16,224 14,743
Preferred -- -- 900 3,600 3,600
- --------------------------------------------- ---------- --------- ------- ------- -------
- --------------------------------------------- ---------- --------- ------- ------- -------
17
- --------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 1, Table 3
COMMON SHAREHOLDER DATA
1998 1997 1996 1995 1994
- ---------------------------------------------- ----------- ------- ------ ------ ------
Per Share
Net income
Basic $ 27.30 26.60 22.54 19.61 16.90
Diluted 26.16 25.26 21.08 17.98 15.73
Cash dividends declared 3.80 3.20 2.80 2.50 2.20
Stockholders' equity at year-end 207.94 155.86 135.45 125.33 103.02
Tangible stockholders' equity at year-end 139.89 153.24 132.62 120.94 99.46
Dividend payout ratio 13.93 % 12.03 % 12.39 % 12.73 % 12.97 %
- ---------------------------------------------- ----------- ------- ------ ------ ------
- ---------------------------------------------- ----------- ------- ------ ------ ------
18
- -------------------------------------------------------------------------------
M&T BANK CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Item 1, Table 4
CHANGES IN INTEREST INCOME AND EXPENSE*
1998 COMPARED WITH 1997 1997 COMPARED WITH 1996
------------------------------- -------------------------------
RESULTING FROM RESULTING FROM
TOTAL CHANGES IN: TOTAL CHANGES IN:
INCREASE (DECREASE) IN THOUSANDS CHANGE VOLUME RATE CHANGE VOLUME RATE
- -------------------------------- --------- --------- --------- --------- --------- ---------
Interest income
Loans and leases, including fees $ 238,819 278,543 (39,724) $ 71,264 74,326 (3,062)
Money-market assets
Deposits at banks (2,075) (1,414) (661) 62 200 (138)
Federal funds sold and agreements
to resell securities 5,304 5,298 6 4 19 (15)
Trading account 2,587 2,723 (136) 837 700 137
Investment securities
U.S. Treasury and federal agencies 17,062 19,964 (2,902) (3,055) (4,941) 1,886
Obligations of states and political
subdivisions 1,734 1,878 (144) 154 137 17
Other 24,748 23,816 932 (384) (1,980) 1,596
--------- ---------
Total interest income $ 288,179 $ 68,882
--------- ---------
--------- ---------
Interest expense
Interest-bearing deposits
NOW accounts $ 1,396 1,008 388 $ (5,975) (5,416) (559)
Savings deposits 24,438 26,516 (2,078) 6,085 12,622 (6,537)
Time deposits 60,574 66,505 (5,931) 41,523 38,400 3,123
Deposits at foreign office 2,813 3,023 (210) (239) (474) 235
Short-term borrowings 61,241 60,997 244 (15,101) (16,846) 1,745
Long-term borrowings 28,948 32,764 (3,816) 15,392 14,534 858
--------- --------- --------- --------- --------- ---------
Total interest expense $ 179,410 $ 41,685
--------- ---------
--------- ---------
- -----------------
* 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 M&T 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. M&T, M&T
Bank and their subsidiaries occupy approximately 84% of the building and the
remainder is leased to non-affiliated tenants. At December 31, 1998, the cost of
this property, net of accumulated depreciation, was $9.6 million.
In September 1992, M&T Bank acquired an additional facility in Buffalo, New York
with approximately 365,000 rentable square feet of space at a cost of
approximately $12 million. Approximately 77% 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, 1998, the cost of this building,
including improvements made subsequent to acquisition and net of accumulated
depreciation, was $15.3 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 $13.6 million.
As a result of the April 1, 1998 ONBANCorp merger, M&T Bank acquired a facility
in Syracuse, New York with approximately 136,000 rentable square feet of space.
Approximately 49% of this facility is occupied by M&T Bank, with the remainder
leased to non-affiliated tenants. At December 31, 1998, the cost of this
building, net of accumulated depreciation, was $7.9 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 248 domestic banking offices of the Registrant's subsidiary banks,
84 are owned in fee and 164 are leased.
Item 3. LEGAL PROCEEDINGS.
M&T and its subsidiaries are subject in the normal course of business to various
pending and threatened legal proceedings in which claims for monetary damages
are asserted. Management, after consultation with legal counsel, does not
anticipate that the aggregate ultimate liability, if any, arising out of
litigation pending against M&T or its subsidiaries will be material to M&T's
consolidated financial position, but at the present time is not in a position to
determine whether such litigation will have a material adverse effect on M&T's
consolidated results of operations in any future reporting period.
Item 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 1, 1999. 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.
-20-
Robert J. Bennett, age 57, is chairman of the board and a director (1998)
of the Registrant. He is a vice chairman of the board and a director
(1998) of M&T Bank and serves as chairman of the Directors Advisory
Council-Syracuse Division. Mr. Bennett is also a director (1998) of
M&T Bank, N.A. He served as chairman of the board, president, chief
executive officer and a director of ONBANCorp from May 1989 until its
merger with M&T on April 1, 1998.
Robert G. Wilmers, age 64, is president (1988), chief executive officer
(1983) and a director (1982) of the Registrant. Prior to the
acquisition of ONBANCorp, Mr. Wilmers held the additional position of
chairman of the board of the Registrant from April 1994 through March
1998. He is chairman of the board, chief executive officer (1983) and
a director (1982) of M&T Bank, and served as president of M&T Bank
from March 1984 to June 1996. Mr. Wilmers is a director of M&T
Financial (1983). He is chairman of the board and a director of M&T
Bank, N.A.(1995).
Emerson L. Brumback, age 47, is an executive vice president (1997) of the
Registrant and M&T Bank, and is in charge of the Company's Retail
Banking Division. Mr. Brumback is president and a director of
Highland Lease (1997) and executive vice president (1998) and a
director of M&T Bank, N.A.(1997). He is a director of M&T Credit
(1997), M&T Mortgage (1997) and M&T Securities (1997). Mr. Brumback
was executive vice president, national retail distribution, at
BancOne Corporation prior to joining the Company.
Atwood Collins, III, age 52, is an executive vice president of the
Registrant (1997) and M&T Bank (1996) and is chairman of the
Directors Advisory Council (1998) of M&T Bank's New York City
Division. Previously, Mr. Collins served as president and chief
executive officer of the New York City Division of M&T Bank (1997),
and as president, chief executive officer and a director (1995) of
The East New York Saving Bank, which had been a wholly owned
subsidiary of the Registrant prior to its merger with and into M&T
Bank on May 24, 1997. He is a director of M&T Real Estate (1995). Mr.
Collins has responsibility for managing the Company's middle market,
commercial real estate and business banking activities in
Westchester, Putnam and Rockland counties of New York State and
Connecticut, business banking in New York City and Investment
banking, Institutional and Correspondent banking activities. He also
manages the Company's Facilities Management and Services group.
Mark J. Czarnecki, age 43, is an executive vice president of the
Registrant (1999) and M&T Bank (1997) and is in charge of the M&T
Investment Group, which is comprised of M&T Securities, Inc., the
Insurance Services Division of M&T Bank, N.A. and the Trust and
Investment Services Division of M&T Bank. Mr. Czarnecki is president
of M&T Securities, Inc. (1996) and an executive vice president of M&T
Bank, N.A. (1997). Mr. Czarnecki has held a number of management
positions with M&T Bank since 1977, most recently as senior vice
president of the private client services group of the Trust and
Investment Services Division (1994), and prior thereto as an
administrative vice president and regional manager for the Retail
Banking Division.
-21-
Brian E. Hickey, age 46, is an executive vice president of the Registrant
(1997) and M&T Bank (1996) and is president and a member of the
Directors Advisory Council (1994) of the Rochester Division of M&T
Bank. Mr. Hickey is a director of M&T Financial (1996). In addition
to managing all of M&T Bank's business segments in the Rochester
market, Mr. Hickey has responsibility for managing the Company's
Western New York Commercial Banking Division.
James L. Hoffman, age 59, is an executive vice president of the
Registrant (1997) and M&T Bank (1996) and 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.
Adam C. Kugler, age 41, is an executive vice president and treasurer
(1997) of the Registrant and M&T Bank, and is in charge of the
Company's Treasury Division. Mr. Kugler is a director of M&T
Financial (1997), M&T Securities (1997) and is an executive vice
president, Treasurer and a director of M&T Bank, N.A. (1997). Mr
Kugler was previously a senior vice president in the Treasury
Division of M&T Bank.
Ray E. Logan, age 61, is an executive vice president of M&T Bank (1999)
and is in charge of the Company's Human Resources Division. Mr. Logan
served as senior vice president of M&T Bank from 1986 to 1999.
John L. Pett, age 50, is an executive vice president (1997) and chief
credit officer (1995) of the Registrant and is an executive vice
president and chief credit officer of M&T Bank (1996). Mr. Pett is
chairman of the board and a director of Highland Lease (1997) and M&T
Credit (1997). He is an executive vice president (1998) and a
director (1996) of M&T Bank, N.A. Mr. Pett served as senior vice
president of the Registrant from 1991 to 1997.
Michael P. Pinto, age 43, is an executive vice president and chief
financial officer of the Registrant (1997) and M&T Bank (1996), and
is in charge of the Company's Finance Division and its Technology and
Banking Operations Division. Mr. Pinto is chairman of the board,
president and a director of Olympia Financial Corp. (1997), and a
director of M&T Capital (1996), M&T Financial (1996), M&T Mortgage
(1996) and M&T Real Estate (1996). He is an executive vice president
and chief financial officer (1996) and a director (1998) of M&T Bank,
N.A. Mr. Pinto served as senior vice president and controller of the
Registrant from 1993 to 1997.
Robert E. Sadler, Jr., age 53, is an executive vice president (1990) and
a director (1999) of the Registrant, president and a director of M&T
Bank (1996), and is in charge of the Company's Commercial Banking
Division. Mr. Sadler is chairman of the board (1987) and a director
of M&T Capital (1983); chairman of the board (1989) and a director of
M&T Financial (1985); chairman of the board and a director of M&T
Mortgage (1991); chairman of the board and a director of M&T
Securities (1994); president, chief executive officer and a director
of M&T Bank, N.A.(1995); and chairman of the board, president and a
director of M&T Real Estate (1995).
-22-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS. The Registrant's common stock is traded under the
symbol MTB on the New York 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
M&T Bank Corporation ("M&T") is a bank holding company headquartered in Buffalo,
New York with consolidated assets of $20.6 billion at December 31, 1998.
Formerly known as First Empire State Corporation, M&T changed its name effective
May 29, 1998. M&T's common stock began trading on the New York Stock Exchange
under the symbol "MTB" on June 1, 1998. Prior to that date, the common stock was
traded on the American Stock Exchange under the symbol "FES." M&T and its
consolidated subsidiaries are hereinafter referred to collectively as "the
Company." M&T's wholly owned banking subsidiaries are Manufacturers and Traders
Trust Company ("M&T Bank") and M&T Bank, National Association ("M&T Bank,
N.A.").
M&T Bank, with total assets of $20.1 billion at December 31, 1998, is a
New York-chartered commercial bank with 223 banking offices throughout New York
State, 19 banking offices in northeastern Pennsylvania and an office in Nassau,
The Bahamas. M&T Bank and its subsidiaries offer 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 northeastern
Pennsylvania, and on small and medium size businesses based in those areas.
Certain lending activities are also conducted in other states through various
subsidiaries. M&T Bank's subsidiaries include M&T Mortgage Corporation, a
residential mortgage banking company; M&T Securities, Inc., a broker/dealer; M&T
Real Estate, Inc., a commercial mortgage lender; M&T Financial Corporation, a
commercial leasing company; M&T Capital Corporation, a venture capital company;
M&T Credit Corporation, a consumer credit company; and Highland Lease
Corporation, a consumer leasing company.
M&T Bank, N.A., with total assets of $629 million at December 31,
1998, is a national bank with an office in Oakfield, New York. M&T Bank, N.A.
commenced operations on October 2, 1995 and offers selected deposit, loan and
insurance products on a nationwide basis, primarily through telephone and
direct mail marketing techniques. Insurance products are also offered by M&T
Bank, N.A. through banking offices of M&T Bank.
On April 1, 1998, M&T completed the acquisition of ONBANCorp, Inc.
("ONBANCorp"), a bank holding company headquartered in Syracuse, New York.
Immediately after the acquisition, ONBANCorp's two banking subsidiaries, OnBank
& Trust Co. in Syracuse, which operated 59 offices in upstate New York, and
Franklin First Savings Bank in Wilkes-Barre, Pennsylvania, which operated 19
offices in northeastern Pennsylvania, were merged with and into
-23-
M&T Bank. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the operations acquired from ONBANCorp have been
included in the financial results of the Company since the acquisition date.
ONBANCorp's stockholders received $266.3 million in cash and 1,429,998 shares of
M&T common stock in exchange for ONBANCorp shares outstanding at the time of
acquisition. The accompanying table provides a summary of assets acquired and
liabilities assumed on April 1, 1998 in connection with the ONBANCorp
transaction:
Assets
(in thousands)
Investment securities $1,576,604
Loans and leases, net of unearned discount 2,970,306
Allowance for possible credit losses (27,905)
----------
Loans and leases, net 2,942,401
Goodwill and core deposit intangible 562,533
Other assets 411,727
----------
Total assets $5,493,265
----------
----------
Liabilities
Deposits $3,767,729
Short-term borrowings 541,689
Long-term borrowings 268,617
Other liabilities 41,680
----------
Total liabilities $4,619,715
----------
----------
In connection with the acquisition, the Company recorded approximately
$563 million of goodwill and core deposit intangible, and incurred nonrecurring
expenses related to systems conversions and other costs of integrating and
conforming the acquired operations with and into the operations of M&T Bank.
Such expenses totaled $21.3 million ($14.0 million after-tax) during the year
ended December 31, 1998 and consisted largely of expenses for professional
services and other temporary help fees associated with the conversion of systems
and/or integration of operations; recruiting and other incentive compensation;
initial marketing and promotion expenses designed to introduce M&T Bank to
ONBANCorp customers; and printing, supplies and other costs of commencing
operations in new market regions. Since the systems conversions and integration
of operations is complete, the Company does not expect to incur a material
amount of additional integration costs. In accordance with generally accepted
accounting principles, included in the determination of goodwill were charges,
net of applicable income taxes, of $16.8 million for severance of former
ONBANCorp employees; investment banking, legal and other professional fees; and
termination of ONBANCorp contracts for data processing and other services. As of
December 31, 1998, the remaining unpaid portion of merger-related expenses and
charges included in the determination of goodwill were $2.1 million and $1.1
million, respectively. The resolution of any preacquisition contingencies is not
expected to have a material impact on the allocation of the purchase price or
the amount of goodwill recorded as part of the acquisition.
On December 9, 1998, M&T entered into a definitive agreement with FNB
Rochester Corp. ("FNB"), a bank holding company headquartered in Rochester, New
York, providing for a merger between the two companies. FNB, with total assets
of $588 million as of December 31, 1998, is the parent company of First National
Bank of Rochester, which has 19 offices in western and central New York State.
Under the terms of the merger agreement, stockholders of FNB may elect to
receive .06766 of a share of M&T common stock (and cash in lieu of any
fractional share) or $33.00 in cash for each outstanding share of FNB common
stock. Subject to certain adjustments set forth in the merger agreements, 50% of
the 3,625,806 shares of FNB common stock outstanding on
-24-
December 9, 1998 will be exchanged for shares of M&T common stock and the
remaining shares will be converted for cash. The elections of FNB's stockholders
will be subject to allocation and proration if either portion of the merger
consideration is oversubscribed. The merger, which will be accounted for as a
purchase, has been approved by the boards of directors of each company, and is
subject to certain conditions, including regulatory approvals and approval of
FNB's stockholders. It is anticipated that the merger will take place during the
second quarter of 1999.
On July 31, 1998, M&T completed the sale of its retail credit card
business, including outstanding balances of approximately $186 million on that
date, and recognized a pre-tax gain of approximately $3.2 million. M&T continues
to offer credit cards to its customers in the name of M&T Bank, but the
cardholder accounts are owned and serviced by the purchaser of that business.
OVERVIEW
The Company's net income was $208.0 million or $26.16 of diluted earnings per
common share in 1998, increases of 18% and 4%, respectively, from $176.2 million
or $25.26 per diluted share in 1997. Basic earnings per share rose 3% to $27.30
in 1998 from $26.60 in 1997. In 1996, net income totaled $151.1 million while
diluted and basic earnings per share were $21.08 and $22.54, respectively. The
after-tax impact of nonrecurring expenses associated with merging the operations
of ONBANCorp into the Company during 1998 was $14.0 million, representing $1.76
of diluted earnings per share and $1.84 of basic earnings per share.
Net income expressed as a rate of return on average assets in 1998 was
1.14%, compared with 1.32% in 1997 and 1.21% in 1996. The return on average
common stockholders' equity was 13.86% in 1998, 18.49% in 1997 and 17.60% in
1996. Excluding the impact of merger-related expenses, the rates of return on
average assets and average common equity in 1998 were 1.21% and 14.79%,
respectively.
Growth in average loans outstanding, including the impact of the $3.0
billion of loans obtained on April 1, 1998 in the ONBANCorp acquisition, was the
leading factor for a 19% increase in taxable-equivalent net interest income to
$671 million in 1998 from $563 million in 1997. Average loans totaled $14.3
billion in 1998, up 30% from $11.0 billion in 1997. Similarly, average earning
assets increased 32%, to $16.9 billion in 1998 from $12.8 billion in 1997. An 8%
increase in average loans in 1997 was also the most significant factor for the
rise in that year's net interest income from $536 million in 1996. Average loans
and average earning assets in 1996 were $10.1 billion and $12.0 billion,
respectively. Improvement in 1998's net interest income resulting from asset
growth was partially offset by a reduction of the Company's net interest margin,
or taxable-equivalent net interest income expressed as a percentage of average
earning assets. Net interest margin in 1998 was 3.97%, compared with 4.40% in
1997 and 4.45% in 1996.
The provision for possible credit losses was $43.2 million in 1998,
compared with $46.0 million in 1997 and $43.3 million in 1996. Net charge-offs
in 1998 were $39.4 million, compared with $41.8 million in 1997 and $35.2
million in 1996. Included in net charge-offs were net consumer loan charge-offs
totaling $31.5 million in 1998, $35.8 million in 1997 and $28.5 million in 1996.
Net charge-offs of credit card balances included in the consumer loan amounts
were $14.4 million in 1998, $19.0 million in 1997, and $15.9 million in 1996. As
a percentage of average loans outstanding, net charge-offs declined to .28% in
1998, compared with .38% in 1997 and .35% in 1996.
-25-
In January 1998, M&T contributed appreciated investment securities with
a fair value of $24.6 million to an affiliated, tax-exempt private charitable
foundation. As a result of this transfer, the Company incurred charitable
contributions expense of $24.6 million and recognized tax-exempt other income of
$15.3 million. The transfer provided an income tax benefit of approximately
$10.0 million and, accordingly, resulted in an after-tax increase in net income
of $0.7 million, or $.09 per diluted share. Excluding the effect of this
transfer, noninterest income totaled $255 million in 1998, 32% above the $193
million in 1997 and 50% above the $170 million in 1996. Approximately 40% of the
increase from 1997 to 1998 was attributable to revenues related to operations
and/or market areas associated with the ONBANCorp acquisition. Higher revenues
from mortgage banking, trust activities and a bank-owned life insurance program
also contributed to the increases from prior years. Excluding $24.6 million of
expense related to the previously mentioned transfer of securities to an
affiliated charitable foundation in 1998, noninterest expense was $542 million
in 1998, up 28% from $422 million in 1997 and 32% from $409 million in 1996. A
$27.2 million increase in amortization of goodwill and core deposit intangible,
$21.3 million of nonrecurring merger-related expenses and operating expenses
related to the acquired operations of ONBANCorp significantly contributed to the
increase in expenses from 1997 to 1998. Expenses associated with expanding
certain businesses providing loan and investment services contributed to the
increase in expenses from 1996 and 1997.
CASH OPERATING RESULTS
As a result of the acquisition of ONBANCorp on April 1, 1998 and, to a
significantly lesser extent, acquisitions of other entities in prior years, the
Company had recorded as assets at December 31, 1998 goodwill and core deposit
intangible totaling $546 million. Since the amortization of goodwill and core
deposit intangible does not result in a cash expense, M&T believes that
supplemental reporting of its operating results on a "cash" (or "tangible")
basis (which excludes the after-tax effect of amortization of goodwill and core
deposit intangible and the related asset balances) presents a relevant measure
of financial performance and better reflects the cash return on the investments
made by M&T to improve and expand its franchise. The supplemental cash basis
data presented herein do not exclude the effect of other non-cash operating
expenses such as depreciation, provision for possible credit losses, or deferred
income taxes associated with the results of operations.
Excluding nonrecurring merger-related expenses, cash net income was
$251.9 million in 1998, up 38% from $182.4 million in 1997. On the same basis,
diluted and basic earnings per share were $31.69 and $33.06, respectively, up
21% and 20%, respectively, from $26.14 and $27.53 in 1997. In 1996, cash net
income was $156.7 million while diluted and basic cash earnings per share were
$21.85 and $23.38, respectively.
Cash return on average tangible assets, excluding the impact of
nonrecurring merger-related expenses, was 1.41% in 1998, compared with 1.37% in
1997 and 1.26% in 1996. Cash return on average tangible common equity, also
before one-time expenses, was 23.08% in 1998, compared with 19.56% and 18.79% in
1997 and 1996, respectively.
NET INTEREST INCOME/LENDING AND FUNDING ACTIVITIES
Net interest income expressed on a taxable-equivalent basis increased 19% to
$671 million in 1998 from $563 million in 1997. This increase resulted from
growth in average earning assets, which rose $4.1 billion or 32% to $16.9
billion in 1998 from $12.8 billion in 1997. Taxable-equivalent net interest
-26-
income and average earning assets in 1996 were $536 million and $12.0 billion,
respectively. Growth in average earning assets in 1998 was largely attributable
to higher average loans and leases outstanding, which totaled $14.3 billion in
1998, up 30% from $11.0 billion in 1997. The primary reason for the higher loan
balances in 1998 was the $3.0 billion of loans obtained on April 1, 1998 from
the ONBANCorp acquisition, including approximately $450 million of commercial
loans, $380 million of commercial real estate loans, $1.2 billion of residential
mortgage loans and $930 million of consumer loans. Partially offsetting these
increases in average loans and leases was the impact of the July 1998 sale of
M&T's retail credit card business. Average credit card balances for 1998 were
$136 million, compared with $268 million in 1997 and $258 million in 1996.
Average loans in 1997 were 8% higher than the $10.1 billion in 1996. The
accompanying table 4 summarizes average loans and leases outstanding in 1998 and
percentage changes in the major components of the loan and lease portfolio over
the past two years.
Loans secured by real estate, including outstanding home equity loans
and lines of credit which are classified as consumer loans, represented
approximately 66% of the loan and lease portfolio during 1998, up from 64% in
1997 and 1996. At December 31, 1998, the Company held approximately $5.5 billion
of commercial real estate loans, $4.3 billion of consumer real estate mortgage
loans secured by one-to-four family residential properties and $739 million of
outstanding home equity loans and lines of credit, compared with $4.4 billion,
$2.5 billion and $654 million, respectively, at December 31, 1997.
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 Syracuse, Albany, Hudson Valley and Southern
Tier regions of New York State, as well as in northeastern Pennsylvania. Most
commercial real estate loans in the Company's portfolio are either fixed-rate
instruments with monthly payments and a balloon payment of the remaining
principal at maturity, often five years after loan origination, or adjustable
rate loans. For borrowers in good standing, the customer may extend the terms of
the loan agreement for an additional five years at the then-current market rate
of interest. In recent years, in response to customer needs, the Company has
also originated fixed-rate commercial real estate loans with maturities of
greater than five years. In general, these loans have original maturity terms of
approximately ten years. The accompanying table 6 presents commercial real
estate loans at December 31, 1998 by geographic area, type of collateral and
size of the loans outstanding. Of the $2.7 billion of commercial real estate
loans in the New York City metropolitan area, approximately 52% were secured by
multi-family residential properties, 22% by retail space and 9% by office 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 61% of the aggregate dollar amount of New York City area loans
were for $5 million or less, while loans of more than $10 million made up
approximately 22% of the total. Commercial real estate loans secured by
properties elsewhere in New York State tend to have a greater diversity of
collateral types and include a significant amount of lending to customers who
use the mortgaged property in their trade or business. Approximately 78% of the
aggregate dollar amount of loans in this segment of the portfolio were for $5
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 8% of total commercial
-27-
real estate loans.
Amounts presented as construction lending in the accompanying table
represent commercial construction loans for which the Company has not committed
to provide permanent financing. Such loans totaled $363 million, or 2% of total
loans and leases at December 31, 1998.
Real estate loans secured by one-to-four family residential properties
totaled $4.3 billion at December 31, 1998, including approximately 62% secured
by properties located in New York State. At December 31, 1998, $445 million of
residential real estate loans were held for sale by M&T Mortgage Corporation,
the Company's mortgage banking subsidiary.
Consumer loans and leases represented approximately 19% of the average
loan portfolio during 1998, compared with 21% in 1997 and 22% in 1996.
Automobile loans and home equity loans and lines of credit represent the largest
components of the consumer loan portfolio. At December 31, 1998, 52% of the
automobile loan portfolio was to borrowers in New York State, while the
remainder was largely to borrowers in Pennsylvania. Automobile loans and leases
are generally originated through dealers, however, all applications submitted by
dealers are subject to the Company's normal underwriting and loan approval
procedures. Automobile loans and leases represented approximately 9% of the
Company's average loan portfolio during 1998, while no other consumer loan
product represented more than 5%. Due to poorer than expected results, during
1998 and 1997 the Company terminated all of its co-branded credit card programs
and, as already discussed, sold its retail credit card business on July 31,
1998, including outstanding balances of approximately $186 million.
The Company's investment securities portfolio averaged $2.4 billion in
1998, $1.7 billion in 1997 and $1.8 billion in 1996. Investment securities
obtained in the acquisition of ONBANCorp added approximately $800 million to the
average balance during 1998. The size of the investment securities portfolio is
influenced by such factors as demand for loans, which generally yield more than
investment securities, ongoing repayments, the level of deposits, and management
of balance sheet size and resulting capital ratios. The investment securities
portfolio is largely comprised of mortgage-backed securities, collateralized
mortgage obligations, and shorter-term U.S. Treasury notes. When purchasing
investment securities, the Company considers its overall interest-rate risk
profile as well as the adequacy of expected returns relative to prepayment and
other risks assumed. The Company occasionally sells investment securities as a
result of changes in interest rates, actual or anticipated prepayments, or
credit risk associated with a particular security.
Money-market assets, which are comprised of interest-earning deposits
at banks, interest-earning trading account assets, Federal funds sold and
agreements to resell securities, averaged $230 million in 1998, compared with
$123 million in 1997 and $110 million in 1996.
Core deposits represent the most significant source of funding to the
Company and generally carry lower interest rates than wholesale funds of
comparable maturities. Core deposits consist of noninterest-bearing deposits,
interest-bearing transaction accounts, savings deposits and nonbrokered domestic
time deposits under $100,000. The Company's branch network is its principal
source of core deposits. Certificates of deposit under $100,000 generated on a
nationwide basis by M&T Bank, N.A. are also included in core deposits. Average
core deposits rose to $10.7 billion in 1998, up from $8.3 billion in 1997 and
$8.0 billion in 1996. Core deposits obtained on April 1, 1998 in the acquisition
of ONBANCorp totaled approximately $2.8 billion. Average core deposits of M&T
Bank, N.A. were $401 million in 1998, $432 million in 1997 and $261 million in
1996. Funding
-28-
provided by core deposits totaled 63% of average earning assets in
1998, compared with 65% in 1997 and 66% in 1996. An analysis of changes in the
components of core deposits is presented in the accompanying table 7.
Domestic time deposits of $100,000 or more, deposits originated through
the Company's offshore branch office, and brokered certificates of deposit also
provide funding to the Company. Domestic time deposits over $100,000, excluding
brokered certificates of deposit, averaged $1.3 billion in 1998, compared with
$1.0 billion and $892 million in 1997 and 1996, respectively. Offshore branch
deposits, comprised primarily of accounts with balances of $100,000 or more,
averaged $288 million in 1998, compared with $230 million in 1997 and $239
million in 1996. Brokered deposits averaged $1.4 billion in 1998 and 1997 and
$1.1 billion in 1996, and totaled $1.3 billion at December 31, 1998. Brokered
deposits are used as an alternative to short-term borrowings to lengthen the
average maturity of interest-bearing liabilities. The weighted-average remaining
term to maturity of brokered deposits at December 31, 1998 was 2 years. However,
certain of the deposits have provisions that allow early redemption.
Nevertheless, in connection with the Company's management of interest rate risk,
interest rate swaps have been entered into under which the Company receives a
fixed rate of interest and pays a variable rate and that have notional amounts
and terms substantially similar to the amounts and terms of the brokered
deposits. Additional amounts of brokered deposits may be solicited in the future
depending on market conditions and the cost of funds available from alternative
sources at the time.
The Company also uses borrowings from banks, securities dealers, the
Federal Home Loan Banks ("FHLB") and others as funding sources. Short-term
borrowings averaged $1.9 billion in 1998, $812 million in 1997 and $1.1 billion
in 1996. 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 or provide funding for loan growth.
Long-term borrowings averaged $835 million in 1998, $373 million in 1997 and
$189 million in 1996. Long-term borrowings include $250 million of trust
preferred securities issued by two special-purpose entities formed by M&T during
the first half of 1997 and similar securities with a carrying value of $69
million that were issued in the first quarter of 1997 by a special-purpose
entity formed by ONBANCorp. Further information regarding the trust preferred
securities is provided in note 8 of Notes to Financial Statements. Average
long-term borrowings included amounts borrowed from the FHLB of $343 million in
1998 and $2 million in 1997 and 1996, as well as $175 million of subordinated
capital notes issued in prior years by M&T Bank. Information regarding
contractual maturities of long-term borrowings is presented in note 8 of Notes
to Financial Statements.
In addition to changes in the composition of the Company's earning
assets and interest-bearing liabilities, as described herein, net interest
income is also affected by changes in interest rates and spreads. The increase
in net interest income resulting from growth in average earning assets in 1998
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 was 3.39% in 1998,
compared with 3.71% in 1997. The yield on earning assets decreased 34 basis
points (hundredths of one percent) to 8.03% in 1998 from 8.37% in 1997. Lower
yielding residential real estate loans, consumer loans and investment securities
acquired in the ONBANCorp transaction; the July 1998 sale of the Company's
retail credit card business; and competitive pressure on interest rates charged
for newly originated loans, particularly commercial loans and commercial real
estate loans, contributed to the decline in yield. The rate paid on
interest-bearing liabilities was 4.64% in 1998, compared with 4.66% in 1997. In
1996, the net interest spread was 3.80%, the yield on earning assets was 8.33%
and the rate paid on interest-bearing liabilities was 4.53%.
-29-
Generally higher prevailing interest rates and the effect of the previously
discussed issuances of $250 million of trust preferred securities during 1997
contributed to the increase in the rate paid on interest-bearing liabilities in
1997 from 1996.
Interest-free funds, consisting largely of noninterest-bearing deposits
and stockholders' equity, contributed .58% to net interest margin in 1998,
compared with .69% in 1997 and .65% in 1996. Average interest-free funds were
$2.1 billion in 1998, $1.9 billion in 1997 and $1.7 billion in 1996. The decline
in the contribution to net interest margin of interest-free funds in 1998 from
1997 and 1996 was due, in part, to the goodwill and core deposit intangible
assets recorded in conjunction with the ONBANCorp acquisition, which averaged
$413 million during 1998, and the cash surrender value of bank-owned life
insurance, which averaged $314 million in 1998, compared with $41 million in
1997 and none in 1996. Increases in the cash surrender value of bank-owned life
insurance are not included in interest income, but rather are recorded in "other
revenues from operations." These two noninterest earning assets mitigated much
of the benefit derived from increases in noninterest-bearing deposits and
stockholders' equity resulting from the ONBANCorp transaction.
Future changes in market interest rates or spreads, as well as changes
in the composition of the Company's portfolios of earning assets and
interest-bearing liabilities that result in reductions in spreads could
adversely impact the Company's net interest margin and net interest income.
Management assesses the potential impact of future changes in interest rates and
spreads by projecting net interest income under a number of different interest
rate scenarios. As part of the management of interest rate risk, the Company
utilizes interest rate swap agreements to modify the repricing characteristics
of certain portions of the loan and deposit portfolios. Revenue and expense
arising from these agreements are reflected in either the yields earned on
assets or, as appropriate, the rates paid on interest-bearing liabilities.
Excluding forward-starting swaps, the notional amount of interest rate swaps
entered into for interest rate risk management purposes as of December 31, 1998
was approximately $2.4 billion. In general, under the terms of these swaps, the
Company receives payments based on the outstanding notional amount of the swaps
at fixed rates of interest and makes payments at variable rates. However, under
terms of $82 million of swaps, the Company pays a fixed rate of interest and
receives a variable rate. To help manage exposure resulting from changing
interest rates in future years, as of December 31, 1998, the Company had also
entered into forward-starting swaps with an aggregate notional amount of $391
million in which the Company will pay a fixed rate of interest and receive a
variable rate. Such forward-starting swaps had no effect on the Company's net
interest income through December 31, 1998. The average notional amounts of
interest rate swaps entered into for interest rate risk management purposes and
the related effect on net interest income and margin are presented in the
accompanying table 8.
The Company estimates that as of December 31, 1998 it would have
received approximately $23 million if all interest rate swap agreements entered
into for interest rate risk management purposes had been terminated. This
estimated fair value of the interest rate swap portfolio results from the
effects of changing interest rates and should be considered in the context of
the entire balance sheet and the Company's overall interest rate risk profile.
Changes in the estimated fair value of interest rate swaps entered into for
interest rate risk management purposes are not reflected in the consolidated
financial statements. Additional information about interest rate swaps is
included in note 17 of Notes to Financial Statements.
-30-
PROVISION FOR POSSIBLE CREDIT LOSSES
The provision for possible credit losses was $43.2 million in 1998, compared
with $46.0 million in 1997 and $43.3 million in 1996. The purpose of the
provision is to replenish or build the Company's allowance for possible credit
losses to a level necessary to maintain an adequate reserve position that
reflects losses inherent in the loan portfolio as of the balance sheet date. Net
charge-offs for 1998 were $39.4 million, compared with $41.8 million in 1997 and
$35.2 million in 1996. Net charge-offs as a percentage of average loans
outstanding were .28% in 1998, .38% in 1997 and .35% in 1996. Nonperforming
loans totaled $117.0 million or .74% of loans outstanding at December 31, 1998,
compared with $80.7 million or .70% of loans a year earlier and $97.9 million or
.91% at December 31, 1996. Included in nonperforming loans at December 31, 1998
were $37.3 million of loans obtained in the acquisition of ONBANCorp. The
allowance for possible credit losses was $306.3 million or 1.94% of net loans
and leases at the end of 1998, compared with $274.7 million or 2.39% at December
31, 1997 and $270.5 million or 2.52% at December 31, 1996. The ratio of the
allowance to nonperforming loans at year-end 1998, 1997 and 1996 was 262%, 341%
and 276%, respectively.
The decline in the allowance as a percentage of total loans at December
31, 1998 as compared with prior years reflects management's evaluation of the
loan and lease portfolio, the July 1998 sale of the retail credit card business,
and other factors. Management regularly assesses the adequacy of the allowance
by performing an ongoing evaluation of the loan and lease portfolio, including
such factors as the differing economic risks associated with each loan category,
the current financial condition of specific borrowers, the economic environment
in which borrowers operate, the level of delinquent loans and the value of any
collateral. Significant loans are individually analyzed, while other smaller
balance loans are evaluated by loan category. Impacting the assessment as of
December 31, 1998 was the effect that volatile economic conditions in foreign
markets were having on the domestic economy. While the Company's direct
international exposure is not significant, volatile conditions in foreign
markets can cause instability in the domestic economy. Given the concentration
of commercial real estate loans in the Company's loan portfolio, particularly
the large concentration of loans secured by properties in New York State, in
general, and in the New York City metropolitan area, in particular, coupled with
the amount of commercial and industrial loans to businesses in areas of New York
State outside of the New York City metropolitan area and significant growth in
recent years in loans to individual consumers, management cautiously evaluated
the impact of interest rates and overall economic conditions on the ability of
borrowers to meet repayment obligations when assessing the adequacy of the
Company's allowance for possible credit losses as of December 31, 1998. Based
upon the results of such review, management believes that the allowance for
possible credit losses at December 31, 1998 was adequate to absorb credit losses
from existing loans and leases.
The accompanying table 10 presents a comparative allocation of the
allowance for possible credit losses for each of the past five year-ends.
Amounts were allocated to specific loan categories based upon management's
classification of loans under the Company's internal loan grading system and
assessment of near-term charge-offs and losses existing in specific larger
balance loans that are reviewed in detail by the Company's internal loan review
department and pools of other loans that are not individually analyzed. The
unallocated portion of the allowa