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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9861
FIRST EMPIRE STATE CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0968385
(State of incorporation) (I.R.S. Employer Identification No.)
One M&T Plaza, Buffalo, New York 14240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716)842-5445
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par value American Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the Common Stock, $5 par value, held by non-affiliates
of the registrant, computed by reference to the closing price as of the close of
business on March 4, 1996: $1,048,221,974.
Number of shares of the Common Stock, $5 par value, outstanding as of the close
of business on March 4, 1996: 6,350,518 shares.
Documents Incorporated By Reference:
(1) Portions of the Proxy Statement for the 1996 Annual Meeting of
Stockholders of First Empire State Corporation in Part III.
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FIRST EMPIRE STATE CORPORATION
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FORM 10-K
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For the fiscal year ended December 31, 1995
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CROSS-REFERENCE SHEET Form
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PART I Page
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Item 1. Business 5
Statistical disclosure pursuant to Guide 3
I. Distribution of assets, liabilities, and stockholders'
equity; interest rates and interest rate differential
A. Average balance sheets 42-43
B. Interest income/expense and resulting yield or rate
on average interest-earning assets (including non-
accrual loans) and interest-bearing liabilities 42-43
C. Rate/volume variances 19
II. Investment portfolio
A. Year-end balances 64-65
B. Maturity schedule and weighted average yield 50
III. Loan portfolio
A. Year-end balances 67
B. Maturities and sensitivities to changes in interest rates 48,51
C. Risk elements
Nonaccrual, past-due and renegotiated loans 47
Actual and pro forma interest on certain loans 67
Nonaccrual policy 60
Foreign outstandings 30
IV. Summary of loan loss experience
A. Charge-offs and recoveries 45
Factors influencing management's judgment concerning
the adequacy of the allowance and provision 60
B. Allocation of allowance for loan losses 46
V. Deposits
A. Average balances and rates 42-43
B. Maturity schedule of domestic time deposits with
balances of $100,000 or more 49
VI. Return on equity and assets, etc. 18,24,33
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FIRST EMPIRE STATE CORPORATION
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FORM 10-K
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For the fiscal year ended December 31, 1995
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CROSS-REFERENCE SHEET--continued Form
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Page
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PART I, continued
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Item 1. Business, continued
VII. Short-term borrowings 70-71
Item 2. Properties 20,68-69
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Executive Officers of the Registrant 20-22
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
A. Principal market 23
Market prices 36-37
B. Approximate number of holders at year-end 16
C. Frequency and amount of dividends declared 37
D. Restrictions on dividends 10-11,83
Item 6. Selected Financial Data
A. Selected consolidated year-end balances 16
B. Consolidated earnings, etc. 17-18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23-52
Item 8. Financial Statements and Supplementary Data
A. Report of Independent Accountants 54
B. Consolidated Balance Sheet -
December 31, 1995 and 1994 55
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FIRST EMPIRE STATE CORPORATION
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FORM 10-K
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For the fiscal year ended December 31, 1995
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CROSS-REFERENCE SHEET--continued Form
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Page
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PART II, continued
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Item 8, continued
C. Consolidated Statement of Income -
Years ended December 31, 1995, 1994 and 1993 56
D. Consolidated Statement of Cash Flows -
Years ended December 31, 1995, 1994 and 1993 57
E. Consolidated Statement of Changes in
Stockholders' Equity - Years ended December 31, 58
1995, 1994 and 1993
F. Notes to Financial Statements 59-85
G. Quarterly Trends 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 86
PART III
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Item 10. Directors and Executive Officers of the
Registrant 86
Item 11. Executive Compensation 86
Item 12. Security Ownership of Certain Beneficial
Owners and Management 86
Item 13. Certain Relationships and Related Transactions 86
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 87
Signatures 88-90
Exhibit Index 91-92
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PART I
Item 1. Business.
First Empire State Corporation ("Registrant" or "First Empire") is a New York
business corporation which is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended ("BHCA") and under Article III-A of
the New York Banking Law ("Banking Law"). The principal executive offices of the
Registrant are located at One M&T Plaza, Buffalo, New York 14240. The Registrant
was incorporated in November 1969. The Registrant and its direct and indirect
subsidiaries are collectively referred to herein as the "Company". As of
December 31, 1995, the Company had consolidated total assets of $12.0 billion,
deposits of $9.5 billion and stockholders' equity of $846 million. The Company
had 4,148 full-time and 741 part-time employees as of December 31, 1995.
At December 31, 1995, the Registrant had three wholly owned bank
subsidiaries: Manufacturers and Traders Trust Company ("M&T Bank"), The East
New York Savings Bank ("East New York") and M&T Bank, National Association
("M&T Bank, N.A.").
Since the beginning of 1990, the Company has experienced significant growth
through federally-assisted acquisitions of assets and liabilities of failed
thrift institutions and through unassisted acquisition transactions involving
commercial banks, thrift institutions and mortgage banking companies. In January
and September 1990, respectively, M&T Bank, in two federally-assisted
transactions, purchased selected assets and assumed selected liabilities of
Monroe Savings Bank, FSB, Rochester, New York, and Empire Federal Savings Bank
of America, Buffalo, New York, two institutions that had been placed in
receivership. In May 1991, M&T Bank and East New York similarly purchased
certain assets and assumed certain liabilities of Goldome, a Buffalo, New York
savings bank, from the Federal Deposit Insurance Corporation ("FDIC"), as
receiver. In July 1992, Central Trust Company and Endicott Trust Company, two
banks located in Rochester and Endicott, New York, respectively, were acquired
and merged with and into M&T Bank. In December 1994, First Empire acquired
Ithaca Bancorp, Inc. ("Ithaca Bancorp"), Ithaca, New York, and simultaneously
merged Ithaca Bancorp's savings bank subsidiary, Citizens Savings Bank, F.S.B.,
into M&T Bank. Also, in December 1994, M&T Bank acquired from Chemical Bank
selected assets and liabilities associated with seven banking offices in New
York State's Hudson Valley region. In July 1995, M&T Bank acquired from The
Chase Manhattan Bank, N.A., selected assets and liabilities associated with four
banking offices, three of which were located in New York State's Hudson Valley
region, and one of which was located in Western New York.
The following table summarizes the loans and deposits acquired by the Company in
the bank acquisition transactions described above at the time those transactions
were consummated:
Recent Bank Acquisitions and Mergers
Loans Deposits
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(In billions of dollars)
Monroe Savings Bank, FSB $0.4 $0.5
Empire Federal Savings Bank of America 0.5 1.2
Goldome 1.0 2.2
Central Trust Company 0.8 1.0
Endicott Trust Company 0.2 0.3
Ithaca Bancorp, Inc. 0.4 0.3
Acquisition of banking offices - 1994 - 0.1
Acquisition of banking offices - 1995 - 0.1
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On March 6, 1995, M&T Bank's mortgage banking subsidiary, M&T Mortgage
Corporation ("M&T Mortgage"), acquired Statewide Funding Corporation
("Statewide"), a privately-owned mortgage banking company based near Albany, New
York. Statewide had a mortgage servicing portfolio of approximately $1.0 billion
as of the acquisition date. Statewide was merged with and into M&T Mortgage on
the same date. On October 2, 1995, M&T Mortgage acquired the mortgage servicing
rights and origination franchise of Exchange Mortgage Corporation ("Exchange"),
a mortgage banking company based in Huntington Station, New York. As of the
acquisition date, Exchange serviced residential mortgage loans owned by other
investors having an outstanding principal balance of approximately $370 million.
The Company from time to time considers acquiring additional banks, thrift
institutions, branch offices or other businesses, generally within markets
currently served or in other nearby markets. The Company has pursued such
opportunities in the past, currently continues to actively review different
opportunities, including the possibility of major acquisitions, and intends to
continue this practice.
Subsidiaries
M&T Bank is a banking corporation which is incorporated under the laws of the
State of New York. M&T Bank is a member of the Federal Reserve System, the FDIC
and the Federal Home Loan Bank System. First Empire acquired all of the issued
and outstanding shares of the capital stock of M&T Bank in December 1969. The
stock of M&T Bank represents a major asset of First Empire. M&T Bank operates
under a charter granted by the State of New York in 1892, and the continuity of
its banking business is traced to the organization of the Manufacturers and
Traders Bank in 1856. The principal executive offices of M&T Bank are located at
One M&T Plaza, Buffalo, New York 14240. As of December 31, 1995, M&T Bank had
146 banking offices located throughout New York State, including 121 in Western
New York and in the Southern Tier of New York State, principally in Buffalo,
Rochester, Ithaca and Binghamton, 22 banking offices in the Hudson Valley region
and one in New York City, plus a branch in Nassau, The Bahamas and a
representative office in Syracuse. As of December 31, 1995, M&T Bank had
consolidated total assets of $10.2 billion, deposits of $7.8 billion and
stockholder's equity of $669 million. The deposit liabilities of M&T Bank are
insured by the FDIC through either its Bank Insurance Fund ("BIF") or its
Savings Association Insurance Fund ("SAIF"). Of M&T Bank's $7.4 billion in
assessable deposits at December 31, 1995, 82% were assessed as BIF-insured and
the remainder as SAIF-insured deposits. As a commercial bank, M&T Bank offers a
broad range of financial services to a diverse base of consumers, businesses,
professional clients, governmental entities and financial institutions located
in its markets. Lending is largely focused on consumers residing in New York
State and on New York-based small and medium-size businesses, however certain of
M&T Bank's subsidiaries conduct lending activities in markets outside of New
York State. M&T Bank also provides other financial services through its
operating subsidiaries.
East New York was acquired by First Empire in December 1987. East New York,
originally organized in 1868, is a New York-chartered capital stock savings bank
and a member of the FDIC and of the Federal Home Loan Bank System. The deposit
liabilities of East New York are insured by the FDIC through the BIF. The stock
of East New York represents a major asset of First Empire. The principal
executive offices of East New York are located at 2644 Atlantic Avenue,
Brooklyn, New York 11207. Its banking business is conducted from 16 banking
offices located in New York City and Nassau County, Long Island. As of December
31, 1995, East New York had consolidated total assets of $1.8 billion, deposits
of $1.6 billion and stockholder's equity of $134 million. East New York takes
deposits from, and offers other banking services to, a diverse base of customers
located in its markets. East New York concentrates on marketing on behalf of the
Company commercial mortgage loans that are secured by income producing
properties that are primarily located throughout the metropolitan New York City
area, especially apartment buildings and cooperative apartments.
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M&T Bank, N.A., a national bank and a member of the Federal Reserve System and
the FDIC, commenced operations on October 2, 1995. The deposit liabilities of
M&T Bank, N.A. are insured by the FDIC through the BIF. The main office of M&T
Bank, N.A. is located at 54 Main Street, Oakfield, New York 14125. M&T Bank,
N.A. offers selected deposit and loan products on a nationwide basis, primarily
through direct mail and telephone marketing techniques. As of December 31, 1995,
M&T Bank, N.A. had total assets of $246 million, deposits of $69 million and
stockholder's equity of $25 million. Credit card receivables of $211 million
were transferred to M&T Bank, N.A. by M&T Bank during 1995.
M&T Capital Corporation ("M&T Capital"), a wholly owned subsidiary of M&T Bank,
was incorporated as a New York business corporation in January 1968. M&T Capital
is a federally-licensed small business investment company operating under the
provisions of the Small Business Investment Act of 1958, as amended ("SBIA").
M&T Capital provides equity capital and long-term credit to "small-business
concerns", as defined by the SBIA. M&T Capital had assets of $8 million and
stockholder's equity of $7 million as of December 31, 1995, and recorded
approximately $3.8 million of revenues in 1995. The headquarters of M&T Capital
are located at One M&T Plaza, Buffalo, New York 14240.
M&T Credit Corporation ("M&T Credit"), a wholly owned subsidiary of M&T Bank,
was incorporated as a New York business corporation in April 1994. M&T Credit is
a consumer credit company with headquarters at One M&T Plaza, Buffalo, New York
14240, and offices in Pennsylvania. As of December 31, 1995, M&T Credit had
assets of $102 million and stockholder's equity of $0.6 million. M&T Credit
recorded $4.7 million of revenues during 1995.
M&T Mortgage, the wholly owned mortgage banking subsidiary of M&T Bank, was
incorporated as a New York business corporation in November 1991. M&T Mortgage's
principal activities are comprised of the origination of residential mortgage
loans and providing residential mortgage loan servicing to M&T Bank, East New
York and others. M&T Mortgage operates throughout New York State, and also
maintains branch offices in Colorado, Massachusetts, Ohio, Oregon, Pennsylvania,
Utah and Washington. M&T Mortgage had assets of $293 million and stockholder's
equity of $76 million as of December 31, 1995, and recorded approximately $56.6
million of revenues during 1995. The headquarters of M&T Mortgage are located at
M&T Center, One Fountain Plaza, Buffalo, New York 14203.
M&T Financial Corporation ("M&T Financial"), a New York business corporation, is
a wholly owned subsidiary of M&T Bank which specializes in capital-equipment
leasing. M&T Financial was formed in October 1985, had assets of $83 million and
stockholder's equity of $15 million as of December 31, 1995, and recorded
approximately $0.9 million of revenues in 1995. The headquarters of M&T
Financial are located at One M&T Plaza, Buffalo, New York 14240.
M&T Real Estate, Inc.("M&T Real Estate"), is a subsidiary of M&T Bank which was
incorporated as a New York business corporation in August 1995. M&T Bank owns
all of the outstanding common and 87.3% of the preferred stock of M&T Real
Estate. The remaining 12.7% of M&T Real Estate's preferred stock is owned by
officers of the Company. M&T Real Estate engages in commercial real estate
lending and servicing activities. During August 1995, M&T Bank contributed $1.9
billion of commercial mortgage loans, representing substantially all of its
commercial real estate loan portfolio, to M&T Real Estate. In addition,
substantially all of East New York's commercial real estate loan portfolio of
approximately $1.2 billion was transferred to M&T Bank, which in turn
contributed such loans to M&T Real Estate. In consideration for the transfer of
commercial real estate loans, East New York received from M&T Bank a portfolio
of residential mortgage and home equity loans with an aggregate estimated market
value comparable to that of the net
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assets transferred by East New York to M&T Bank. As of December 31, 1995, M&T
Real Estate had assets of $3.2 billion and stockholder's equity of $3.1 billion.
M&T Real Estate recorded $122 million of revenues in 1995. The headquarters of
M&T Real Estate are located at M&T Center, One Fountain Plaza, Buffalo, New York
14203.
M&T Securities, Inc. ("M&T Securities") is a wholly owned subsidiary of M&T Bank
which was incorporated as a New York business corporation in November 1985. M&T
Securities is registered as a broker/dealer under the Securities Exchange Act of
1934, as amended, and provides securities brokerage and investment advisory
services. As of December 31, 1995, M&T Securities had assets of $4.1 million and
stockholder's equity of $(81) thousand. M&T Securities recorded $8.6 million of
revenues during 1995. The headquarters of M&T Securities are located at One M&T
Plaza, Buffalo, New York 14240.
Highland Lease Corporation ("Highland Lease"), a wholly owned subsidiary of M&T
Bank, was incorporated as a New York business corporation in October 1994.
Highland Lease is a consumer leasing company with headquarters at One M&T Plaza,
Buffalo, New York 14240. As of December 31, 1995, Highland Lease had assets of
$108 million and stockholder's equity of $7.3 million. Highland Lease recorded
$4.9 million of revenues during 1995.
The Registrant and its banking subsidiaries have a number of other
special-purpose or inactive subsidiaries. These other subsidiaries represented,
individually and collectively, an insignificant portion of the Company's
consolidated assets, net income and stockholders' equity at December 31, 1995.
Lines of Business, Principal Services, Industry Segments
and Foreign Operations
Commercial and retail banking, with activities incidental thereto, represents
the sole significant line and/or segment of business of the Company. The
Company's international activities are discussed in note 15 of Notes to
Financial Statements filed herewith in Part II, Item 8, "Financial Statements
and Supplementary Data". The only activities that, as a class, contributed 10%
or more of the sum of consolidated interest income and other income in each of
the last three years were lending and investment securities transactions. The
amount of income from such sources during those years is set forth on the
Company's Consolidated Statement of Income filed herewith in Part II, Item 8,
"Financial Statements and Supplementary Data".
Supervision and Regulation
The banking industry is subject to extensive state and federal regulation and
continues to undergo significant change. In 1991, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") was enacted. FDICIA substantially amended
the Federal Deposit Insurance Act ("FDI Act") and certain other statutes. Since
FDICIA's enactment, the federal bank regulatory agencies have adopted
regulations to implement its statutory provisions.
The following discussion summarizes certain aspects of the banking laws and
regulations that affect the Company. Proposals to change the laws and
regulations governing the banking industry are frequently raised in Congress, in
state legislatures, and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have on
the Company are impossible to determine with any certainty. A change in
applicable laws or regulations, or a change in the way such laws or regulations
are interpreted by regulatory agencies or courts, may have a material impact on
the business, operations and earnings of the Company. To the extent that the
following information describes statutory or regulatory provisions, it is
qualified entirely by reference to the particular statutory or regulatory
provision.
Bank Holding Company Regulation
As a registered bank holding company, the Registrant and its nonbank
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subsidiaries are subject to supervision and regulation under the BHCA by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") and
the New York State Banking Superintendent ("Banking Superintendent"). The
Federal Reserve Board requires regular reports from the Registrant and is
authorized by the BHCA to make regular examinations of the Registrant and its
subsidiaries.
Under the BHCA, the Registrant may not acquire direct or indirect ownership or
control of more than 5% of the voting shares of any company, including a bank,
without the prior approval of the Federal Reserve Board, except as specifically
authorized under the BHCA. The Registrant is also subject to regulation under
the Banking Law with respect to certain acquisitions of domestic banks. Under
the BHCA, the Registrant, subject to the approval of the Federal Reserve Board,
may acquire shares of non-banking corporations the activities of which are
deemed by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The Federal Reserve Board has enforcement powers over bank holding companies and
their non-banking subsidiaries, among other things, to interdict activities that
represent unsafe or unsound practices or constitute violations of law, rule,
regulation, administrative orders or written agreements with a federal bank
regulator. These powers may be exercised through the issuance of
cease-and-desist orders, civil money penalties or other actions.
Under the Federal Reserve Board's statement of policy with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit all available resources to support such institutions in circumstances
where it might not do so absent such policy. Although this "source of strength"
policy has been challenged in litigation, the Federal Reserve Board continues to
take the position that it has authority to enforce it. For a discussion of
circumstances under which a bank holding company may be required to guarantee
the capital levels or performance of its subsidiary banks, see Capital Adequacy,
below. The Federal Reserve also has the authority to terminate any activity of a
bank holding company that constitutes a serious risk to the financial soundness
or stability of any subsidiary depository institution or to terminate its
control of any bank or nonbank subsidiaries.
On September 29, 1994, the Riegle-Neal Interstate Banking Efficiency Act of 1994
(the "Interstate Banking Act") was enacted into law. Generally, the Interstate
Banking Act permits bank holding companies to acquire banks in any state as of
September 29, 1995, and preempts all state laws restricting the ownership by a
bank holding company of banks in more than one state. The Interstate Banking Act
also permits, prior to June 1, 1997, a bank to merge with an out-of-state bank
and convert any offices into branches of the resulting bank if the home states
of both banks expressly permit interstate bank mergers; permits, beginning June
1, 1997, a bank to merge with an out-of-state bank and convert any offices into
branches of the resulting bank if both states have not opted out of interstate
branching; permits a bank to acquire branches from an out-of-state bank,
beginning June 1, 1997, if the law of the state where the branches are located
permits the interstate branch acquisition; and permits banks to establish and
operate de novo interstate branches whenever the host state opts-in to de novo
branching. Bank holding companies and banks seeking to engage in transactions
authorized by the Interstate Banking Act must be adequately capitalized and
managed.
On January 29, 1996, New York State enacted into law an interstate branching law
which enables New York to "opt-in" early to interstate branching by merger and
acquisition, as permitted under the Interstate Banking Act. The law adopted in
New York (the "New York Interstate Branching Law") provides for the immediate
opt-in of branching by merger or acquisition on a
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reciprocal basis until June 1, 1997, and is thereafter unrestricted. The New
York Interstate Branching Law permits the acquisition of a single branch on a
reciprocal basis until June 1, 1997, and thereafter without restriction, but
does not provide for de novo interstate branching.
Bank holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the terms of
the CRA, the Federal Reserve Board (or other appropriate bank regulatory agency)
is required, in connection with its examination of a bank, to assess such bank's
record in meeting the credit needs of the community served by that bank,
including low- and moderate-income neighborhoods. Furthermore, such assessment
is also required of any bank that has applied, among other things, to merge or
consolidate with or acquire the assets or assume the liabilities of a
federally-regulated financial institution, or to open or relocate a branch
office. In the case of a bank holding company applying for approval to acquire a
bank or bank holding company, the Federal Reserve Board will assess the record
of each subsidiary bank of the applicant bank holding company in considering the
application. The Banking Law contains provisions similar to the CRA which are
applicable to New York-chartered banks.
Supervision and Regulation of Bank Subsidiaries
The Registrant's banking subsidiaries are subject to regulation, and are
examined regularly, by various bank regulatory agencies: M&T Bank by the Federal
Reserve Board and the Banking Superintendent; East New York by the FDIC and the
Banking Superintendent; and M&T Bank, N.A. by the Comptroller of the Currency.
The Registrant and its direct non-banking subsidiaries are affiliates, within
the meaning of the Federal Reserve Act, of the Registrant's subsidiary banks and
their subsidiaries. As a result, the Registrant's subsidiary banks and their
subsidiaries are subject to restrictions on loans or extensions of credit to,
purchases of assets from, investments in, and transactions with the Registrant
and its direct non-banking subsidiaries and on certain other transactions with
them or involving their securities.
Under the "cross-guarantee" provisions of the FDI Act, insured depository
institutions under common control are required to reimburse the FDIC for any
loss suffered by either the BIF or SAIF of the FDIC as a result of the default
of a commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. Thus, any insured depository institution subsidiary of First
Empire could incur liability to the FDIC in the event of a default of another
insured depository institution owned or controlled by First Empire. The FDIC's
claim under the cross-guarantee provisions is superior to claims of stockholders
of the insured depository institution or its holding company and to most claims
arising out of obligations or liabilities owed to affiliates of the institution,
but is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the BIF or
SAIF or both.
Dividends from Bank Subsidiaries
M&T Bank, East New York and M&T Bank, N.A. are subject, under one or more of the
banking laws, to restrictions on the amount and frequency (no more often than
quarterly) of dividend declarations. Future dividend payments to the Registrant
by its subsidiary banks will be dependent on a number of factors, including the
earnings and financial condition of each such bank, and are subject to the
limitations referred to in note 18 of Notes to Financial Statements filed
herewith in Part II, Item 8, "Financial Statements and
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Supplementary Data," and to other statutory powers of bank regulatory agencies.
Under FDICIA, an insured depository institution is prohibited from making any
capital distribution to its owner, including any dividend, if, after making such
distribution, the depository institution fails to meet the required minimum
level for any relevant capital measure, including the risk-based capital
adequacy and leverage standards discussed below.
Capital Adequacy
The Federal Reserve Board and the FDIC have adopted risk-based capital adequacy
guidelines for bank holding companies and banks under their supervision. Under
the guidelines the so-called "Tier 1 capital" and "Total capital" as a
percentage of risk-weighted assets and certain off-balance sheet instruments
must be at least 4% and 8%, respectively.
The Federal Reserve Board and the FDIC have also imposed a leverage standard to
supplement their risk-based ratios. This leverage standard focuses on a banking
institution's ratio of Tier 1 capital to average total assets, adjusted for
goodwill and certain other items. Under these guidelines, banking institutions
that meet certain criteria, including excellent asset quality, high liquidity,
low interest rate exposure and good earnings, and that have received the highest
regulatory rating must maintain a ratio of Tier 1 capital to total assets of at
least 3%. Institutions not meeting these criteria, as well as institutions with
supervisory, financial or operational weaknesses, along with those experiencing
or anticipating significant growth are expected to maintain a Tier 1 capital to
total assets ratio equal to at least 4 to 5%.
As reflected in the following table, the risk-based capital ratios and leverage
ratios of the Registrant, M&T Bank, East New York and M&T Bank, N.A. as of
December 31, 1995 exceeded the risk-based capital adequacy guidelines and the
leverage standard.
Capital Components and Ratios at December 31, 1995
(dollars in millions)
Registrant M&T Bank,
(Consolidated) M&T Bank East New York N.A.
-------------- -------- ------------- ----
Capital Components
Tier 1 capital $ 821 $ 646 $ 133 $ 22
Total capital 1,118 927 148 25
Risk-weighted assets
and off-balance sheet
instruments $ 9,624 $8,392 $1,168 $235
Risk-based Capital Ratio
Tier 1 capital 8.53% 7.70% 11.41% 9.46%
Total capital 11.62 11.05 12.68 10.76
Leverage Ratio 6.91 6.38 7.33 10.08
FDICIA required each federal banking agency, including the Federal Reserve
Board, to revise its risk-based capital standards within 18 months of the
enactment of the statute into law on December 19, 1991 in order to ensure that
those standards take adequate account of interest rate risk, concentration of
credit risk and the risk of nontraditional activities, as well as reflect the
actual performance and expected risk of loss on certain multifamily housing
loans.
On December 29, 1993, the Federal Reserve Board amended the risk-based capital
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guidelines, effective December 31, 1993, lowering from 100 percent to 50 percent
the risk weight assigned to certain multifamily housing loans.
On December 7, 1994, the Federal Reserve Board adopted a final rule, effective
December 31, 1994, providing that institutions regulated by the Federal Reserve
Board could net for risk-based capital purposes the positive and negative market
values of interest and exchange rate contracts subject to a qualifying, legally
enforceable, bilateral netting contract to calculate one current exposure for
that netting contract.
On December 8, 1994, the Federal Reserve Board amended its risk-based capital
guidelines effective December 31, 1994, directing institutions to generally not
include in regulatory capital the "net unrealized holding gains (losses) on
securities available for sale", determined pursuant to the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", when preparing financial statements
in accordance with generally accepted accounting principles. Net unrealized
losses on marketable equity securities (i.e., equity securities with readily
determinable fair values), however, continue to be deducted from Tier 1 capital.
This rule has the general effect of valuing available for sale securities at
amortized cost (i.e., based on historical cost), rather than at fair value
(i.e., generally at market value), for purposes of calculating the risk-based
and leverage ratios.
On December 15, 1994, the Federal Reserve Board issued a final rule, effective
January 17, 1995, addressing concentration of credit risk and risks of
nontraditional activities. Accordingly, risk-based capital guidelines were
amended to explicitly cite concentrations of credit risk and an institution's
ability to monitor and control them as important factors in assessing an
institution's overall capital adequacy. Institutions identified through the
examination process as having significant exposure to concentration of credit
risk or as not adequately managing concentration risk will be required to hold
capital in excess of the regulatory minimums. The risk-based capital guidelines
were further amended to explicitly cite the risks arising from nontraditional
activities and management's ability to monitor and control these risks as
important factors to consider in assessing an institution's overall capital
adequacy. The rule requires that as banking institutions begin to engage in, or
significantly expand their participation in, a nontraditional activity, the
risks of that activity be promptly analyzed and the activity given appropriate
capital treatment by the agencies.
On December 22, 1994, the Federal Reserve Board revised its capital adequacy
guidelines, effective April 1, 1995, to establish a limitation on the amount of
certain deferred tax assets that may be included in (that is, not deducted from)
Tier 1 capital for purpose of risk-based capital and leverage ratios. Under the
revised guidelines, deferred tax assets that can only be realized if an
institution earns taxable income in the future are limited for regulatory
capital purposes to the amount that the institution expects to realize, based on
projections of taxable income, within one year of each quarter-end report date
or 10 percent of Tier 1 capital, whichever is less.
In August 1995, the federal banking agencies issued final rules under which
exposure to interest rate risk will be measured as the effect that a change in
interest rates would have on the net economic value of a bank. This economic
perspective considers the effect that changing interest rates may have on the
value of a bank's assets, liabilities and off-balance sheet positions. Exposure
estimates collected through a new proposed supervisory measurement process, a
bank's historical financial performance, and it's earnings exposure to interest
rate movements will be quantitative factors used by examiners to determine the
adequacy of a bank's capital for interest rate risk. Examiners will also
consider qualitative factors, including the adequacy of a bank's internal
interest rate risk management. As a result, the final supervisory judgement on a
bank's capital adequacy may differ significantly from conclusions that might be
drawn solely from the level of the bank's risk-based capital ratio. Although the
final rule did not codify a measurement framework, the federal banking agencies
also intend to adopt a measurement framework which can be incorporated into
risk-based capital standards.
-12-
Bank regulators periodically propose amendments to the risk-based capital
guidelines and related regulatory framework. While the Company's management
studies such proposals, the timing of adoption, ultimate form and effect of such
proposed amendments on the Company's capital requirements and operations cannot
be predicted.
FDICIA requires the federal banking agencies to take "prompt corrective action"
in respect of depository institutions that do not meet minimum capital
requirements. FDICIA established five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized". A depository institution's capital tier
depends upon where its capital levels are in relation to various relevant
capital measures, including a risk-based capital measure and a leverage ratio
capital measure, and certain other factors.
Under the implementing regulations adopted by the federal banking agencies, a
bank is considered "well capitalized" if it has (i) a total risk-based capital
ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or
3% or greater in the case of a bank with a composite CAMEL rating of 1). A bank
is considered (A) "undercapitalized" if it has (i) a total risk-based capital
ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or
(iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a
composite CAMEL rating of 1); (B) "significantly undercapitalized" if the bank
has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1
risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than
3% and (C)"critically undercapitalized" if the bank has a ratio of tangible
equity to total assets equal to or less than 2%. The Federal Reserve Board may
reclassify a "well capitalized" bank as "adequately capitalized" or subject an
"adequately capitalized" or "undercapitalized" institution to the supervisory
actions applicable to the next lower capital category if it determines that the
bank is in an unsafe or unsound condition or deems the bank to be engaged in an
unsafe or unsound practice and not to have corrected the deficiency. M&T Bank,
East New York and M&T Bank, N.A. currently meet the definition of "well
capitalized" institutions.
"Undercapitalized" depository institutions, among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions, are limited in their ability to obtain funding from a Federal
Reserve Bank and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan and provide appropriate assurances of performance. If a
depository institution fails to submit an acceptable plan, including if the
holding company refuses or is unable to make the guarantee described in the
previous sentence, it is treated as if it is "significantly undercapitalized".
Failure to submit or implement an acceptable capital plan also is grounds for
the appointment of a conservator or a receiver. "Significantly undercapitalized"
depository institutions may be subject to a number of additional requirements
and restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. Moreover, the parent holding
company of a significantly undercapitalized depository institution may be
ordered to divest itself of the institution or of nonbank subsidiaries of the
holding company. "Critically undercapitalized" institutions, among other things,
are prohibited from making any payments of principal and interest on
subordinated debt, and are subject to the appointment of a receiver or
conservator.
-13-
FDICIA directs, among other things, that each federal banking agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
value for publicly traded shares and other standards as they deem appropriate.
The Federal Reserve Board adopted such standards in 1993.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, limitations on
the amount of capitalized mortgage servicing rights and purchased credit card
relationships includable in Tier 1 capital, and the requirement that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch. FDICIA also contains a prohibition on the
acceptance or renewal of brokered deposits by depository institutions that are
not "well capitalized" or are "adequately capitalized" and have not received a
waiver from the FDIC.
FDIC Deposit Insurance Assessments
As institutions insured by the BIF and the SAIF, M&T Bank, East New York and M&T
Bank, N.A. are subject to FDIC deposit insurance assessments. Under current law
the insurance assessment to be paid by BIF-insured institutions shall be
specified in a schedule required to be issued by the FDIC that specifies, at
semiannual intervals, target reserve ratios designed to increase the reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) no later than 2006. The FDIC is
also authorized to impose one or more special assessments in any amounts deemed
necessary to enable repayment of amounts borrowed by the FDIC from the Treasury
Department. On September 15, 1992, the FDIC approved the implementation of a
risk-based deposit premium assessment system under which each depository
institution is placed in one of nine assessment categories based on the
institution's capital classification under the prompt corrective action
provisions described above, and whether such institution is considered by its
supervisory agency to be financially sound or to have supervisory concerns. The
assessment rates under the system range from .23% to .31% depending upon the
assessment category into which the insured institution is placed. The risk-based
assessment system became effective January 1, 1993. In September 1995, the FDIC
announced that the BIF was fully capitalized at the end of May 1995. As a
result, the BIF assessments from the FDIC for M&T Bank and East New York were
reduced to .04%, retroactive to June 1, 1995. In addition, effective January 1,
1996, such assessment was reduced to a nominal level for M&T Bank, East New York
and M&T Bank, N.A. The FDIC retains the ability to increase BIF assessments and
to levy special additional assessments.
With respect to deposit insurance assessments on SAIF-insured deposits at M&T
Bank (which represent approximately 18% of its total assessed deposit
liabilities), under current law such assessments must be the greater of .15% of
M&T Bank's average assessment base (as defined) or such rate as the FDIC at its
sole discretion determines to be appropriate to increase (or maintain) the
reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as
the FDIC may determine in accordance with the statute) within a reasonable
period of time. From January 1, 1994 through December 31, 1997 the assessment
rate must not be less than .18% of the institution's average assessment base.
The assessment rate may be higher if the FDIC, in its sole discretion,
determines such higher rate to be appropriate. Effective January 1, 1993, the
risk-based deposit premium assessment system described above was made applicable
to SAIF-insured deposits. However, unlike assessments for BIF-insured deposits,
the FDIC has not reduced the 1995 or 1996 assessment rates for SAIF-insured
deposits. Furthermore, in 1995 congressional committees considered proposals
that would require a one-time special assessment related to deposits insured by
the SAIF. Although final legislation has yet to be enacted, management believes
that it is likely that a special assessment will ultimately be levied against
M&T Bank on its SAIF insured deposits.
-14-
A significant increase in the assessment rate or a special additional assessment
with respect to insured deposits could have an adverse impact on the results of
operations and capital of M&T Bank, East New York or M&T Bank, N.A.
Governmental Policies
The earnings of the Company are significantly affected by the monetary and
fiscal policies of governmental authorities, including the Federal Reserve
Board. Among the instruments of monetary policy used by the Federal Reserve
Board to implement these objectives are open-market operations in U.S.
Government securities and Federal funds, changes in the discount rate on member
bank borrowings and changes in reserve requirements against member bank
deposits. These instruments of monetary policy are used in varying combinations
to influence the overall level of bank loans, investments and deposits, and the
interest rates charged on loans and paid for deposits. The Federal Reserve Board
frequently uses these instruments of monetary policy, especially its open-market
operations and the discount rate, to influence the level of interest rates and
to affect the strength of the economy, the level of inflation or the price of
the dollar in foreign exchange markets. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banking
institutions in the past and are expected to continue to do so in the future. It
is not possible to predict the nature of future changes in monetary and fiscal
policies, or the effect which they may have on the Company's business and
earnings.
Competition
The Company competes in offering commercial and personal financial services with
other banking institutions and with firms in a number of other industries, such
as thrift institutions, credit unions, personal loan companies, sales finance
companies, leasing companies, securities brokers and dealers, insurance
companies and retail merchandising organizations. Furthermore, diversified
financial services companies are able to offer a combination of these services
to their customers on a nationwide basis. Compared to less extensively regulated
financial services companies, the Company's operations are significantly
impacted by state and federal regulations applicable to the banking industry.
Moreover, the provisions of the Interstate Banking Act and the New York State
Interstate Branching Law may further ease entry into New York State by
out-of-state banking institutions. As a result, the number of banking
organizations with which the Registrant's subsidiary banks compete may grow in
the future.
Other Legislative Initiatives
From time to time, various proposals are introduced in the United States
Congress and in the New York Legislature and before various bank regulatory
authorities which would alter the powers of, and restrictions on, different
types of banking organizations and which would restructure part or all of the
existing regulatory framework for banks, bank holding companies and other
financial institutions.
Moreover, a number of other bills have been introduced in Congress which would
further regulate, deregulate or restructure the financial services industry. It
is not possible to predict whether these or any other proposals will be enacted
into law or, even if enacted, the effect which they may have on the Company's
business and earnings.
Statistical Disclosure Pursuant to Guide 3
See cross-reference sheet for disclosures incorporated elsewhere in this Annual
Report on Form 10-K. Additional information is included in the following tables.
-15-
- -------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
Item 1, Table 1
SELECTED CONSOLIDATED YEAR-END BALANCES
Dollars in thousands 1995 1994 1993 1992 1991
- ------------------------------------------------- ----------- ---------- ---------- --------- ----------
Money-market assets
Interest-bearing deposits at banks $ 125,500 143 55,044 110,041 -
Federal funds sold and resell agreements 1,000 3,080 329,429 312,461 67,351
Trading account 9,709 5,438 9,815 53,515 42,957
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total money-market assets 136,209 8,661 394,288 476,017 110,308
Investment securities
U.S. Treasury and federal agencies 1,087,005 999,407 1,387,395 916,621 1,725,604
Obligations of states and political subdivisions 35,250 55,787 49,230 53,789 128,409
Other 647,040 735,846 992,527 750,154 731,973
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total investment securities 1,769,295 1,791,040 2,429,152 1,720,564 2,585,986
Loans and leases
Commercial, financial, leasing, etc. 2,013,937 1,680,415 1,510,205 1,478,555 1,068,606
Real estate - construction 77,604 53,535 51,384 35,831 30,895
Real estate - mortgage 5,648,590 5,046,937 4,540,177 4,422,730 4,091,414
Consumer 2,133,592 1,666,230 1,337,293 1,211,401 1,015,722
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total loans and leases 9,873,723 8,447,117 7,439,059 7,148,517 6,206,637
Unearned discount (317,874) (229,824) (177,960) (164,713) (160,083)
Allowance for possible credit losses (262,344) (243,332) (195,878) (151,690) (100,265)
- ------------------------------------------------- ------------ ---------- ---------- --------- ---------
Loans and leases, net 9,293,505 7,973,961 7,065,221 6,832,114 5,946,289
Other real estate owned 7,295 10,065 12,222 16,694 10,354
Total assets 11,955,902 10,528,644 10,364,958 9,587,931 9,171,066
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Demand deposits 1,184,359 1,087,102 1,052,258 1,078,690 655,876
NOW accounts 768,559 748,199 764,690 770,618 683,732
Savings deposits 2,765,301 3,098,438 3,364,983 3,573,717 2,841,590
Time deposits 4,596,053 3,106,723 1,982,272 2,536,309 3,066,897
Deposits at foreign office 155,303 202,611 189,058 117,776 226,229
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Total deposits 9,469,575 8,243,073 7,353,261 8,077,110 7,474,324
Short-term borrowings 1,273,206 1,364,850 2,101,667 692,691 1,022,430
Long-term borrowings 192,791 96,187 75,590 75,685 9,477
Total liabilities 11,109,649 9,807,648 9,640,964 8,961,136 8,635,291
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
Stockholders' equity 846,253 720,996 723,994 626,795 535,775
- ------------------------------------------------- ----------- ---------- ---------- --------- ---------
STOCKHOLDERS, EMPLOYEES AND OFFICES
Number at year-end 1995 1994 1993 1992 1991
- ------------------------------------------------- ----------- ---------- ---------- ---------- ---------
Stockholders 3,787 3,981 3,985 4,157 4,346
Employees 4,889 4,505 4,400 4,275 3,338
Banking offices 181 168 145 151 115
- ------------------------------------------------- ----------- ---------- ---------- ---------- ---------
-16-
- ---------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------
Item 1, Table 2
CONSOLIDATED EARNINGS
Dollars in thousands 1995 1994 1993 1992 1991
- -------------------------------------------- --------- ------- ------- ------- -------
Interest income
Loans and leases, including fees $ 794,181 633,077 608,473 602,932 592,395
Money-market assets
Deposits at banks 8,181 2,212 6,740 1,083 7,864
Federal funds sold and resell agreements 3,007 4,751 20,403 18,100 5,322
Trading account 1,234 361 1,242 2,927 15,716
Investment securities
Fully taxable 118,791 104,185 101,187 125,529 138,808
Exempt from federal taxes 2,760 2,760 2,584 5,906 9,292
- -------------------------------------------- --------- ------- ------- ------- -------
Total interest income 928,154 747,346 740,629 756,477 769,397
- -------------------------------------------- --------- ------- ------- ------- -------
Interest expense
NOW accounts 11,902 11,286 13,113 16,544 27,418
Savings deposits 87,612 84,804 90,392 110,142 123,468
Time deposits 239,882 97,067 98,508 153,588 242,684
Deposits at foreign office 6,952 5,894 3,243 4,348 9,014
Short-term borrowings 84,225 73,868 58,459 38,386 36,972
Long-term borrowings 11,157 6,287 6,158 590 659
- -------------------------------------------- --------- ------- ------- ------- -------
Total interest expense 441,730 279,206 269,873 323,598 440,215
- -------------------------------------------- --------- ------- ------- ------- -------
Net interest income 486,424 468,140 470,756 432,879 329,182
Provision for possible credit losses 40,350 60,536 79,958 84,989 63,412
- -------------------------------------------- --------- ------- ------- ------- -------
Net interest income after provision
for possible credit losses 446,074 407,604 390,798 347,890 265,770
- -------------------------------------------- --------- ------- ------- ------- -------
Other income
Trust income 25,477 22,574 23,865 16,905 11,847
Service charges on deposit accounts 38,290 35,016 32,291 28,372 20,688
Merchant discount and other credit card fees 10,675 8,705 7,932 6,728 5,776
Trading account gains 1,151 700 2,702 1,684 5,015
Gain on sales of bank investment securities 4,479 128 870 28,050 450
Mortgage banking revenues 37,142 16,002 12,776 10,943 8,548
Gain on sales of venture capital investments 2,619 802 2,896 3,230 2,064
Other revenues from operations 29,705 39,812 27,212 30,314 23,298
- -------------------------------------------- --------- ------- ------- ------- -------
Total other income 149,538 123,739 110,544 126,226 77,686
- -------------------------------------------- --------- ------- ------- ------- -------
Other expense
Salaries and employee benefits 188,222 161,221 154,340 130,751 103,201
Equipment and net occupancy 50,526 49,132 47,823 41,659 33,350
Printing, postage and supplies 14,442 13,516 13,021 13,111 10,727
Deposit insurance 14,675 16,442 17,684 17,783 15,222
Other costs of operations 106,574 96,551 94,951 108,034 66,161
- -------------------------------------------- --------- ------- ------- ------- -------
Total other expense 374,439 336,862 327,819 311,338 228,661
- -------------------------------------------- --------- ------- ------- ------- -------
Income before income taxes 221,173 194,481 173,523 162,778 114,795
Income taxes 90,137 77,186 71,531 64,841 47,601
- -------------------------------------------- --------- ------- ------- ------- -------
Net income $ 131,036 117,295 101,992 97,937 67,194
============================================ ========= ======= ======= ======= =======
Dividends declared
Common $ 16,224 14,743 13,054 10,780 9,344
Preferred 3,600 3,600 3,600 3,600 2,860
============================================ ========= ======= ======= ======= =======
-17-
- ----------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------
Item 1, Table 3
COMMON SHAREHOLDER DATA
1995 1994 1993 1992 1991
- -------------------------------------------- ------ ------ ----- ----- -----
Per Share
Net income $18.79 16.35 13.87 13.41 9.32
Cash dividends declared 2.50 2.20 1.90 1.60 1.40
Stockholders' equity at year-end 125.33 103.02 99.43 85.79 73.91
Dividend payout ratio 12.73% 12.97% 13.27% 11.43% 14.52%
============================================ ====== ====== ===== ===== =====
-18-
- -----------------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------
Item 1, Table 4
CHANGES IN INTEREST INCOME AND EXPENSE*
1995 compared with 1994 1994 compared with 1993
----------------------- -----------------------
Resulting from Resulting from
changes in: changes in:
Total --------------- Total ---------------
Increase (decrease) in thousands change Volume Rate change Volume Rate
- --------------------------------------------------------- ------ ------ ---- ------ ------ ----
Interest income
Loans and leases, including fees $ 161,336 127,303 34,033 $ 24,416 38,266 (13,850)
Money-market assets
Deposits at banks 5,969 4,005 1,964 (4,528) (6,055) 1,527
Federal funds sold and agreements to resell securities (1,744) (3,335) 1,591 (15,652) (20,432) 4,780
Trading account 840 952 (112) (935) (1,083) 148
Investment securities
U.S. Treasury and federal agencies 17,563 3,841 13,722 (5,735) (6,451) 716
Obligations of states and political subdivisions 348 (227) 575 472 747 (275)
Other (2,945) (6,562) 3,617 8,682 972 7,710
- --------------------------------------------------------- --------- ---------
Total interest income $ 181,367 $ 6,720
========================================================= ========= =========
Interest expense
Interest-bearing deposits
NOW accounts $ 616 237 379 $ (1,827) (28) (1,799)
Savings deposits 2,808 (9,704) 12,512 (5,588) (5,848) 260
Time deposits 142,815 105,852 36,963 (1,441) (3,099) 1,658
Deposits at foreign office 1,058 (953) 2,011 2,651 1,146 1,505
Short-term borrowings 10,357 (16,495) 26,852 15,409 (4,856) 20,265
Long-term borrowings 4,870 5,272 (402) 129 135 (6)
- --------------------------------------------------------- --------- ---------
Total interest expense $ 162,524 $ 9,333
========================================================= ========= =========
* Interest income data are on a taxable-equivalent basis. The apportionment of
changes resulting from the combined effect of both volume and rate was based
on the separately determined volume and rate changes.
-19-
Item 2. Properties.
Both First Empire and M&T Bank maintain their executive offices at One M&T Plaza
in Buffalo, New York. This twenty-one story headquarters building, containing
approximately 276,000 rentable square feet of space, is owned in fee by M&T
Bank, and was completed in 1967 at a cost of approximately $17 million. First
Empire, M&T Bank and their subsidiaries occupy approximately 68% of the building
and the remainder is leased to non-affiliated tenants. At December 31, 1995, the
cost of this property, net of accumulated depreciation, was $10.2 million.
In September 1992, M&T Bank acquired an additional facility in Buffalo, New York
with approximately 346,000 rentable square feet of space at a cost of
approximately $12 million. Approximately 83% of this facility, known as M&T
Center, is occupied by M&T Bank and its subsidiaries, with the remainder leased
to non-affiliated tenants. At December 31, 1995, the cost of this building,
including improvements made subsequent to acquisition and net of accumulated
depreciation, was $16.3 million.
M&T Bank also owns and occupies two separate facilities in the Buffalo area
which support certain back-office and operations functions of the Company. The
total square footage of these facilities approximates 223,000 square feet and
their combined cost, net of accumulated depreciation, was $12.5 million.
The cost, net of accumulated depreciation and amortization, of the Company's
premises and equipment is detailed in note 6 of Notes to Financial Statements
filed herewith in Part II, Item 8, "Financial Statements and Supplementary
Data". Of the 161 domestic banking offices of the Registrant's subsidiary banks,
57 are owned in fee and 104 are leased.
Item 3. Legal Proceedings.
A number of lawsuits were pending against the Registrant and its subsidiaries at
December 31, 1995. In the opinion of management, the potential liabilities, if
any, arising from such litigation will not have a materially adverse impact on
the Company's consolidated financial condition. Moreover, management believes
that the Company has substantial defenses in such litigation, but there can be
no assurance that the potential liabilities, if any, arising from such
litigation will not have a materially adverse impact on the Company's
consolidated results of operations in the future.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable
Executive Officers of the Registrant
Information concerning the Registrant's executive officers is presented below as
of March 4, 1996. Shown parenthetically is the year since which the officer has
held the indicated position with the Registrant or its subsidiaries. In the case
of each such corporation, officers' terms run until the first meeting of the
board of directors after such corporation's annual meeting, and until their
successors are elected and qualified.
Robert G. Wilmers, age 61, is chairman of the board (1994), president
(1988), chief executive officer (1983) and a director (1982) of the
Registrant. He is chairman of the board, president and chief executive
officer (1983) and a director (1982) of M&T Bank. Mr. Wilmers is a
director of East New York (1988) and M&T Financial (1985). He is
chairman of the board and a director of M&T Bank, N.A.(1995).
William A. Buckingham, age 53, is an executive vice president (1990) of
the Registrant and of M&T Bank and is in charge of the Company's Retail
Banking Division. Mr. Buckingham is a director of M&T Securities. He is
an executive vice president and a director of M&T Bank, N.A.(1995). Mr.
Buckingham is chairman of the board and a director of M&T Credit
(1995); chairman of the board and a director of Highland Lease (1995);
-20-
and a director of M&T Securities (1995). Mr. Buckingham held a number
of management positions with Manufacturers Hanover Trust Company from
1973 to 1990, including the position of executive vice president of its
branch banking division which he held immediately prior to joining the
Registrant and M&T Bank.
Atwood Collins, III, age 49, is the president, chief executive officer and
a director (1995) of East New York. Previously, Mr. Collins served as
executive vice president and chief operating officer of East New York
(1988). Mr. Collins is a director of M&T Real Estate (1995). Mr.
Collins held a number of management positions with Morgan Guaranty
Trust Company of New York from 1972 to 1988, including the position of
senior vice president and manager of treasury operations which he held
immediately prior to joining East New York.
Brian E. Hickey, age 43, is president (1994) of the Rochester Division of
M&T Bank and has responsibility for managing all of M&T Bank's business
segments in the Rochester market. Before joining M&T Bank, Mr. Hickey
served as regional president, Rochester/Southern Region of Marine
Midland Bank, which he joined as a regional executive in 1989.
James L. Hoffman, age 56, is president (1992) of the Hudson Valley
Division of M&T Bank. Mr. Hoffman served as chairman of the board,
president, chief executive officer and a director (1983) of The First
National Bank of Highland, which had been a wholly owned subsidiary of
the Registrant prior to its merger with and into M&T Bank on February
29, 1992. Mr. Hoffman is a director of M&T Financial (1986). He served
as an executive vice president of M&T Bank from 1974 to 1984.
Barbara L. Laughlin, age 51, is an executive vice president of the
Registrant (1993) and of M&T Bank (1990), and is in charge of the
Company's Technology and Banking Operations Division. Ms. Laughlin is
an executive vice president and a director of M&T Bank, N.A.(1995). Ms.
Laughlin was executive vice president of retail banking and technology
at The Seamen's Bank for Savings from June 1986 to April 1990 before
joining M&T Bank.
William C. Rappolt, age 50, is an executive vice president and treasurer
of the Registrant (1993) and M&T Bank (1984), and executive vice
president of East New York (1994). Mr. Rappolt is in charge of the
Company's Treasury Division. Mr. Rappolt is a director of M&T Financial
(1985), M&T Securities (1985), and is an executive vice president and a
director of M&T Bank, N.A.(1995).
Robert E. Sadler, Jr., age 50, is an executive vice president of the
Registrant (1990) and of M&T Bank (1983), and is in charge of the
Company's Commercial Banking Division. Mr. Sadler is chairman of the
board (1987) and a director of M&T Capital (1983); chairman of the
board (1989) and a director of M&T Financial (1985); chairman of the
board and a director of M&T Mortgage (1991); chairman of the board and
a director of M&T Securities (1994); president, chief executive officer
and a director of M&T Bank, N.A.(1995); and chairman of the board,
president and a director of M&T Real Estate (1995).
Harry R. Stainrook, age 59, is an executive vice president of the
Registrant (1993) and of M&T Bank (1985), and is in charge of M&T
Bank's Trust and Investment Services Division. Mr. Stainrook is a
director of M&T Securities (1994).
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James L. Vardon, age 54, is an executive vice president and chief
financial officer (1984) of the Registrant and of M&T Bank, and is in
charge of the Company's Finance Division. Mr. Vardon is a director of
M&T Capital (1984), M&T Financial (1985) and M&T Real Estate (1995). He
is an executive vice president and chief financial officer of M&T Bank,
N.A.(1995).
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. The Registrant's common stock is traded under the symbol
FES on the American Stock Exchange. See cross-reference sheet for
disclosures incorporated elsewhere in this Annual Report on Form
10-K for market prices of the Registrant's common stock,
approximate number of common stockholders at year-end, frequency
and amounts of dividends on common stock and restrictions on the
payment of dividends.
Item 6. Selected Financial Data. See cross-reference sheet for disclosures
incorporated elsewhere in this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Corporate Profile and Significant Developments
First Empire State Corporation ("First Empire") is a bank holding company
headquartered in Buffalo, New York with consolidated assets of $12.0 billion at
December 31, 1995. First Empire and its consolidated subsidiaries are
hereinafter referred to collectively as "the Company". First Empire's banking
subsidiaries are Manufacturers and Traders Trust Company ("M&T Bank"), The East
New York Savings Bank ("East New York") and M&T Bank, National Association ("M&T
Bank, N.A."), all of which are wholly owned. M&T Bank, with total assets of
$10.2 billion at December 31, 1995, is a New York-chartered commercial bank
with 121 offices throughout Western New York State and New York's Southern Tier,
22 offices in New York's Hudson Valley region and offices in New York City,
Albany, Syracuse and Nassau, The Bahamas. East New York, with $1.8 billion in
assets at December 31, 1995, is a New York-chartered savings bank with 16
offices in metropolitan New York City. M&T Bank, N.A., with $246 million in
assets at December 31, 1995, is a national bank headquartered in Oakfield, New
York that commenced operations on October 2, 1995. M&T Bank, N.A. is currently
offering consumer banking products, primarily credit cards and home equity loans
and lines of credit. Additionally, M&T Bank, N.A. markets certificates of
deposit nationwide.
M&T Bank's subsidiaries include M&T Mortgage Corporation, a residential
mortgage banking company; M&T Securities, Inc., a broker/dealer; M&T Real
Estate, Inc., a commercial real estate lending company; M&T Financial
Corporation, an equipment leasing company; M&T Capital Corporation, a venture
capital company; M&T Credit Corporation, a consumer credit company; and Highland
Lease Corporation, a consumer leasing company.
On March 6, 1995, M&T Mortgage Corporation acquired Statewide Funding
Corporation ("Statewide"), a privately-owned mortgage banking company based near
Albany, New York. Statewide had a mortgage servicing portfolio of approximately
$1.0 billion at the acquisition date and originated more than $400 million of
mortgage loans in 1994. Through this acquisition, several New York State offices
were retained, as was an origination office in Massachusetts. On October 2,
1995, M&T Mortgage Corporation acquired the mortgage servicing rights and
origination franchise of Exchange Mortgage Corporation ("Exchange"), a mortgage
banking company based in Huntington Station, New York. Exchange had total
mortgage originations of approximately $177 million in 1994 and serviced a
portfolio of approximately $370 million as of the acquisition date. M&T Mortgage
Corporation has also continued to expand its out-of-state network of residential
mortgage origination offices. During 1995, offices were opened in Colorado,
Oregon, Utah and Washington.
On July 21, 1995, the Company acquired four banking offices from The Chase
-23-
Manhattan Bank, N.A., including approximately $84 million in deposits, and on
December 10, 1994 purchased approximately $146 million of deposits from Chemical
Bank, along with seven banking offices in the Hudson Valley region of New York
State. Additionally, on December 1, 1994 First Empire acquired Ithaca Bancorp,
Inc. ("Ithaca Bancorp"), Ithaca, New York, with total assets of $470 million,
including $369 million of loans, and liabilities of $425 million, including $330
million of deposits, along with twelve banking offices in the Southern Tier of
New York State.
The acquisitions noted herein were consummated for cash and have been
accounted for as purchase transactions. Accordingly, the operating results of
the acquired entities have been included in the consolidated results of
operations of the Company since the respective acquisition dates.
Overview
The Company's net income was $131.0 million or $18.79 per common share in 1995,
increases of 12% and 15%, respectively, from $117.3 million or $16.35 per common
share in 1994. Fully diluted earnings per common share, which assumes the full
conversion of outstanding preferred stock into common, was $17.78 in 1995 and
$15.71 in 1994, an increase of 13%. In 1993, net income was $102.0 million while
primary and fully diluted earnings per common share were $13.87 and $13.42,
respectively. Excluding the after-tax effect of securities transactions, net
income and earnings per common share were $128.4 million and $18.41,
respectively, in 1995 compared with $117.2 million and $16.34 in 1994 and $101.5
million and $13.81 in 1993. On the same basis, fully diluted earnings per common
share were $17.43, $15.70 and $13.36 in 1995, 1994 and 1993, respectively.
The Company achieved a return on average assets in 1995 of 1.14%, compared
with 1.17% in 1994 and .98% in 1993. The return on average common stockholders'
equity was 17.16% in 1995, 16.64% in 1994 and 15.61% in 1993. Excluding the
after-tax effect of securities transactions, the return on average assets was
1.12%, while the return on average common stockholders' equity was 16.81% in
1995, compared with 1.17% and 16.63% in 1994 and .98% and 15.53% in 1993,
respectively.
Growth in average earning assets, primarily in loans, was the most
significant factor contributing to a rise in taxable-equivalent net interest
income to $491.1 million in 1995 from $472.2 million in 1994. Average earning
assets totaled $11.1 billion in 1995, a 15% increase from $9.7 billion in 1994.
The beneficial impact on net interest income of growth in earning assets
exceeded the effect of a narrowing of the spread between yields on earning
assets and rates paid on interest-bearing liabilities. As a result of such
narrowing, net interest margin, or taxable-equivalent net interest income
expressed as a percentage of average earning assets, decreased 46 basis points
(hundredths of one percent) in 1995 to 4.43% from 4.89% in 1994.
Taxable-equivalent net interest income was $474.8 million in 1993 when average
earning assets and net interest margin were $10.0 billion and 4.76%,
respectively.
Reflecting generally stable economic conditions in market areas served by
the Company, the provision for possible credit losses decreased to $40.4 million
in 1995, compared with $60.5 million in 1994 and $80.0 million in 1993. Net
charge-offs in 1995 were $21.3 million, compared with $16.6 million in 1994 and
$35.8 million in 1993. Nonperforming loans totaled $93.1 million at December 31,
1995, up from $77.5 million at December 31, 1994 and $82.3 million at year-end
1993.
In December 1994, First Empire transferred appreciated investment securities
with a fair value of $15.7 million to an affiliated, tax-exempt charitable
foundation. Such securities had been previously classified by First Empire as
available for sale. As a result of the transfer, the Company
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recognized charitable contributions expense and tax-exempt other income of $13.8
million and $10.4 million, respectively, resulting in an after-tax increase in
1994 net income of $2.4 million.
Excluding the impact of securities gains and the December 1994 transfer of
investment securities to the affiliated foundation, noninterest income for 1995
totaled $145.1 million, 28% above the $113.2 million in 1994 and 32% above the
$109.7 million in 1993. Noninterest expense was $374.4 million in 1995, up 16%
from $323.1 million in 1994 (excluding $13.8 million related to the December
1994 transfer of investment securities) and 14% from $327.8 million in 1993.
As described in note 1 of Notes to Financial Statements, during the second
quarter of 1995 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights", retroactive to
January 1, 1995. The effect of implementing SFAS No. 122 was to increase 1995
noninterest income and noninterest expense by $10.0 million and $1.8 million,
respectively, and, as a result, net income increased by $4.8 million for the
year-ended December 31, 1995.
Net Interest Income/Lending and Funding Activities
Taxable-equivalent net interest income rose to $491.1 million in 1995 from
$472.2 million in 1994. A $1.4 billion increase in average earning assets to
$11.1 billion in 1995 from $9.7 billion in 1994 was the major factor for the
rise. Taxable-equivalent net interest income and average earning assets in 1993
were $474.8 million and $10.0 billion, respectively. The growth in average
earning assets in 1995 was predominately attributable to increased demand for
loans offered by the Company and the impact of the December 1994 acquisition of
$369 million of loans of Ithaca Bancorp. Average loans outstanding grew to $8.9
billion in 1995 from $7.4 billion in 1994 and $7.0 billion in 1993. The
acquisition of Ithaca Bancorp did not substantially impact average loans in
1994.
The increase in net interest income resulting from growth in average earnings
assets was partially offset by a narrowing of the net interest spread, or the
difference between the yield on earning assets and the rate paid on
interest-bearing liabilities. The net interest spread in 1995 was 3.77%,
compared with 4.37% in 1994 and 4.33% in 1993. A combination of higher market
interest rates, in general, and a greater proportion of loans, which typically
yield more than money-market assets and investment securities, in the
composition of the portfolio of earning assets resulted in a 65 basis point
increase in 1995 to 8.42% in the yield on earning assets, from 7.77% in 1994.
However, rising market interest rates throughout much of 1995 and 1994 had the
effect of increasing the cost of the Company's interest-bearing liabilities more
than the yield on earning assets. As a result, the cost of interest-bearing
liabilities increased 125 basis points to 4.65% in 1995 from 3.40% in 1994. The
yield on earning assets and the rate paid on interest-bearing liabilities in
1993 were 7.46% and 3.13%, respectively. In 1994, the benefit obtained from
increased holdings of loans as compared with 1993 was offset by a rise in
interest expense on deposits and short-term borrowings.
The contribution to net interest margin of interest-free funds, which consist
primarily of noninterest-bearing demand deposits and stockholders' equity, rose
to .66% in 1995 from .52% in 1994 and .43% in 1993. The improvement in 1995 from
1994 resulted largely from the 125 basis point increase to 4.65% in the rate
paid on interest-bearing liabilities used to value these funds, supplemented by
an 8% increase in average interest-free funds. The 9 basis point addition to the
contribution of interest-free funds in 1994 from 1993 was a reflection of the 27
basis point increase in the rate paid on interest-bearing liabilities from 3.13%
coupled with a 7% increase in average interest-free balances. Average
interest-free funds were $1.6
-25-
billion in 1995, $1.5 billion in 1994 and $1.4 billion in 1993.
Changing interest rates and spreads affect the Company's net interest income
and net interest margin. As a result of the changes described herein, the
Company's net interest margin declined to 4.43% in 1995 from 4.89% in 1994 and
4.76% in 1993. Management believes that further changes in market interest rates
or reductions in spreads could adversely impact the Company's net interest
margin and net interest income. Although not necessarily indicative of future
results, the Company's net interest spread declined in each quarter of 1995.
Accordingly, the net interest spread in the fourth quarter of 1995 of 3.67% was
below that achieved in any other quarter of 1995.
Management analyzes the Company's exposure to changing interest rates and
spreads by projecting net interest income under a number of different interest
rate scenarios. As part of the management of interest rate risk, the Company
utilizes interest rate swap agreements to modify the repricing characteristics
of certain portions of the loan and deposit portfolios. Revenue and expense
arising from these agreements are reflected in either the yields earned on loans
or, as appropriate, rates paid on interest-bearing deposits. In general, under
the terms of swaps in effect through December 31, 1995, the Company receives
payments based on the outstanding notional amount of the swaps at a fixed rate
of interest and makes payments at a variable rate.
The effect of interest rate swaps on the Company's net interest income and
margin as well as average notional amounts and rates are presented in table 4.
The Company estimates that as of December 31, 1995 it would have received
approximately $37.0 million if all interest rate swap agreements entered into
for interest rate risk management purposes were terminated. This estimated fair
value of the interest rate swap portfolio results from the effects of changing
interest rates and should be considered in the context of the entire balance
sheet and the Company's overall interest rate risk profile. Changes in the
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes are not reflected in the consolidated financial statements.
Additional information about interest rate swaps is included in note 16 of Notes
to Financial Statements.
As previously noted, average loans and leases grew to $8.9 billion in 1995
from $7.4 billion in 1994 and $7.0 billion in 1993, due, in large part, to
improved economic conditions, the December 1994 acquisition of Ithaca Bancorp
and expansion of the Company's consumer lending business. Table 5 summarizes by
type, average loans and leases outstanding in 1995 and percentage changes in
average loans over the past two years.
Loans secured by real estate, excluding $587 million of outstanding home
equity lines of credit which are classified as consumer loans, represented
approximately 60% of the loan portfolio during 1995, compared with 61% in 1994
and 63% in 1993. At December 31, 1995, the Company held approximately $3.6
billion of commercial real estate loans and $2.0 billion of consumer real estate
loans.
Commercial real estate loans originated by the Company are predominately
secured by properties in the New York City metropolitan area, including areas in
neighboring states generally considered to be within commuting distance of New
York City, and Western New York, which includes Buffalo, Niagara Falls,
Rochester and surrounding areas. Commercial real estate loans are also
originated in the Hudson Valley and Southern Tier regions of New York State. In
general, commercial real estate loans originated by the Company are fixed-rate
instruments with monthly payments and a balloon payment of the remaining
principal at maturity, usually five years after loan origination. For borrowers
in good standing, the customer may extend the terms of the loan
-26-
agreement for an additional five years at the then-current market rate of
interest. Table 6 presents commercial real estate loans at December 31, 1995 by
geographic area, type of collateral and size of the loans outstanding.
Approximately 60% of the $1.9 billion of commercial real estate loans in the New
York City metropolitan area were secured by multi-family residential properties,
23% by office space and 8% by retail space. The Company's experience has been
that office space and retail properties tend to demonstrate more volatile
fluctuations in value through economic cycles and changing economic conditions
than do multi-family residential properties. Approximately 55% of the aggregate
dollar amount of New York City area loans were for $3 million or less.
Commercial real estate loans secured by properties elsewhere in New York State,
mostly in Western New York, tend to have a greater diversity of collateral types
and include a significant amount of lending to customers who use the mortgaged
property in their trade or business. Most loans in this segment of the portfolio
were for $3 million or less. Commercial real estate loans secured by properties
located outside of New York State and outside of areas of neighboring states
considered to be part of the New York City metropolitan area comprised less then
4% of total commercial real estate loans.
The Company normally refrains from construction lending, except when the
borrower has obtained a commitment for permanent financing upon project
completion. As a result, the commercial construction loan portfolio totaled only
$41.6 million, or .4% of total loans at December 31, 1995.
Excluding $185.0 million of loans held for sale, the Company's portfolio of
real estate loans secured by one-to-four family residential properties totaled
$1.8 billion at December 31, 1995, approximately 70% of which were secured by
properties located in New York State. The Company originates residential
mortgage loans in New York State, as well as in Colorado, Massachusetts, Ohio,
Oregon, Pennsylvania, Utah and Washington.
As a percentage of average loans, consumer loans and leases were 20% in 1995,
19% in 1994 and 17% in 1993, however, no consumer loan product type exceeded ten
percent of the Company's average loan portfolio. Beginning in 1994 and, to a
greater extent, continuing in 1995, the Company began to market automobile loans
and leases and credit cards in areas outside of New York State. Automobile loans
and leases are generally originated through dealers, however, all applications
submitted by dealers are subject to the Company's normal underwriting and loan
approval procedures. Credit card accounts are marketed through mail campaigns
and co-branding initiatives.
The Company's portfolio of investment securities averaged $2.0 billion in
1995, $2.1 billion in 1994 and $2.2 billion in 1993. The level of the investment
securities portfolio is influenced by such factors as management of balance
sheet size and resulting capital ratios, demand for loans, which generally yield
more than investment securities, ongoing repayments, and the level of deposits.
The investment securities portfolio is largely comprised of collateralized
mortgage obligations, other adjustable rate mortgage-backed securities and
shorter-term U.S. Treasury notes. When purchasing investment securities, the
Company considers its overall interest-rate risk profile as well as the adequacy
of expected returns relative to prepayment and other risks assumed. During 1995,
the Company sold approximately $445 million of investment securities for a
pre-tax gain of approximately $4.5 million. Included in the securities sold was
a municipal bond with a carrying value of $1.0 million that had been classified
as "held to maturity". Such bond was sold for a modest loss immediately
following the downgrading of the municipality's credit rating by several rating
agencies. Gains realized from sales of bank investment securities were $.1
million and $.9 million in 1994 and 1993, respectively. To enhance flexibility
in managing the investment securities portfolio, and as allowed by the Financial
Accounting Standards Board, in December 1995 the Company transferred
approximately $220 million of U.S. Treasury notes from "held to maturity" to
"available for sale" classification. No gain or loss was realized as a result of
such transfer.
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The average balance of money-market assets, which are comprised of
interest-bearing deposits at banks, trading account assets, Federal funds sold
and agreements to resell securities, was $186 million in 1995, compared with
$166 million in 1994 and $826 million in 1993. The lower level of such assets in
1995 and 1994 largely reflects increased demand for loans, the Company's
decision to limit the amount of short-term borrowings, which had been used to
fund money-market assets, and, in 1994, reduction of the size of the balance
sheet in order to strengthen capital ratios in anticipation of the December
acquisitions.
Core deposits represent a significant source of funding to the Company. Core
deposits are commonly generated through the branch network at generally lower
interest rates than are available on wholesale funds of similar maturities, and
include noninterest-bearing demand deposits, interest-bearing transaction
accounts, savings deposits and domestic time deposits under $100,000. In 1995,
average core deposits rose to $7.4 billion from $6.8 billion in 1994. Increases
in interest rates paid on deposits in response to higher money-market rates and
the December 1994 and July 1995 acquisitions of $442 million and $76 million,
respectively, of core deposits contributed to this rise. Higher interest rates
also contributed to a shift into time deposits from more liquid deposit
accounts. Core deposits averaged $7.2 billion in 1993. Funding provided by core
deposits totaled 67% of average earning assets in 1995, compared with 70% in
1994 and 72% in 1993. An analysis of changes in the components of core deposits
is presented in table 8.
In addition to core deposits, the Company obtains funding through domestic
time deposits of $100,000 or more, offshore deposits originated through the
Company's international office, and brokered certificates of deposit. Domestic
time deposits over $100,000, excluding brokered certificates of deposit,
averaged $625 million in 1995 compared with $357 million in 1994 and $294
million in 1993. Offshore deposits, comprised primarily of accounts with
balances of $100,000 or more, averaged $133 million in 1995, compared with $156
million and $120 million in 1994 and 1993, respectively. Brokered deposits
averaged $874 million in 1995 and $45 million in 1994, and totaled $922 million
at December 31, 1995. The weighted-average remaining term to maturity of
brokered deposits as of December 31, 1995 was 1.7 years. Additional amounts of
brokered deposits may be solicited from time to time depending on such factors
as current market conditions and the cost of funds available from alternative
sources.
The Company also uses short-term borrowings from banks, securities dealers,
the Federal Home Loan Bank of New York ("FHLB") and others as sources of
funding. Short-term borrowings averaged $1.4 billion in 1995, $1.8 billion in
1994 and $1.9 billion in 1993. In general, short-term borrowings have been used
to fund the Company's discretionary investments in money-market assets and
investment securities, and, if necessary, to replace deposit outflows.
Additionally, M&T Bank has issued $175 million of subordinated capital notes of
which $75 million mature in 2002 and $100 million mature in 2005. Although
issued primarily to enhance regulatory capital ratios, such notes also provided
funding to the Company.
Provision for Possible Credit Losses
The purpose of the provision is to replenish and build the Company's allowance
for possible credit losses to a level necessary to maintain an adequate reserve
position. In assessing the adequacy of the allowance for possible credit losses,
management performs an ongoing evaluation of the loan portfolio and other credit
commitments, including such factors as the differing economic risks associated
with each loan category, the current financial condition of specific borrowers,
the economic environment in which borrowers operate, the level of delinquent
loans and the value of any collateral. Based upon the results of such review,
management believes that
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the allowance for possible credit losses at December 31, 1995 was adequate to
absorb credit losses from existing loans, leases and credit commitments.
Reflecting generally stable economic conditions in market areas served by the
Company throughout much of 1995, the provision for possible credit losses was
reduced to $40.4 million from $60.5 million in 1994. The provision was $80.0
million in 1993 when there was concern by management about unsettled commercial
real estate markets, in particular in the New York City metropolitan area, and
the timing and sustainability of economic recovery in market areas served by the
Company in general. Net charge-offs in 1995 were $21.3 million, compared with
$16.6 million in 1994 and $35.8 million in 1993. Net charge-offs as a percentage
of average loans outstanding were .24% in 1995, .22% in 1994 and .51% in 1993.
Nonperforming loans totaled $93.1 million or .97% of loans outstanding at
December 31, 1995, compared with $77.5 million or .94% a year earlier and $82.3
million or 1.13% at December 31, 1993. The allowance for possible credit losses
was $262.3 million or 2.75% of net loans and leases at the end of 1995, compared
with $243.3 million or 2.96% at December 31, 1994 and $195.9 million or 2.70% at
December 31, 1993. The ratio of the allowance to nonperforming loans was 282%,
314% and 238% at year-end 1995, 1994 and 1993, respectively.
A comparative allocation of the allowance for possible credit losses for each
of the past five year-ends is presented in table 10. Amounts were allocated to
specific loan categories based upon management's classification of loans under
the Company's internal loan grading system and estimates of potential
charge-offs inherent in each category. However, as the total reserve is
available to absorb losses from any loan category, amounts assigned do not
necessarily indicate future losses within these categories. The increase in the
allocated portion of the reserve since 1993 compared with prior years is not
indicative of a deterioration of credit quality within the loan portfolio, but
rather reflects certain revisions to the assumptions used to calculate the
allocated portion of the allowance for possible credit losses. Nevertheless, the
unallocated portion of the reserve represents management's assessment of the
overall level of credit risk inherent in the loan portfolio over a longer time
frame.
The Company's credit loss experience is influenced by many factors, including
overall economic conditions, in general, and, due to the size of the Company's
commercial real estate loan portfolio, real estate valuations, in particular.
Nonperforming commercial real estate loans totaled $42.3 million, $47.5 million
and $48.3 million at December 31, 1995, 1994 and 1993, respectively. At December
31, 1995, $16.8 million of nonperforming commercial real estate loans were
secured by properties located in the New York City metropolitan area, compared
with $27.1 million and $29.7 million at December 31, 1994 and 1993,
respectively. Net charge-offs of commercial real estate loans were $6.6 million
in 1995, $12.8 million in 1994 and $19.2 million in 1993. Included in these
totals are net charge-offs of commercial real estate loans secured by properties
in the New York City metropolitan area of $3.2 million, $11.1 million and $14.2
million in 1995, 1994 and 1993, respectively.
Net charge-offs of consumer loans were $11.3 million in 1995, or .65% of
average consumer loans outstanding during the year, compared with $5.6 million
or .40% in 1994 and $6.0 million or .51% in 1993. Higher charge-offs of credit
card balances were the principal factor contributing to the increase in consumer
loan charge-offs in 1995. Net credit card charge-offs were $6.1 million in 1995,
compared with $3.1 million and $3.3 million in 1994 and 1993, respectively.
Nonperforming consumer loans totaled $13.7 million or .70% of outstanding
consumer loans at December 31, 1995, compared with $8.4 million or .54% at
December 31, 1994 and $5.9 million or .48% at December 31, 1993.
The Company has limited exposure to possible credit losses originating from
concentrations of credit extended to any specific industry. No such
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concentration exceeded 10% of total loans outstanding at December 31, 1995.
Furthermore, the Company had no exposure to less developed countries, and only
$1.1 million of foreign loans in total.
Repossessed assets taken in foreclosure of defaulted loans totaled $7.3
million at December 31, 1995, compared with $10.1 million and $12.2 million at
the end of 1994 and 1993, respectively.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan", in the first quarter of 1995. As amended, SFAS No. 114 requires that
creditors measure certain impaired loans based on the present value of expected
future cash flows discounted at the loan's effective interest rate or at the
loan's observable value or the fair value of underlying collateral, if the loan
is collateral-dependent. A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In general, the Company places loans considered to be impaired on
nonaccrual status. The adoption of SFAS No. 114 had no impact on the Company's
results of operations or on its loan classification policies.
Other Income
Other income in 1994 included $10.4 million of tax-exempt income resulting from
the transfer of appreciated investment securities to an affiliated, tax-exempt
charitable foundation. Excluding the effect of such income, as well as gains
from sales of bank investment securities, other income increased 28% to $145.1
million in 1995 from $113.2 million in 1994 and 32% from $109.7 million in 1993.
Including the impact of deposit accounts associated with the franchises acquired
in late-1994 and 1995, service charges on deposit accounts increased 9% to $38.3
million in 1995 from $35.0 million in 1994, and 19% from $32.3 million in 1993.
Merchant discount and other credit card fees in 1995 totaled $10.7 million,
compared with $8.7 million in 1994 and $7.9 million in 1993. Trust income of
$25.5 million increased 13% from $22.6 million in 1994, and 7% from $23.9
million in 1993. The increases in trust revenues were attributable, in large
part, to enhanced earnings from mutual fund management fees and from personal
and corporate trust business. Trading account gains increased to $1.2 million in
1995 from $.7 million in 1994, but decreased from $2.7 million in 1993. Other
revenues from operations totaled $32.3 million in 1995, compared with $30.2
million in 1994 (excluding the $10.4 million of tax-exempt income related to the
1994 transfer of securities to the affiliated foundation) and $30.1 million in
1993.
Mortgage banking revenues, which consist of residential mortgage loan
servicing fee income, gains from sales of residential mortgage loans and loan
servicing rights, and other residential mortgage-related fees, increased to
$37.1 million in 1995 from $16.0 million in 1994 and $12.8 million in 1993. Fees
earned in 1995 for servicing residential mortgage loans for others increased
$5.7 million from a year earlier, while gains from sales of residential mortgage
loans increased $8.4 million, including $10.0 million resulting from the
previously noted adoption of SFAS No. 122. Additionally, in 1995 the Company
realized $6.6 million of gains from sales of rights to service approximately
$630 million of residential mortgage loans. The $3.2 million improvement in
mortgage banking revenues in 1994 from 1993 was also largely attributable to
growth in the Company's residential mortgage servicing business. Residential
mortgage loans serviced for others totaled $5.7 billion, $4.0 billion and $2.9
billion at December 31, 1995, 1994 and 1993, respectively. Revenues from
servicing residential mortgage loans for others were $19.3 million in 1995,
$13.6 million in 1994 and $10.8 million in 1993.
-30-
Other Expense
Other expense totaled $374.4 million in 1995, compared with $336.9 million in
1994 and $327.8 million in 1993.
Salaries and employee benefits expenses were $188.2 million in 1995, an
increase of $27.0 million or 17% from $161.2 million in 1994. Factors
contributing to the higher personnel expenses were acquisitions, expansion of
the Company's residential mortgage banking and securities businesses, and
incentive-based compensation arrangements, including an increase of $5.6 million
in expenses related to stock appreciation rights granted to employees in 1990
and 1991. Personnel costs in 1994 increased $6.9 million or 4% from $154.3
million in 1993. Such increase was due largely to merit salary increases and
higher pension and other benefits costs. The number of full-time equivalent
employees was 4,546 at December 31, 1995, up from 4,149 and 4,028 at December
31, 1994 and 1993, respectively.
As previously noted, during 1994 the Company incurred $13.8 million of
charitable contributions expense related to the transfer of securities to a
charitable foundation affiliated with the Company. Excluding the impact of such
contributions expense, which is included in 1994's other costs of operations,
nonpersonnel expenses totaled $186.2 million in 1995, up from $161.9 million in
1994 and $173.5 million in 1993. Higher mortgage banking-related expenses and
expenses associated with operating the entities acquired in late-1994 and 1995
contributed to the increases. Additionally, in February 1995, the Company
wrote-off $2.3 million of non-marketable securities of Nationar, a bank that
provided services to financial institutions, which was seized by banking
regulators. During 1995, the assessment to the Company from the Federal Deposit
Insurance Corporation ("FDIC") for deposit insurance provided by the Bank
Insurance Fund ("BIF") was reduced, and effective January 1, 1996 was
substantially eliminated. Although First Empire's banking subsidiaries are
BIF-insured institutions, the Company has approximately $1.4 billion of deposits
obtained in so-called "Oakar" acquisitions for which deposit insurance premiums
are paid to the Savings Association Insurance Fund ("SAIF") of the FDIC. The
FDIC has not reduced the assessment rate for SAIF-insured deposits. Furthermore,
in 1995, congressional committees considered proposals that would require a
one-time special assessment related to deposits insured by the SAIF. Although
final legislation has yet to be enacted, management believes that it is likely
that a special assessment will ultimately be levied against the Company on its
SAIF-insured Oakar deposits. The amount of any such special assessment cannot be
precisely predicted at this time.
The $11.6 million decline in nonpersonnel expenses to $161.9 million in 1994
from $173.5 million in 1993, as cited above, was due, in part, to a combined
$7.9 million reduction in expenses for professional services and other real
estate owned and a reduction in the amount of write-downs in the carrying value
of excess servicing receivables and capitalized mortgage servicing rights
associated with residential mortgage loans serviced for others. Such write-downs
totaled $.5 million in 1994 and $4.7 million in 1993. There were no write-downs
of excess servicing receivables or capitalized mortgage servicing rights in
1995, however, an impairment allowance of $1.1 million for declines in value of
capitalized mortgage servicing rights was recorded. At December 31, 1995, excess
servicing receivables and capitalized mortgage servicing rights were $6.9
million and $34.5 million, respectively, compared with $7.6 million and $10.0
million, respectively, at December 31, 1994.
Income Taxes
The provision for income taxes in 1995 was $90.1 million, up from $77.2 million
in 1994 and $71.5 million in 1993. The effective tax rates were 41% in 1995 and
1993, and 40% in 1994. A reconciliation of income tax expense to
-31-
the amount computed by applying the statutory federal income tax rate to pre-tax
income is provided in note 13 of Notes to Financial Statements.
International Activities
The Company's investment in international assets was $87 million at December 31,
1995, consisting largely of Eurodollar placements, and $7 million at December
31, 1994. Total offshore deposits were $155 million and $203 million at December
31, 1995 and 1994, respectively.
Liquidity and Interest Rate Sensitivity
As part of its ongoing operations, the Company is exposed to liquidity risk
whenever the maturities of financial instruments included in assets and
liabilities differ. Accordingly, a critical element in managing a banking
institution is ensuring that sufficient cash flow and liquid assets are
available to satisfy demands for loans, deposit withdrawals, operating expenses
and other corporate purposes. The Company's core deposits have historically
provided a large source of funds. Such deposits are generated from a large base
of consumer, corporate and institutional customers, which over the past several
years has become more geographically diverse as a result of acquisitions and
expansion of the Company's businesses. Nevertheless, in recent years the Company
has faced increased competition in offering services and products from a large
array of financial market participants, including banks, thrifts, mutual funds,
securities dealers and others. As a result, and consistent with banking industry
experience in general, the Company has experienced a reduction in the percentage
of average earning assets funded by core deposits. Core deposits financed 67% of
the Company's earning assets at December 31, 1995, compared with 71% at December
31, 1994 and 68% at December 31, 1993.
The Company supplements funding from core deposits with various wholesale
borrowings, such as Federal funds purchased and securities sold under agreements
to repurchase, and brokered certificates of deposit. Additionally, M&T Bank and
East New York have a combined credit facility with the FHLB aggregating $890
million, with any borrowings secured by loans and investment securities.
Borrowings outstanding under such credit facility totaled $17 million at
December 31, 1995 and $249 million at December 31, 1994. Although informal and
sometimes reciprocal, sources of funding are also available to the Company
through various arrangements for unsecured short-term borrowings from a wide
group of banks and other financial institutions. Other sources of liquidity
include maturities of money-market assets, repayments of loans and investment
securities, and cash flow generated from operations, such as fees collected for
services.
First Empire's ability to pay dividends, repurchase stock and fund operating
expenses is primarily dependent on the receipt of dividends from its banking
subsidiaries, which are subject to various regulatory limitations. First Empire
also maintains a line of credit with an unaffiliated commercial bank.
Management does not anticipate engaging in any activities, in either the
short- or long-term, which would cause a significant strain on liquidity of
either First Empire or its subsidiary banks. Furthermore, management believes
that available sources of liquidity are more than adequate to meet anticipated
funding needs.
Net interest income earned by the Company is subject to the effects of
changing interest rates. The Company's management of interest rate risk is
intended to limit the variability of net interest income under differing
interest rate scenarios. As part of such management, the Company has entered
into interest rate swap agreements having an aggregate notional amount of
-32-
approximately $2.4 billion at December 31, 1995. Information about interest rate
swaps entered into for interest rate risk management purposes is included herein
under "Net Interest Income/Lending and Funding Activities" and in note 16 of
Notes to Financial Statements.
In accordance with industry practice, table 15 presents information about the
repricing or maturity of assets and liabilities on a contractual basis within
the specified time frames, as well as the impact of interest rate swap
agreements entered into for interest rate risk management purposes. Management
believes this measure does not appropriately depict interest rate risk since
changes in interest rates do not necessarily affect all categories of earning
assets and interest-bearing liabilities equally nor, as assumed in the table, on
the contractual maturity or repricing date. Furthermore, this static
presentation of interest rate risk fails to consider the effect of ongoing
lending and deposit gathering activities, projected changes in balance sheet
composition or any subsequent interest rate risk management activities the
Company is likely to implement. In management's opinion, the interest rate
sensitivity analysis presented in the table does not accurately reflect the
Company's actual sensitivity to changes in interest rates.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's exposure to changing interest rates. Interest rate risk
is measured by the variability of projected net interest income under a number
of possible interest rate scenarios. Management's philosophy toward positioning
the Company for interest rate movements is to attempt to limit such variability.
Management monitors the Company's interest rate sensitivity with the aid of a
computer model which considers the impact of ongoing lending and deposit
gathering activities, as well as statistically derived interrelationships in the
magnitude and timing of the repricing of financial instruments, including the
effect of changing interest rates on expected prepayments and maturities. Giving
consideration to interest rate swaps in place at December 31, 1995 and utilizing
the model described above, management's assessment is that the variability of
net interest income would be largely unaffected by changes in interest rates in
the coming year, but a sustained decrease in interest rates would likely have a
detrimental effect on net interest income in later years. Management closely
monitors the Company's exposure to changing interest rates and spreads and
stands ready to take action, through the use of on- or off-balance sheet
instruments, to mitigate such exposure when deemed prudent to do so. Possible
actions include, but are not limited to, changes in the pricing of loan and
deposit products, modifying the composition of earning assets and
interest-bearing liabilities, and entering into or modifying existing interest
rate swap agreements.
Capital
Common stockholders' equity totaled $806.3 million at December 31, 1995,
compared with $681.0 million and $684.0 million at the end of 1994 and 1993,
respectively. On a per share basis, common stockholders' equity was $125.33 at
December 31, 1995, an increase of 22% from $103.02 at December 31, 1994 and 26%
from $99.43 at December 31, 1993. Total stockholders' equity at December 31,
1995 was $846.3 million or 7.08% of total assets, compared with $721.0 million
or 6.85% at December 31, 1994 and $724.0 million or 6.99% at December 31, 1993.
The ratio of average total stockholders' equity to average total assets was
6.81%, 7.21% and 6.45% in 1995, 1994 and 1993, respectively.
Stockholders' equity at December 31, 1995 was reduced by $3.2 million, or
$.49 per common share, for the net after-tax impact of unrealized losses on
investment securities classified as available for sale, compared with a
reduction of $50.6 million, or $7.65 per common share, at December 31, 1994.
Such unrealized losses represent the amount by which amortized cost exceeded the
fair value of investment securities classified as available for sale, net
-33-
of applicable income taxes. The market valuation of investment securities should
be considered in the context of the entire balance sheet of the Company. With
the exception of investment securities classified as available for sale, trading
account assets and liabilities, and mortgage loans held for sale, the carrying
values of financial instruments in the balance sheet are generally not adjusted
for appreciation or depreciation in market value resulting from changes in
interest rates.
Federal regulators generally require banking institutions to maintain "core
capital" and "total capital" ratios of at least 4% and 8%, respectively, of
risk-adjusted total assets. In addition to the risk-based measures, Federal bank
regulators have also implemented a minimum "leverage" ratio guideline of 3% of
the quarterly average of total assets. Under regulatory guidelines, the
unrealized gains or losses on investment securities classified as available for
sale are not recognized in determining regulatory capital. The capital ratios of
the Company and its banking subsidiaries, M&T Bank, East New York and M&T Bank,
N.A., as of December 31, 1995 are presented in table 16.
The Company has historically maintained capital ratios well in excess of
minimum regulatory guidelines largely through a high rate of internal capital
generation. The rate of internal capital generation, or net income (excluding
the after-tax effects of gains from sales of investment securities) less
dividends paid expressed as a percentage of average total stockholders' equity,
was 13.88% in 1995, 13.67% in 1994 and 12.66% in 1993.
Cash dividends on common stock of $16.2 million were paid in 1995, compared
with $14.7 million in 1994 and $13.1 million in 1993. In the fourth quarter of
1995, First Empire's quarterly common stock dividend was increased to $.70 per
share from $.60. In total, dividends per common share increased to $2.50 in 1995
from $2.20 in 1994 and $1.90 in 1993. Dividends of $3.6 million were paid to the
preferred stockholder in 1995, 1994 and 1993.
During 1995, First Empire acquired 208,230 shares pursuant to and thereby
completing the program announced in December 1993 to repurchase and hold as
treasury stock up to 506,930 shares of common stock for reissuance upon the
possible future conversion of its 9% convertible preferred stock. The 506,930
repurchased shares were acquired at an average cost of $154.08. The preferred
stock is convertible at any time into shares of First Empire's common stock at a
conversion price of $78.90625 per share, subject to certain adjustments. First
Empire has the right to redeem the preferred stock without premium on or after
March 31, 1996. However, upon receipt of notification of such a planned
redemption, the holder may convert the preferred stock into common shares. On
February 9, 1996, First Empire notified the preferred stockholder of its
intention to redeem the preferred stock. On February 13, 1996, the preferred
stockholder advised First Empire of its intention to convert the preferred stock
into shares of common stock of First Empire. In November 1995, First Empire
announced an additional plan to repurchase and hold as treasury stock up to
380,582 shares of common stock for reissuance upon the possible future exercise
of outstanding stock options. As of December 31, 1995, First Empire had
repurchased 15,300 common shares pursuant to such plan at an average cost of
$211.35 per share.
Fourth Quarter Results
First Empire earned $36.8 million or $5.29 per common share in the fourth
quarter of 1995, increases of 15% and 17%, respectively, from the fourth quarter
of 1994 when net income was $31.9 million or $4.53 per common share.
Taxable-equivalent net interest income increased to $126.0 million in the fourth
quarter of 1995, up $7.7 million from $118.3 million in the fourth quarter of
1994. Growth in average loans outstanding was the primary factor contributing to
the improvement in net interest income. Average loans for
-34-
the fourth quarter of 1995 totaled $9.4 billion, a 20% increase from $7.8
billion during the fourth quarter of 1994. The increase in net interest income
resulting from growth in average loans was partially offset by a narrowing of
the net interest spread to 3.67% in the recent quarter, compared with 4.15% in
the fourth quarter of 1994. Net interest margin was 4.36% in the fourth quarter
of 1995, compared with 4.75% in the year-earlier quarter.
The provision for possible credit losses was $12.0 million and net
charge-offs were $8.8 million in the final 1995 quarter, compared with $12.9
million and $7.4 million, respectively, in the fourth quarter of 1994. Net
charge-offs as an annualized percentage of average loans and leases were .37% in
both quarters. Exclusive of the effects of investment securities transactions
and the December 1994 transfer of investment securities to an affiliated
charitable foundation, other income rose 60% to $45.3 million in the fourth
quarter of 1995 from $28.2 million in the year-earlier quarter. Higher revenues
associated with mortgage banking activities and the sales of mutual funds and
annuities contributed to this increase. Also excluding the effect of the
December 1994 transfer of securities to the affiliated foundation, other expense
was $97.0 million in the fourth quarter of 1995, compared with $81.2 million in
the fourth quarter of 1994. Acquisitions, expansion of First Empire's mortgage
banking and securities businesses, and stock appreciation rights expense were
factors contributing to the rise in other expense over the comparable prior-year
period.
Recently Issued Accounting Standards Not Yet Adopted
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 establishes a fair value
based method of accounting for stock-based compensation plans and encourages,
but does not require, entities to adopt that method in place of the provisions
of Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees", for all arrangements under which employees receive shares
of stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the stock. SFAS No.
123 also establishes fair value as the measurement basis for transactions in
which an entity acquires goods or services from nonemployees in exchange for
equity instruments.
An entity may continue to apply APBO No. 25 in accounting for stock-based
employee compensation arrangements. However, entities doing so will be required
to disclose pro forma net income and earnings per share determined as if the
fair value based method established by SFAS No. 123 had been applied in
measuring compensation cost.
The provisions of SFAS No. 123 regarding accounting for transactions with
nonemployees are effective for transactions entered into after December 15,
1995. The remaining requirements of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. Following adoption of SFAS No. 123, the
Company expects to continue measuring compensation cost for employee stock
compensation plans in accordance with the provisions of APBO No. 25.
-35-
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Table 1
FINANCIAL HIGHLIGHTS
Amounts in thousands, except per share 1995 1994 Change
- ------------------------------------------ ------------ ---------- ------
For the year
Net income $131,036 117,295 +12%
Per common share
Net income
Primary $18.79 16.35 +15
Fully diluted 17.78 15.71 +13
Cash dividends 2.50 2.20 +14
Average common shares outstanding
Primary 6,781 6,952 - 2
Fully diluted 7,368 7,464 - 1
Return on
Average total assets 1.14% 1.17%
Average common stockholders' equity 17.16% 16.64%
Market price per common share
Closing $218.00 136.00 +60
High 218.00 165.00
Low 136.50 134.50
- ------------------------------------------ ------------ ---------- ------
At December 31
- ------------------------------------------ ------------ ---------- ------
Loans and leases, net of unearned discount $ 9,555,849 8,217,293 +16%
Total assets 11,955,902 10,528,644 +14
Total deposits 9,469,575 8,243,073 +15
Total stockholders' equity 846,253 720,996 +17
Stockholders' equity per common share $125.33 103.02 +22
========================================== ============ ========== ======
-36-
- -------------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
Table 2
QUARTERLY TRENDS
1995 Quarters 1994 Quarters
--------------------------------------- -------------------------------------
Taxable-equivalent basis Fourth Third Second First Fourth Third Second First
- -------------------------------------- --------- ------- ------- ------- ------- ------- ------- -------
Earnings and dividends
Amounts in thousands, except per share
- --------------------------------------
Interest income $ 242,704 241,374 232,468 216,250 201,543 190,555 181,171 178,160
Interest expense 116,726 116,329 112,096 96,579 83,287 72,393 64,277 59,249
- -------------------------------------- --------- ------- ------- ------- ------- ------- ------- -------
Net interest income 125,978 125,045 120,372 119,671 118,256 118,162 116,894 118,911
Less: provision for possible
credit losses 12,025 11,310 8,515 8,500 12,850 13,802 14,022 19,862
Other income 44,850 44,398 33,888 26,402 38,651 27,261 29,378 28,449
Less: other expense 97,044 97,632 90,269 89,494 95,048 80,584 82,015 79,215
- -------------------------------------- --------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 61,759 60,501 55,476 48,079 49,009 51,037 50,235 48,283
Applicable income taxes 23,949 23,694 22,747 19,747 16,034 20,934 20,553 19,665
Taxable-equivalent adjustment 1,023 1,180 1,275 1,164 1,087 1,005 1,001 990
- -------------------------------------- --------- ------- ------- ------- ------- ------- ------- -------
Net income $ 36,787 35,627 31,454 27,168 31,888 29,098 28,681 27,628
- -------------------------------------- --------- ------- ------- ------- ------- ------- ------- -------
Cash dividends on preferred stock $900 900 900 900 900 900 900 900
Per common share data
Net income
Primary $5.29 5.14 4.51 3.85 4.53 4.09 3.96 3.77
Fully diluted 5.03 4.89 4.31 3.68 4.35 3.93 3.80 3.64
Net income, excluding securities
transactions
Primary 5.33 4.71 4.52 3.85 4.53 4.08 3.96 3.77
Fully diluted 5.06 4.50 4.31 3.68 4.35 3.92 3.80 3.64
Cash dividends .70 .60 .60 .60 .60 .60 .50 .50
Average common shares outstanding
Primary 6,774 6,763 6,768 6,820 6,817 6,899 7,014 7,083
Fully diluted 7,310 7,291 7,293 7,384 7,324 7,406 7,541 7,590
====================================== ======== ======= ======= ======= ======= ======= ======= =======
Balance sheet data
Dollars in millions, except per share
- --------------------------------------
Average balances
Total assets $ 11,898 11,848 11,506 10,681 10,200 9,959 9,886 10,056
Earning assets 11,454 11,404 11,108 10,330 9,869 9,620 9,515 9,665
Investment securities 1,898 2,179 2,137 1,925 1,923 1,992 2,097 2,293
Loans and leases,
net of unearned discount 9,384 9,038 8,682 8,311 7,805 7,442 7,266 7,188
Deposits 9,423 9,011 8,945 8,698 7,703 7,250 7,220 7,287
Stockholders' equity 825 801 766 737 724 715 723 731
- -------------------------------------- --------- ------- ------- ------- ------- ------- ------- -------
At end of quarter
Total assets $ 11,956 11,754 11,630 11,277 10,529 10,301 10,336 10,412
Earning assets 11,461 11,321 11,201 10,727 10,017 9,888 9,840 10,023
Investment securities 1,769 1,954 2,159 2,045 1,791 1,889 1,985 2,153
Loans and leases,
net of unearned discount 9,556 9,222 8,881 8,559 8,217 7,590 7,401 7,240
Deposits 9,470 9,170 8,866 9,044 8,243 7,362 7,276 7,329
Stockholders' equity 846 809 794 751 721 721 718 725
Equity per common share $ 125.33 119.53 116.05 108.64 103.02 102.73 100.63 100.19
====================================== ======== ======= ======= ======= ======= ======= ======= =======
Performance ratios, annualized
- --------------------------------------
Return on
Average assets 1.23% 1.19% 1.10% 1.03% 1.24% 1.16% 1.16% 1.11%
Average common stockholders' equity 18.14% 18.10% 16.87% 15.29% 17.97% 16.58% 16.32% 15.68%
Net interest margin on average
earning assets 4.36% 4.35% 4.35% 4.70% 4.75% 4.87% 4.93% 4.99%
Nonperforming assets to total assets,
at end of quarter .84% .72% .72% .79% .83% .91% .90% .95%
- -------------------------------------- --------- ------- ------- ------- ------- ------- ------- -------
Market price per common share
High $ 218 194 1/2 172 1/2 171 153 165 156 1/2 144
Low 190 1/2 170 159 136 1/2 134 1/2 146 136 3/4 135
Closing 218 190 171 1/2 171 136 151 1/2 156 1/2 139 1/4
====================================== ======== ======= ======= ======= ======= ======= ======= =======
-37-
- ------------------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------
Table 3
EARNINGS SUMMARY
Dollars in millions
Increase (decrease)* Compound
1994 to 1995 1993 to 1994 growth rate
-------------- -------------- 5 years
Amount % Amount % 1995 1994 1993 1992 1991 1990 to 1995
------ --- ------ --- --------------------------------- ------- ----- ----- ----- ----- ------------
$ 181.4 24 $ 6.7 1 Interest income** $ 932.8 751.4 744.7 762.2 777.9 7%
162.5 58 9.3 3 Interest expense 441.7 279.2 269.9 323.6 440.2 1
-------- --- ------ --- --------------------------------- ------- ----- ----- ----- ----- -----------
18.8 4 (2.6) (1) Net interest income** 491.1 472.2 474.8 438.6 337.7 15
Less: provision for possible
(20.2) (33) (19.4) (24) credit losses 40.4 60.5 80.0 85.0 63.4 8
Gain on sales of bank
4.4 - (.7) (85) investment securities 4.5 .1 .9 28.1 .4 -
21.4 17 13.9 13 Other income 145.1 123.6 109.7 98.2 77.2 22
Less:
27.0 17 6.9 4 Salaries and employee benefits 188.2 161.2 154.3 130.8 103.2 17
10.6 6 2.1 1 Other expense 186.3 175.6 173.5 180.6 125.4 17
-------- --- ------ --- --------------------------------- ------- ----- ----- ----- ----- -----------
27.3 14 21.0 12 Income before income taxes 225.8 198.6 177.6 168.5 123.3 19
Less:
.6 14 - - Taxable-equivalent adjustment** 4.7 4.1 4.1 5.8 8.5 (12)
13.0 17 5.7 8 Income taxes 90.1 77.2 71.5 64.8 47.6 24
-------- --- ------ --- --------------------------------- ------- ----- ----- ----- ----- -----------
$ 13.7 12 $ 15.3 15 Net income $ 131.0 117.3 102.0 97.9 67.2 19%
======== === ====== === ================================= ======= ===== ===== ===== ===== ===========
* Changes were calculated from unrounded amounts.
** Interest income data are on a taxable-equivalent basis. The
taxable-equivalent adjustment represents additional income taxes that would
be due if all interest income were subject to income taxes. This adjustment
is primarily to interest received on qualified municipal securities and
industrial revenue financings and is based on a composite income tax rate of
approximately 42% for 1995 and 1993, 43% for 1994 and 41% for all other
periods.
-38-
- ----------------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------
Table 4
INTEREST RATE SWAPS
Year ended December 31
---------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------- --------------------------- ----------------------------
Dollars in thousands Amount Rate* Amount Rate* Amount Rate*
- ------------------------- ----------- ---------- ----------- ------------ ----------- --------
Increase (decrease) in:
Interest income $ (5,831) (.05)% $ 10,463 .10% $ 26,695 .27%
Interest expense (6,715) (.07) (2,018) (.03) (7,547) (.09)
- ------------------------- ----------- ---------- ----------- ------------ ----------- --------
Net interest income/margin $ 884 .01% $ 12,481 .13% $ 34,242 .34%
- ------------------------- ----------- ---------- ----------- ------------ ----------- --------
Average notional amount** $ 2,536,329 $ 1,627,454 $ 1,213,886
Fixed rate received*** 6.17% 5.72% 6.10%
Variable rate paid*** 6.14% 4.93% 3.32%
========================= ========== ============ ========
* Computed as an annualized percentage of average earning assets or
interest-bearing liabilities.
** Excludes forward-starting interest rate swaps.
*** Weighted-average rate paid or received on interest rate swaps in effect
during year.
-39-
- -----------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------
Table 5
AVERAGE LOANS AND LEASES
(net of unearned discount) Percent increase
(decrease) from
-----------------------------
Dollars in millions 1995 1994 to 1995 1993 to 1994
- ------------------------------- ------ ------------ ------------
Commercial, financial, etc. $1,804 21% 5%
Real estate - commercial 3,494 12 9
Real estate - consumer 1,807 26 (6)
Consumer
Automobile 716 66 66
Home equity 587 1 (1)
Credit cards 176 28 17
Other 273 19 9
- ------------------------------- ------ ------------ ------------
Total consumer 1,752 27 17
- ------------------------------- ------ ------------ ------------
Total $8,857 19% 6%
=============================== ====== ============ ============
-40-
- -----------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------
Table 6
COMMERCIAL REAL ESTATE LOANS
(net of unearned discount)
December 31, 1995
Percent of dollars outstanding by loan size
Out- -------------------------------------------
Dollars in millions standings $0-1 $1-3 $3-10 $10+
- ------------------------------------ ---------- ------- ------- ------- -------
Metropolitan New York City
Apartments/
Multifamily $ 1,146.5 15% 20% 18% 7%
Office 437.2 3 8 11 1
Retail 156.0 1 3 3 1
Construction 1.8 - - - -
Industrial 46.7 - 1 1 -
Other 126.2 2 2 2 1
- ------------------------------------ ---------- ------- ------- ------- -------
Total Metropolitan New York City $ 1,914.4 21% 34% 35% 10%
- ------------------------------------ ---------- ------- ------- ------- -------
Other New York State
Apartments/
Multifamily $ 313.4 7% 6% 6% 1%
Office 392.2 8 7 8 2
Retail 292.4 7 6 6 -
Construction 39.8 2 1 - -
Industrial 126.3 5 2 1 -
Other 384.5 9 7 6 3
- ------------------------------------ ---------- ------- ------- ------- -------
Total other New York State $ 1,548.6 38% 29% 27% 6%
- ------------------------------------ ---------- ------- ------- ------- -------
Other
Apartments/
Multifamily $ 57.6 7% 22% 13% -%
Office 5.3 2 - 2 -
Retail 37.9 3 9 16 -
Construction - - - -
Industrial 14.2 2 2 6 -
Other 21.2 4 11 1 -
- ------------------------------------ ---------- ------- ------- ------- -------
Total other $ 136.2 18% 44% 38% -%
- ------------------------------------ ---------- ------- ------- ------- -------
Total commercial real estate loans $ 3,599.2 28% 32% 32% 8%
==================================== ========== ======= ======= ======= =======
-41-
- ---------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------
Table 7
AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES
1995 1994
--------------------------- ---------------------------
Average Average Average Average
Average balance in millions; interest in thousands balance Interest rate balance Interest rate
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc. $ 1,804 $ 155,750 8.63% 1,487 116,479 7.84%
Real estate 5,301 471,714 8.90 4,562 390,681 8.56
Consumer 1,752 169,149 9.65 1,378 128,117 9.30
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total loans and leases, net 8,857 796,613 8.99 7,427 635,277 8.55
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Money-market assets
Interest-bearing deposits at banks 110 8,181 7.44 48 2,212 4.58
Federal funds sold and agreements
to resell securities 48 3,007 6.29 109 4,751 4.35
Trading account 28 1,339 4.78 9 499 5.92
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total money-market assets 186 12,527 6.75 166 7,462 4.50
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Investment securities**
U.S. Treasury and federal agencies 1,242 74,248 5.98 1,167 56,685 4.86
Obligations of states and political subdivisions 50 3,420 6.90 53 3,072 5.77
Other 743 45,988 6.19 852 48,933 5.74
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total investment securities 2,035 123,656 6.08 2,072 108,690 5.24
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total earning assets 11,078 932,796 8.42 9,665 751,429 7.77
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Allowance for possible credit losses (254) (223)
Cash and due from banks 326 307
Other assets 335 276
- -------------------------------------------------- ------- -------
Total assets $ 11,485 10,025
- -------------------------------------------------- ------- -------
================================================== ======= ======== ====== ======= ======== =======
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 761 11,902 1.56 746 11,286 1.51
Savings deposits 2,922 87,612 3.00 3,274 84,804 2.59
Time deposits 4,112 239,882 5.83 2,179 97,067 4.45
Deposits at foreign office 133 6,952 5.23 156 5,894 3.79
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total interest-bearing deposits 7,928 346,348 4.37 6,355 199,051 3.13
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Short-term borrowings 1,423 84,225 5.92 1,772 73,868 4.17
Long-term borrowings 146 11,157 7.64 77 6,287 8.13
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total interest-bearing liabilities 9,497 441,730 4.65 8,204 279,206 3.40
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Demand deposits 1,093 1,011
Other liabilities 112 87
- -------------------------------------------------- ------- -------
Total liabilities 10,702 9,302
- -------------------------------------------------- ------- -------
Stockholders' equity 783 723
- -------------------------------------------------- ------- -------
Total liabilities and stockholders' equity $ 11,485 10,025
- -------------------------------------------------- ------- -------
Net interest spread 3.77 4.37
Contribution of interest-free funds .66 .52
- -------------------------------------------------- -------- ------- -------- -------
Net interest income/margin on earning assets $ 491,066 4.43% 472,223 4.89%
================================================== ======== ======= ======== =======
1993
---------------------------
Average Average
Average balance in millions; interest in thousands balance Interest rate
- -------------------------------------------------- ------- -------- -------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc. 1,420 112,568 7.93%
Real estate 4,387 379,832 8.66
Consumer 1,175 118,461 10.08
- -------------------------------------------------- ------- -------- -------
Total loans and leases, net 6,982 610,861 8.75
- -------------------------------------------------- ------- -------- -------
Money-market assets
Interest-bearing deposits at banks 189 6,740 3.56
Federal funds sold and agreements
to resell securities 610 20,403 3.35
Trading account 27 1,434 5.32
- -------------------------------------------------- ------- -------- -------
Total money-market assets 826 28,577 3.46
- -------------------------------------------------- ------- -------- -------
Investment securities**
U.S. Treasury and federal agencies 1,300 62,420 4.80
Obligations of states and political subdivisions 41 2,600 6.40
Other 832 40,251 4.84
- -------------------------------------------------- ------- -------- -------
Total investment securities 2,173 105,271 4.84
- -------------------------------------------------- ------- -------- -------
Total earning assets 9,981 744,709 7.46
- -------------------------------------------------- ------- -------- -------
Allowance for possible credit losses (174)
Cash and due from banks 304
Other assets 279
- -------------------------------------------------- -------
Total assets 10,390
================================================== ========
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts 747 13,113 1.75
Savings deposits 3,500 90,392 2.58
Time deposits 2,249 98,508 4.38
Deposits at foreign office 120 3,243 2.71
- -------------------------------------------------- ------- -------- -------
Total interest-bearing deposits 6,616 205,256 3.10
- -------------------------------------------------- ------- -------- -------
Short-term borrowings 1,922 58,459 3.04
Long-term borrowings 76 6,158 8.14
- -------------------------------------------------- ------- -------- -------
Total interest-bearing liabilities 8,614 269,873 3.13
- -------------------------------------------------- ------- -------- -------
Demand deposits 976
Other liabilities 130
- -------------------------------------------------- -------
Total liabilities 9,720
- -------------------------------------------------- -------
Stockholders' equity 670
- -------------------------------------------------- -------
Total liabilities and stockholders' equity 10,390
================================================== =======
Net interest spread 4.33
Contribution of interest-free funds .43
- -------------------------------------------------- -------- -------
Net interest income/margin on earning assets 474,836 4.76%
================================================== ======== =======
*Includes nonaccrual loans
**Includes available for sale securities at amortized cost (continued)
-42-
- ---------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------
Table 7 (continued)
AVERAGE BALANCE SHEETS AND TAXABLE-EQUIVALENT RATES
1992 1991
--------------------------- ---------------------------
Average Average Average Average
Average balance in millions; interest in thousands balance Interest rate balance Interest rate
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Assets
Earning assets
Loans and leases, net of unearned discount*
Commercial, financial, etc. $ 1,237 $ 103,786 8.39% 1,067 101,717 9.53%
Real estate 4,225 392,384 9.29 3,910 389,748 9.97
Consumer 1,109 109,284 9.85 898 104,500 11.64
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total loans and leases, net 6,571 605,454 9.21 5,875 595,965 10.14
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Money-market assets
Interest-bearing deposits at banks 29 1,083 3.76 109 7,864 7.19
Federal funds sold and agreements
to resell securities 510 18,100 3.55 95 5,322 5.62
Trading account 55 3,096 5.62 192 15,873 8.27
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total money-market assets 594 22,279 3.75 396 29,059 7.34
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Investment securities**
U.S. Treasury and federal agencies 1,204 81,940 6.81 1,222 109,300 8.94
Obligations of states and political subdivisions 103 8,122 7.85 146 13,427 9.21
Other 686 44,414 6.48 357 30,194 8.47
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total investment securities 1,993 134,476 6.75 1,725 152,921 8.87
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total earning assets 9,158 762,209 8.32 7,996 777,945 9.73
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Allowance for possible credit losses (130) (91)
Cash and due from banks 273 213
Other assets 253 227
- -------------------------------------------------- ------- -------
Total assets $ 9,554 8,345
================================================== ======= =======
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts $ 666 16,544 2.48 576 27,418 4.76
Savings deposits 3,338 110,142 3.30 2,395 123,468 5.16
Time deposits 2,773 153,588 5.54 3,354 242,684 7.24
Deposits at foreign office 130 4,348 3.35 159 9,014 5.68
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total interest-bearing deposits 6,907 284,622 4.12 6,484 402,584 6.21
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Short-term borrowings 1,121 38,386 3.42 650 36,972 5.69
Long-term borrowings 7 590 8.32 7 659 9.35
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Total interest-bearing liabilities 8,035 323,598 4.03 7,141 440,215 6.16
- -------------------------------------------------- ------- -------- ------- ------- -------- -------
Demand deposits 789 563
Other liabilities 147 143
- -------------------------------------------------- ------- -------
Total liabilities 8,971 7,847
- -------------------------------------------------- ------- -------
Stockholders' equity 583 498
- -------------------------------------------------- ------- -------
Total liabilities and stockholders' equity $ 9,554 8,345
- -------------------------------------------------- ------- -------
Net interest spread 4.29 3.57
Contribution of interest-free funds .50 .65
- -------------------------------------------------- -------- ------- -------- -------
Net interest income/margin on earning assets $ 438,611 4.79% 337,730 4.22%
- -------------------------------------------------- -------- ------- -------- -------
*Includes nonaccrual loans
**Includes available for sale securities at amortized cost
-43-
- -----------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------
Table 8
AVERAGE CORE DEPOSITS
Percent increase
(decrease) from
-----------------------------
Dollars in millions 1995 1994 to 1995 1993 to 1994
- ------------------- ------- ------------ ------------
NOW accounts $ 761 2% -%
Savings deposits 2,922 (11) (6)
Time deposits under $100,000 2,613 47 (9)
Demand deposits 1,093 8 4
- ------------------- ------- ------------ ------------
Total $ 7,389 9% (5)%
=================== ======= ============ ============
-44-
- ------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------
Table 9
LOAN CHARGE-OFFS, PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Dollars in thousands 1995 1994 1993 1992 1991
- --------------------------------------------------------- --------- ------- ------- ------- -------
Allowance for possible credit losses
beginning balance $ 243,332 195,878 151,690 100,265 74,982
- --------------------------------------------------------- --------- ------- ------- ------- -------
Charge-offs during year
Commercial, financial, agricultural, etc. 5,475 5,505 14,118 15,966 23,014
Real estate - construction - - 150 400 -
Real estate - mortgage 10,750 17,957 22,686 27,530 18,447
Consumer 14,982 8,981 9,135 7,488 7,033
- --------------------------------------------------------- --------- ------- ------- ------- -------
Total charge-offs 31,207 32,443 46,089 51,384 48,494
- --------------------------------------------------------- --------- ------- ------- ------- -------
Recoveries during year
Commercial, financial, agricultural, etc. 3,967 7,877 5,403 2,095 2,268
Real estate - construction 87 13 - - -
Real estate - mortgage 2,137 4,515 1,772 445 247
Consumer 3,678 3,418 3,144 2,531 1,850
- --------------------------------------------------------- --------- ------- ------- ------- -------
Total recoveries 9,869 15,823 10,319 5,071 4,365
- --------------------------------------------------------- --------- ------- ------- ------- -------
Net charge-offs 21,338 16,620 35,770 46,313 44,129
Provision for possible credit losses 40,350 60,536 79,958 84,989 63,412
Allowance for possible credit losses acquired during year - 3,538 - 12,749 6,000
- --------------------------------------------------------- --------- ------- ------- ------- -------
Allowance for possible credit
losses ending balance $ 262,344 243,332 195,878 151,690 100,265
- --------------------------------------------------------- --------- ------- ------- ------- -------
Net charge-offs as a percent of:
Provision for possible credit losses 52.88% 27.45% 44.74% 54.49% 69.59%
Average loans and leases, net of
unearned discount .24% .22% .51% .70% .75%
- --------------------------------------------------------- --------- ------- ------- ------- -------
Allowance for possible credit losses as a
percent of loans and leases, net
of unearned discount, at year-end 2.75% 2.96% 2.70% 2.17% 1.66%
- --------------------------------------------------------- --------- ------- ------- ------- -------
-45-
- --------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------
Table 10
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES TO LOAN CATEGORIES
December 31
--------------------------------------------------
Dollars in thousands 1995 1994 1993 1992 1991
- ----------------------------------------- --------- ------- ------- ------- -------
Commercial, financial, agricultural, etc. $ 36,793 44,092 42,820 18,100 5,100
Real estate - mortgage 75,894 72,285 78,823 19,740 15,293
Consumer 23,385 17,532 13,630 6,700 6,500
Unallocated 126,272 109,423 60,605 107,150 73,372
- ----------------------------------------- --------- ------- ------- ------- -------
Total $ 262,344 243,332 195,878 151,690 100,265
========================================= ========= ======= ======= ======= =======
As a percentage of gross loans
and leases outstanding
- ----------------------------------------- --------- ------- ------- ------- -------
Commercial, financial, agricultural, etc. 1.83% 2.62% 2.84% 1.22% .48%
Real estate - mortgage 1.34 1.43 1.74 .45 .37
Consumer 1.10 1.05 1.02 .55 .64
========================================= ========= ======= ======= ======= =======
-46-
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Table 11
NONPERFORMING ASSETS
December 31
-------------------------------------------------
Dollars in thousands 1995 1994 1993 1992 1991
- ----------------------------- --------- ------ ------ ------- -------
Nonaccrual loans $ 75,224 62,787 68,936 96,057 74,267
Loans past due
90 days or more 17,842 11,754 11,122 17,536 15,422
Renegotiated loans - 2,994 2,195 - -
- ----------------------------- --------- ------ ------ ------- -------
Total nonperforming loans 93,066 77,535 82,253 113,593 89,689
- ----------------------------- --------- ------ ------ ------- -------
Other real estate owned 7,295 10,065 12,222 16,694 10,354
- ----------------------------- --------- ------ ------ ------- -------
Total nonperforming assets $ 100,361 87,600 94,475 130,287 100,043
- ----------------------------- --------- ------ ------ ------- -------
Nonperforming loans
to total loans and leases,
net of unearned discount .97% .94% 1.13% 1.63% 1.48%
Nonperforming assets
to total net loans and leases
and other real estate owned 1.05% 1.06% 1.30% 1.86% 1.65%
============================= ========= ====== ====== ======= =======
-47-
- -------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------
Table 12
MATURITY DISTRIBUTION OF LOANS*
December 31, 1995
1997- After
Dollars in thousands Demand 1996 2000 2000
- ----------------------------------------- ---------- ------- -------- ------
Commercial, financial, agricultural, etc. $1,183,869 229,507 413,378 83,489
Real estate - construction 17,381 46,462 13,663 -
- ----------------------------------------- ---------- ------- -------- ------
Total $1,201,250 275,969 427,041 83,489
========================================= ========== ======= ======== ======
Floating or adjustable interest rates $364,917 58,739
Fixed or predetermined interest rates 62,124 24,750
- ----------------------------------------- -------- ------
Total $427,041 83,489
========================================= ======== ======
*The data do not include nonaccrual loans.
-48-
- -------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Table 13
MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE
Dollars in thousands December 31, 1995
- -------------------------- -------------------
Under 3 months $ 639,482
3 to 6 months 82,870
6 to 12 months 273,227
Over 12 months 691,643
- -------------------------- -------------------
Total $ 1,687,222
========================== ===================
-49-
- -------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
Table 14
MATURITY AND TAXABLE-EQUIVALENT YIELD OF INVESTMENT SECURITIES
One year One to Five to Over
Dollars in thousands or less five years ten years ten years Total
- ------------------------------------------------ -------- ---------- --------- --------- ----------
December 31, 1995
Investment securities available for sale*
- ------------------------------------------------
U.S. Treasury and federal agencies
Carrying value $122,043 117,438 - - $ 239,481
Yield 4.42% 7.28% - - 5.79%
Mortgage-backed securities**
Government issued or guaranteed
Carrying value 32,999 94,413 104,921 465,191 697,524
Yield 6.04% 6.03% 6.43% 6.38% 6.32%
Privately issued
Carrying value 16,083 136,947 137,699 285,390 576,119
Yield 6.27% 6.13% 6.22% 6.47% 6.33%
Other debt securities
Carrying value 468 2,879 183 - 3,530
Yield 9.27% 8.71% 8.46% - 8.77%
Equity securities
Carrying value - - - - 15,239
Yield - - - - -
================================================ ======== ========= ======== ======== ==========
Total investment securities available for sale
Carrying value $171,593 351,677 242,803 750,581 $ 1,531,893
Yield 4.92% 6.50% 6.31% 6.41% 6.20%
- ------------------------------------------------ -------- ---------- --------- --------- ----------
Investment securities held to maturity
- ------------------------------------------------
U.S. Treasury and federal agencies
Carrying value $ - 150,000 - - $ 150,000
Yield - 6.42% - - 6.42%
Obligations of states and political subdivisions
Carrying value 30,532 3,104 1,474 140 35,250
Yield 6.45% 9.14% 10.76% 11.01% 6.88%
Other debt securities
Carrying value - 584 - - 584
Yield - 7.37% - - 7.37%
================================================ ======== ========= ======== ======== ==========
Total investment securities held to maturity
Carrying value $ 30,532 153,688 1,474 140 $ 185,834
Yield 6.45% 6.48% 10.76% 11.01% 6.51%
================================================ ======== ========= ======== ======== ==========
Other investment securities $ - - - - $ 51,568
- ------------------------------------------------ -------- --------- -------- -------- ----------
Total investment securities
Carrying value $202,125 505,365 244,277 750,721 $ 1,769,295
Yield 5.15% 6.49% 6.34% 6.41% 6.05%
================================================ ======== ========= ======== ======== ==========
* Investment securities available for sale are presented at estimated fair
value. Yields on such securities are based on amortized cost.
**Maturities are reflected based upon contractual payments due. Actual
maturities are expected to be significantly shorter as a result of loan
repayments in the underlying mortgage pools.
-50-
- ------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------
Table 15
INTEREST RATE SENSITIVITY
Dollars in thousands by repricing date
Three Four to One to
months twelve five After five
December 31, 1995 or less months years years Total
- ----------------------- ----------- --------- --------- --------- ---------
Loans and leases, net $ 4,104,422 1,241,900 3,034,943 1,174,584 9,555,849
Money-market assets 81,209 55,000 - - 136,209
Investment securities 253,164 601,973 498,453 415,705 1,769,295
- ----------------------- ---------- --------- --------- --------- ----------
Total earning assets 4,438,795 1,898,873 3,533,396 1,590,289 11,461,353
- ----------------------- ---------- --------- --------- --------- ----------
NOW accounts 768,559 - - - 768,559
Savings deposits 2,765,301 - - - 2,765,301
Time deposits 1,176,680 1,963,691 1,455,682 - 4,596,053
Deposits at foreign
office 155,303 - - - 155,303
- ----------------------- ---------- --------- --------- --------- ----------
Total interest-
bearing deposits 4,865,843 1,963,691 1,455,682 - 8,285,216
- ----------------------- ---------- --------- --------- --------- ----------
Short-term borrowings 1,273,206 - - - 1,273,206
Long-term borrowings 2,450 12,233 1,221 176,887 192,791
- ----------------------- ---------- --------- --------- --------- ----------
Total interest-
bearing liabilities 6,141,499 1,975,924 1,456,903 176,887 9,751,213
- ----------------------- ---------- --------- --------- --------- ----------
Interest rate swaps (1,950,416) 488,287 1,462,129 - -
- ----------------------- ---------- --------- --------- --------- ----------
Periodic gap (3,653,120) 411,236 3,538,622 1,413,402
Cumulative gap $(3,653,120) (3,241,884) 296,738 1,710,140
Cumulative gap as a %
of total earning
assets (31.9)% (28.3)% 2.6% 14.9%
======================= ========== ========= ========= =========
-51-
- --------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Table 16
REGULATORY CAPITAL RATIOS
First East
Empire M&T New M&T
December 31, 1995 (Consolidated) Bank York Bank, N.A.
- ------------------------- -------------- -------- ------- ----------
Core capital 8.53% 7.70% 11.41% 9.46%
Total capital 11.62% 11.05% 12.68% 10.76%
Leverage 6.91% 6.38% 7.33% 10.08%
========================= ============== ======== ======= ========
-52-
Item 8. Financial Statements and Supplementary Data. Financial
Statements and Supplementary Data consist of the financial
statements as indexed and presented below and table 2 "Quarterly
Trends" presented in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Index to Financial Statements and Financial Statement Schedules
Report of Independent Accountants
Consolidated Balance Sheet -
December 31, 1995 and 1994
Consolidated Statement of Income -
Years ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows -
Years ended December 31, 1995,
1994 and 1993
Consolidated Statement of Changes in
Stockholders' Equity - Years ended December 31,
1995, 1994 and 1993
Notes to Financial Statements
-53-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
First Empire State Corporation:
We have audited the accompanying consolidated balance sheet of First Empire
State Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of First Empire State
Corporation and subsidiaries at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 122 in 1995, which
changed its method of accounting for mortgage servicing rights.
/s/ PRICE WATERHOUSE LLP
Buffalo, New York
January 10, 1996, except as to Note 9,
which is as of February 13, 1996
-54-
- --------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
December 31
-----------
Dollars in thousands, except per share 1995 1994
- --------------------------------------------------------------------------------------------------
Assets Cash and due from banks $ 363,119 377,781
Money-market assets
Interest-bearing deposits at banks 125,500 143
Federal funds sold and
agreements to resell securities 1,000 3,080
Trading account 9,709 5,438
-----------------------------------------------------------------------------
Total money-market assets 136,209 8,661
-----------------------------------------------------------------------------
Investment securities
Available for sale (cost: $1,537,393 in 1995;
$1,602,916 in 1994) 1,531,893 1,514,395
Held to maturity (market value: $187,476 in 1995;
$221,165 in 1994) 185,834 227,651
Other (market value: $51,568 in 1995;
$48,994 in 1994) 51,568 48,994
-----------------------------------------------------------------------------
Total investment securities 1,769,295 1,791,040
-----------------------------------------------------------------------------
Loans and leases 9,873,723 8,447,117
Unearned discount (317,874) (229,824)
Allowance for possible credit losses (262,344) (243,332)
-----------------------------------------------------------------------------
Loans and leases, net 9,293,505 7,973,961
-----------------------------------------------------------------------------
Premises and equipment 128,516 127,274
Accrued interest and other assets 265,258 249,927
-----------------------------------------------------------------------------
Total assets $ 11,955,902 10,528,644
==================================================================================================
Liabilities Noninterest-bearing deposits $ 1,184,359 1,087,102
NOW accounts 768,559 748,199
Savings deposits 2,765,301 3,098,438
Time deposits 4,596,053 3,106,723
Deposits at foreign office 155,303 202,611
-----------------------------------------------------------------------------
Total deposits 9,469,575 8,243,073
-----------------------------------------------------------------------------
Federal funds purchased and agreements
to repurchase securities 1,213,372 695,665
Other short-term borrowings 59,834 669,185
Accrued interest and other liabilities 174,077 103,538
Long-term borrowings 192,791 96,187
-----------------------------------------------------------------------------
Total liabilities 11,109,649 9,807,648
- --------------------------------------------------------------------------------------------------
Stockholders' Preferred stock, $1 par, 1,000,000 shares
equity authorized, 40,000 shares issued, stated at aggregate
liquidation value 40,000 40,000
Common stock, $5 par, 15,000,000 shares
authorized, 8,097,472 shares issued 40,487 40,487
Surplus 98,657 98,014
Undivided profits 805,486 694,274
Unrealized investment losses, net (3,155) (50,555)
Treasury stock - common, at cost - 1,664,306 shares
in 1995; 1,486,969 shares in 1994 (135,222) (101,224)
-----------------------------------------------------------------------------
Total stockholders' equity 846,253 720,996
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 11,955,902 10,528,644
==================================================================================================
See accompanying notes to financial statements.
-55-
- ----------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31
--------------------------------
Dollars in thousands, except per share 1995 1994 1993
- ----------------------------------------------------------------------------------------------
Interest income Loans and leases, including fees $ 794,181 633,077 608,473
Money-market assets
Deposits at banks 8,181 2,212 6,740
Federal funds sold and agreements
to resell securities 3,007 4,751 20,403
Trading account 1,234 361 1,242
Investment securities
Fully taxable 118,791 104,185 101,187
Exempt from federal taxes 2,760 2,760 2,584
-----------------------------------------------------------------------------
Total interest income 928,154 747,346 740,629
- ----------------------------------------------------------------------------------------------
Interest expense NOW accounts 11,902 11,286 13,113
Savings deposits 87,612 84,804 90,392
Time deposits 239,882 97,067 98,508
Deposits at foreign office 6,952 5,894 3,243
Short-term borrowings 84,225 73,868 58,459
Long-term borrowings 11,157 6,287 6,158
-----------------------------------------------------------------------------
Total interest expense 441,730 279,206 269,873
-----------------------------------------------------------------------------
Net interest income 486,424 468,140 470,756
Provision for possible credit losses 40,350 60,536 79,958
-----------------------------------------------------------------------------
Net interest income after provision
for possible credit losses 446,074 407,604 390,798
- ----------------------------------------------------------------------------------------------
Other income Trust income 25,477 22,574 23,865
Service charges on deposit accounts 38,290 35,016 32,291
Merchant discount and other credit card fees 10,675 8,705 7,932
Trading account gains 1,151 700 2,702
Gain on sales of bank investment securities 4,479 128 870
Mortgage banking revenues 37,142 16,002 12,776
Other revenues from operations 32,324 40,614 30,108
-----------------------------------------------------------------------------
Total other income 149,538 123,739 110,544
- ----------------------------------------------------------------------------------------------
Other expense Salaries and employee benefits 188,222 161,221 154,340
Equipment and net occupancy 50,526 49,132 47,823
Printing, postage and supplies 14,442 13,516 13,021
Deposit insurance 14,675 16,442 17,684
Other costs of operations 106,574 96,551 94,951
-----------------------------------------------------------------------------
Total other expense 374,439 336,862 327,819
-----------------------------------------------------------------------------
Income before income taxes 221,173 194,481 173,523
Income taxes 90,137 77,186 71,531
-----------------------------------------------------------------------------
Net income $ 131,036 117,295 101,992
==============================================================================================
Net income per common share
Primary $18.79 16.35 13.87
Fully diluted 17.78 15.71 13.42
==============================================================================================
See accompanying notes to financial statements.
-56-
- ----------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31
--------------------------------------
Dollars in thousands 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from Net income $ 131,036 117,295 101,992
operating activities Adjustments to reconcile net income to net cash
provided by operating activities
Provision for possible credit losses 40,350 60,536 79,958
Depreciation and amortization of premises
and equipment 18,530 17,625 16,238
Amortization of capitalized mortgage
servicing rights 7,251 3,503 2,797
Provision for deferred income taxes (7,360) (2,866) (23,700)
Asset write-downs 3,852 3,184 9,037
Net gain on sales of assets (12,121) (4,744) (870)
Net change in accrued interest receivable, payable 4,381 8,084 (6,946)
Net change in other accrued income and expense 61,205 (39,654) 33,010
Net change in loans held for sale (136,303) 169,883 (70,462)
Net change in trading account assets (2,288) 4,377 43,700
---------------------------------------------------------------------------------------------
Net cash provided by operating activities 108,533 337,223 184,754
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from Proceeds from sales of investment securities
investing activities Available for sale 448,532 52,824 -
Held to maturity 990 - -
Other - 7,446 -
Proceeds from maturities of investment securities
Available for sale 244,862 562,498 -
Held to maturity 115,986 55,283 -
Other - - 1,298,887
Purchases of investment securities
Available for sale (418,507) (17,143) -
Held to maturity (295,582) (59,704) -
Other (3,408) (20,292) (2,011,405)
Net (increase) decrease in interest-bearing
deposits at banks (125,357) 54,901 54,997
Net increase in loans and leases (1,189,108) (778,201) (242,249)
Capital expenditures, net (17,520) (6,876) (22,329)
Acquisitions, net of cash acquired 52,298 102,721 -
Other, net 4,078 23,185 28,842
---------------------------------------------------------------------------------------------
Net cash used by investing activities (1,182,736) (23,358) (893,257)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from Net increase (decrease) in deposits 1,139,555 413,865 (722,480)
financing activities Net increase (decrease) in short-term borrowings (124,644) (807,826) 1,408,976
Proceeds from issuance of subordinated notes 100,000 - -
Payments on long-term borrowings (3,529) (116) (95)
Purchases of treasury stock (37,374) (43,964) -
Dividends paid - common (16,224) (14,743) (13,054)
Dividends paid - preferred (3,600) (3,600) (3,600)
Other, net 3,277 (1,841) (12,990)
---------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,057,461 (458,225) 656,757
---------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents $ (16,742) (144,360) (51,746)
Cash and cash equivalents at beginning of year 380,861 525,221 576,967
Cash and cash equivalents at end of year $ 364,119 380,861 525,221
=========================================================================================================================
Supplemental Interest received during the year $ 909,005 743,184 750,947
disclosure of cash Interest paid during the year 408,221 270,802 278,125
flow information Income taxes paid during the year 68,237 110,162 77,024
=========================================================================================================================
Supplemental schedule
of noncash investing Real estate acquired
and financing activities in settlement of loans $ 7,372 9,936 9,415
=========================================================================================================================
See accompanying notes to financial statements.
-57-
- -------------------------------------------------------------------------------------------------------------------
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
investment
gains
Preferred Common Undivided (losses), Treasury
Dollars in thousands, except per share stock stock Surplus profits net stock Total
- -------------------------------------------------------------------------------------------------------------------
1993 Balance - January 1, 1993 $40,000 40,487 96,816 509,984 - (60,492) $626,795
Net income - - - 101,992 - - 101,992
Preferred stock cash dividends - - - (3,600) - - (3,600)
Common stock cash dividends -
$ 1.90 per share - - - (13,054) - - (13,054)
Exercise of stock options - - 971 - - 1,742 2,713
Unrealized gains on investment
securities available for sale, net - - - - 9,148 - 9,148
----------------------------------------------------------------------------------------------------------
Balance - December 31, 1993 $40,000 40,487 97,787 595,322 9,148 (58,750) $723,994
- -------------------------------------------------------------------------------------------------------------------
1994 Net income - - - 117,295 - - 117,295
Preferred stock cash dividends - - - (3,600) - - (3,600)
Common stock cash dividends -
$ 2.20 per share - - - (14,743) - - (14,743)
Exercise of stock options - - 227 - - 1,490 1,717
Purchases of treasury stock - - - - - (43,964) (43,964)
Unrealized losses on investment
securities available for sale, net - - - - (59,703) - (59,703)
----------------------------------------------------------------------------------------------------------
Balance - December 31, 1994 $40,000 40,487 98,014 694,274 (50,555) (101,224) $720,996
- -------------------------------------------------------------------------------------------------------------------
1995 Net income - - - 131,036 - - 131,036
Preferred stock cash dividends - - - (3,600) - - (3,600)
Common stock cash dividends -
$ 2.50 per share - - - (16,224) - - (16,224)
Exercise of stock options - - 643 - - 3,376 4,019
Purchases of treasury stock - - - - - (37,374) (37,374)
Unrealized gains on investment
securities available for sale, net - - - - 47,400 - 47,400
----------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 $40,000 40,487 98,657 805,486 (3,155) (135,222) $846,253
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
-58-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
1. Significant accounting policies
First Empire State Corporation ("First Empire") is a bank holding company
headquartered in Buffalo, New York. Through subsidiaries, First Empire provides
individuals, corporations and institutions with commercial and retail banking
services, including loans and deposits, trust, mortgage banking, asset
management and other financial services. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The accounting and reporting policies of First Empire State Corporation and
subsidiaries ("the Company") conform to generally accepted accounting principles
and to general practices within the banking industry. The more significant
accounting policies are as follows:
Consolidation
The consolidated financial statements include First Empire and all of its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The financial statements of First Empire included
in note 20 report investments in subsidiaries under the equity method.
Consolidated Statement of Cash Flows
For purposes of this statement, cash and due from banks, Federal funds sold and
agreements to resell securities are considered cash and cash equivalents.
Trading account
Financial instruments used for trading purposes are stated at fair value.
Realized gains and losses and unrealized changes in fair value are included in
trading account gains in the Consolidated Statement of Income.
Investment securities
Investments in debt securities are classified as held to maturity and stated at
amortized cost when management has the positive intent and ability to hold such
securities to maturity. Investments in other debt securities and equity
securities having readily determinable fair values are classified as available
for sale and stated at estimated fair value. Unrealized gains or losses related
to investment securities available for sale are reflected in stockholders'
equity, net of applicable income taxes.
Other securities include stock of the Federal Reserve Bank of New York and
the Federal Home Loan Bank of New York and are stated at cost.
Amortization of premiums and accretion of discounts for investment
securities available for sale and held to maturity are included in interest
income. The cost basis of individual securities is written down to estimated
fair value through a charge to earnings when declines in value below amortized
cost are considered to be other than temporary. Realized gains and losses on the
sales of investment securities are determined using the specific identification
method.
On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
-59-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
1. Significant accounting policies, continued
Debt and Equity Securities". As required, the provisions of SFAS No. 115 were
not applied to any prior periods. Prior to December 31, 1993 debt securities
were carried at amortized cost when management had both the ability and intent
to hold such securities to maturity. Periodic sales of these securities occurred
principally as a result of reactive measures taken by management to changing
business circumstances. When it became probable that a debt security would be
sold, the security was classified as held for sale. Investment securities held
for sale were reported at the lower of aggregate cost or fair market value.
Adjustments to the carrying value of investment securities held for sale were
included in gain on sales of bank investment securities in the Consolidated
Statement of Income. Equity securities were stated at the lower of cost or fair
market value. The carrying value of individual securities was written down to
estimated fair value through a charge to earnings when declines in value were
considered to be other than temporary.
Loans
Interest income on loans is accrued on a level yield method. Loans are placed on
nonaccrual status and previously accrued interest thereon is charged against
income when principal or interest is delinquent 90 days, unless management
determines that the loan status clearly warrants other treatment. Loan balances
are charged off when it becomes evident that such balances are not fully
collectible. Loan fees and certain direct loan origination costs are deferred
and recognized as an interest yield adjustment over the life of the loan. Net
deferred fees have been included in unearned discount in the Consolidated
Balance Sheet as a reduction of loans outstanding. Loans held for sale are
carried at the lower of aggregate cost or fair market value. Valuation
adjustments made on these loans are included in mortgage banking revenues in the
Consolidated Statement of Income.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan", as amended. Except for consumer and
residential mortgage loans that are considered smaller balance homogenous loans
and are evaluated collectively, the Company considers a loan to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts according to the contractual terms of the
loan agreement or the loan is delinquent 90 days. Impaired loans are classified
as either nonaccrual or as loans renegotiated at below market rates. Loans less
than 90 days delinquent are deemed to have a minimum delay in payment and are
generally not considered impaired. Impairment of a loan is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price, or the fair value of
collateral if the loan is collateral dependent. Interest received on impaired
loans placed on nonaccrual status is applied to reduce the carrying value of the
loan or, if principal is considered fully collectible, recognized as interest
income.
Allowance for possible credit losses
The allowance for possible credit losses represents the amount which, in
management's judgment, will be adequate to absorb credit losses from existing
loans, leases and credit commitments. The adequacy of the allowance is
determined by management's evaluation of the loan portfolio and other credit
commitments based on 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, any delinquency in
payments, and the value of any collateral.
-60-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
1. Significant accounting policies, continued
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed principally using the straight-line method over
the estimated useful lives of the assets.
Capitalized mortgage servicing rights
In the second quarter of 1995, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights", retroactive to January 1, 1995. As a result, the
Company recognizes as separate assets rights to service mortgage loans for
others, whether those servicing rights are originated or purchased. Prior to the
adoption of SFAS No. 122, only purchased mortgage servicing rights were recorded
as assets. Retroactive application of the provisions of SFAS No. 122 to prior
years is not permitted.
The total cost of mortgage loans sold with servicing rights retained is
allocated to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. Mortgage servicing rights
purchased separately from loans are recorded at cost. Capitalized mortgage
servicing rights are included in other assets and amortized in proportion to and
over the period of estimated net servicing income.
To estimate the fair value of mortgage servicing rights, the Company
considers market prices for similar assets and the present value of expected
future cash flows associated with the servicing rights calculated using
assumptions that market participants would use in estimating future servicing
income and expense. Such assumptions include estimates of the cost of servicing
loans, loan default rates, an appropriate discount rate, and prepayment speeds.
For purposes of evaluating and measuring impairment of capitalized mortgage
servicing rights, the Company stratifies such rights based on predominant risk
characteristics of underlying loans that are expected to have the most impact on
projected prepayments, cost of servicing and other factors affecting future cash
flows associated with the servicing rights. Such factors include loan type, note
rate and term. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed estimated fair value.
Impairment is recognized through a valuation allowance.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax effects
attributable to differences between the financial statement value of existing
assets and liabilities and their respective tax bases and carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates and
laws. Investment tax credits related to leveraged leasing property are amortized
into income tax expense over the life of the lease agreement.
Financial futures
Outstanding financial futures contracts represent future commitments and are not
included in the Consolidated Balance Sheet. Futures contracts used in securities
trading operations are marked to market and the resulting gains or
-61-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
1. Significant accounting policies, continued
losses are recognized in trading account gains. On occasion the Company uses
interest rate futures contracts as part of its management of interest rate risk.
Gains and losses on futures contracts designated as hedges are amortized as an
adjustment to interest income or expense over the life of the item hedged.
Interest rate swap agreements
For interest rate swap agreements used to manage interest rate risk arising from
financial assets and liabilities, amounts receivable or payable are recognized
as accrued under the terms of the agreement and the net interest differential,
including any amortization of premiums paid or accretion of discounts received,
is recorded as an adjustment to interest income or expense of the related asset
or liability. Gains or losses resulting from early termination of interest rate
swap agreements used to manage interest rate risk are amortized over the
remaining term or estimated life of the agreement. Agreements and commitments
entered into for trading purposes are marked to market with resulting gains or
losses recorded in trading account gains.
Earnings per common share
Earnings per common share data are computed on the basis of the weighted average
number of shares outstanding during the year, plus shares issuable upon the
assumed exercise of outstanding common stock options. Proceeds assumed to have
been received on such exercise are treated as if applied toward the repurchase
of outstanding common shares in the open market during the year, as required
under the "treasury stock" method of accounting.
2. Acquisitions
On March 6, 1995, the Company's mortgage banking subsidiary, M&T Mortgage
Corporation, acquired Statewide Funding Corporation ("Statewide"), a
privately-owned mortgage banking company based near Albany, New York, in a cash
transaction. As of the acquisition date, Statewide serviced residential mortgage
loans owned by other investors having an outstanding principal balance of
approximately $1.0 billion. On October 2, 1995, in another cash transaction, M&T
Mortgage Corporation acquired the mortgage servicing rights and origination
franchise of Exchange Mortgage Corporation ("Exchange"), a mortgage banking
company based in Huntington Station, New York. As of the acquisition date,
Exchange serviced residential mortgage loans owned by other investors having an
outstanding principal balance of approximately $370 million. The combined
purchase price of the Statewide and Exchange transactions was approximately $25
million.
In separate cash transactions, on July 21, 1995, Manufacturers and Traders
Trust Company ("M&T Bank"), a wholly owned subsidiary of First Empire, acquired
four banking offices from The Chase Manhattan Bank, N.A., including
approximately $84 million of deposits, and on December 10, 1994 purchased
approximately $146 million of deposits from Chemical Bank, along with seven
banking offices. Ten of the banking offices obtained in these transactions were
in the Hudson Valley region of New York State and one office was in Western New
York.
On December 1, 1994, First Empire acquired Ithaca Bancorp, Inc. ("Ithaca
Bancorp"), Ithaca, New York, in exchange for cash consideration of $19 per
common share, or approximately $44.2 million. Simultaneously with the
-62-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
2. Acquisitions, continued
acquisition, Ithaca Bancorp's savings bank subsidiary, Citizens Savings Bank,
F.S.B., was merged into M&T Bank bringing twelve banking offices in New York's
Southern Tier into M&T Bank's branch network. As of December 1, 1994, assets
acquired totaled $470 million, including $369 million of loans; at that date,
liabilities assumed totaled $425 million, including $330 million of deposits.
These acquisitions have been accounted for as purchase transactions and,
accordingly, the operating results of the acquired entities have been included
in the Company's results of operations since the respective acquisition dates.
The excess of the cost of the acquired entities over the fair value of
identifiable assets acquired less liabilities assumed has been recorded as
goodwill and amounted to approximately $11 million and $24 million for
acquisitions completed in 1995 and 1994, respectively. Such goodwill is being
amortized on a straight-line basis over five years.
Amortization of goodwill was $6,294,000 in 1995 and $358,000 in 1994.
There was no goodwill amortization in 1993. The amount of goodwill totaled
$28,234,000 and $23,514,000 at December 31, 1995 and 1994, respectively.
Presented below is certain proforma information as if Statewide, Exchange
and Ithaca had been acquired on January 1, 1994. These results combine the
historical results of the acquired businesses into the Company's Consolidated
Statement of Income and, while certain adjustments were made for the estimated
impact of purchase accounting adjustments and other acquisition-related
activity, they are not necessarily indicative of what would have occurred had
the acquisitions taken place at that time.
Proforma
Year ended December 31
1995 1994
-------- --------
(in thousands,
except per share)
Interest income $929,382 782,259
Other income 156,306 149,852
Net income 129,442 112,738
Earnings per common share $ 18.56 15.70
======== =======
-63-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
3. Investment securities
The amortized cost and estimated fair value of investment securities were as
follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
December 31, 1995
Investment securities
available for sale:
U.S. Treasury and federal
agencies $ 235,986 3,983 488 239,481
Mortgage-backed securities
Government issued
or guaranteed 705,523 3,505 11,504 697,524
Privately issued 580,275 806 4,962 576,119
Other debt securities 3,454 76 - 3,530
Equity securities 12,155 3,084 - 15,239
--------- ------ ------ ---------
1,537,393 11,454 16,954 1,531,893
--------- ------ ------ ---------
Investment securities
held to maturity:
U.S. Treasury and
federal agencies 150,000 1,199 - 151,199
Obligations of states and
political subdivisions 35,250 446 3 35,693
Other debt securities 584 - - 584
--------- ------ ------ ---------
185,834 1,645 3 187,476
--------- ------ ------ ---------
Other securities 51,568 - - 51,568
--------- ------ ------ ---------
Total $1,774,795 13,099 16,957 1,770,937
========== ====== ====== =========
-64-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
3. Investment securities, continued
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(in thousands)
December 31, 1994
Investment securities
available for sale:
U.S. Treasury and federal
agencies $ 5,775 - 13 5,762
Mortgage-backed securities
Government issued
or guaranteed 869,031 403 46,901 822,533
Privately issued 706,909 110 41,810 665,209
Other debt securities 6,537 20 - 6,557
Equity securities 14,664 1,532 1,862 14,334
---------- ----- ------ ---------
1,602,916 2,065 90,586 1,514,395
---------- ----- ------ ---------
Investment securities
held to maturity:
U.S. Treasury and
federal agencies 171,112 1 6,511 164,602
Obligations of states and
political subdivisions 55,787 266 181 55,872
Other debt securities 752 - 61 691
---------- ----- ------ ---------
227,651 267 6,753 221,165
---------- ----- ------ ---------
Other securities 48,994 - - 48,994
---------- ----- ------ ---------
Total $1,879,561 2,332 97,339 1,784,554
========== ===== ====== =========
No investment in securities of a single non-U.S. Government or government
agency issuer exceeded ten percent of stockholders' equity at December 31, 1995.
As permitted by the Financial Accounting Standards Board, in December 1995
the Company reclassified U.S. Treasury securities with an amortized cost and
estimated fair value of $220,185,000 and $223,309,000, respectively, from held
to maturity to available for sale to enhance flexibility in managing the
investment securities portfolio.
As of December 31, 1995, the latest available investment ratings of all
privately issued mortgage-backed securities were AA or better, except one
security with an amortized cost of $1,075,000 was rated AA-.
At December 31, 1995, investment securities classified as held to maturity
and issued by U.S. Treasury and federal agencies consisted of structured notes
issued by the Federal Home Loan Banks. There were no structured notes in
investment securities at December 31, 1994.
-65-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
3. Investment securities, continued
The amortized cost and estimated fair value of collateralized mortgage
obligations included in mortgage-backed securities were as follows:
December 31
1995 1994
---- ----
(in thousands)
Amortized cost $673,476 788,776
Estimated fair value 662,785 736,259
======== =======
Gross realized gains on the sale of investment securities available for
sale were $5,113,000 in 1995 and $128,000 in 1994. Gross realized losses on the
sale of investment securities available for sale were $624,000 in 1995. There
were no such losses in 1994. Gains recognized in 1993 consisted of appreciation
in market value of investment securities held for sale at December 31, 1992.
During 1995, the Company sold a municipal bond with an amortized cost of
$1,000,000 that had been classified as held to maturity. Such bond was sold for
an insignificant loss immediately following the downgrading of the
municipality's credit rating by several rating agencies.
At December 31, 1995, the amortized cost and estimated fair value of debt
securities by contractual maturity were as follows:
Estimated
Amortized fair
cost value
--------- ---------
(in thousands)
Debt securities available for sale:
Due in one year or less $ 122,948 122,511
Due after one year through five years 116,314 120,317
Due after five years through ten years 178 183
Due after ten years - -
---------- ---------
239,440 243,011
---------- ---------
Mortgage-backed securities available
for sale 1,285,798 1,273,643
---------- ---------
$1,525,238 1,516,654
========== =========
Debt securities held to maturity:
Due in one year or less $ 30,532 30,594
Due after one year through five years 153,688 155,037
Due after five years through ten years 1,474 1,682
Due after ten years 140 163
---------- ---------
$ 185,834 187,476
========== =========
At December 31, 1995, investment securities with a carrying value of
$795,759,000, including $629,729,000 of investment securities available for
sale, were pledged to secure demand notes issued to the U.S. Treasury,
borrowings from the Federal Home Loan Bank of New York, repurchase agreements,
governmental deposits and interest rate swap agreements.
-66-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
4. Loans and leases
Total gross loans and leases outstanding were comprised of the following:
December 31
1995 1994
---- ----
(in thousands)
Loans
Commercial, financial,
agricultural, etc. $1,928,969 1,592,627
Real estate:
Residential 2,061,342 1,707,840
Commercial 3,587,248 3,339,097
Construction 77,604 53,535
Consumer 2,017,099 1,662,881
---------- ---------
Total loans 9,672,262 8,355,980
---------- ---------
Leases
Commercial 84,968 87,788
Consumer 116,493 3,349
---------- ---------
Total leases 201,461 91,137
---------- ---------
Total loans and leases $9,873,723 8,447,117
========== =========
One-to-four family residential mortgage loans held for sale were $185.0
million at December 31, 1995 and $33.4 million at December 31, 1994. One-to-
four family residential mortgage loans serviced for others totaled approximately
$5.7 billion and $4.0 billion at December 31, 1995 and 1994, respectively.
Approximately $17.3 million of one-to-four family residential mortgage loans
have been sold with recourse. The total credit loss exposure resulting from
loans sold with recourse was considered negligible as of December 31, 1995.
Included in the table above are nonperforming loans (loans on which
interest was not being accrued, or which were ninety days or more past due or
had been renegotiated at below-market interest rates) of $93,066,000 at December
31, 1995 and $77,535,000 at December 31, 1994. If nonaccrual and renegotiated
loans had been accruing interest at their originally contracted terms, interest
income on these loans would have amounted to $9,931,000 in 1995 and $9,648,000
in 1994. The actual amount included in interest income during 1995 and 1994 on
these loans was $2,178,000 and $1,590,000, respectively.
The adoption of SFAS No. 114, as amended, on January 1, 1995 had no impact
on the Company's results of operations nor on the level of the allowance for
possible credit losses. At December 31, 1995, the recorded investment in loans
that are considered impaired under SFAS No. 114 was $60,778,000. Included in
this amount was $41,654,000 of impaired loans for which the related SFAS No. 114
allowance for possible credit losses was $4,775,000. The average recorded
investment in impaired loans during 1995 was $52,357,000. Interest income
recognized on impaired loans totaled $1,151,000 for the year ended December 31,
1995.
-67-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
4. Loans and leases, continued
Borrowings by directors and certain officers of First Empire and its
banking subsidiaries, and by associates of such persons, exclusive of loans
aggregating less than $60,000, amounted to $52,613,000 and $129,736,000 at
December 31, 1995 and 1994, respectively. During 1995, new borrowings by such
persons amounted to $25,415,000 (including borrowings of new directors or
officers that were outstanding at the time of their election) and repayments and
other reductions equaled $102,538,000.
At December 31, 1995, approximately $19 million of one-to-four family
residential mortgage loans were pledged to secure borrowings.
5. Allowance for possible credit losses
Changes in the allowance for possible credit losses were as follows:
1995 1994 1993
---- ---- ----
(in thousands)
Beginning balance $243,332 195,878 151,690
Provision for possible
credit losses 40,350 60,536 79,958
Allowance for possible
credit losses acquired - 3,538 -
Net charge-offs
Charge-offs (31,207) (32,443) (46,089)
Recoveries 9,869 15,823 10,319
-------- ------- -------
Net charge-offs (21,338) (16,620) (35,770)
-------- ------- -------
Ending balance $262,344 243,332 195,878
======== ======= =======
6. Premises and equipment
The detail of premises and equipment was as follows:
December 31
1995 1994
---- ----
(in thousands)
Land $ 12,791 12,730
Buildings-owned 89,062 88,123
Buildings-capital leases 1,773 1,773
Leasehold improvements 29,098 33,404
Furniture and equipment-owned 114,007 102,212
Furniture and equipment-capital leases 429 -
-------- -------
247,160 238,242
Less: accumulated depreciation
and amortization
Owned assets 116,954 109,354
Capital leases 1,690 1,614
-------- -------
118,644 110,968
-------- -------
Premises and equipment, net $128,516 127,274
======== =======
-68-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
6. Premises and equipment, continued
Net lease expense for all operating leases totaled $13,091,000 in 1995,
$13,329,000 in 1994 and $12,051,000 in 1993. The Company occupies certain
banking offices and uses certain equipment under noncancellable operating lease
agreements expiring at various dates over the next 22 years. Minimum lease
payments under noncancellable operating leases are summarized as follows:
Year ending December 31: (in thousands)
1996 $ 7,455
1997 7,333
1998 6,505
1999 7,461
2000 6,837
Later years 59,331
--------
$ 94,922
========
Payments required under capital leases are not material.
7. Capitalized mortgage servicing rights
Changes in capitalized mortgage servicing rights were as follows:
Year ended December 31
1995 1994 1993
---- ---- ----
(in thousands)
Beginning balance $10,048 8,472 7,555
Originations 12,515 - -
Purchases 22,980 5,079 4,034
Amortization (7,251) (3,503) (2,797)
Sales (2,704) - -
Write-downs - - (320)
------- ------ -----
35,588 10,048 8,472
Valuation allowance (1,100) - -
------- ------ -----
Ending balance, net $34,488 10,048 8,472
======= ====== =====
As a result of impairment of certain strata of capitalized mortgage
servicing rights, an impairment allowance totaling $1,100,000 was recorded
during 1995. The estimated fair value of capitalized mortgage servicing was
approximately $44 million at December 31, 1995. Such amount was calculated using
current prepayment and discount rate assumptions.
The effect on the 1995 results of operations from implementing SFAS No.
122 was to increase mortgage banking revenues by $9,985,000 and other costs of
operations by $1,795,000.
-69-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
8. Borrowings
The amount and interest rate of short-term borrowings were as follows:
Federal funds
purchased and
repurchase Other
agreements borrowings Total
------------- ---------- ---------
(dollars in thousands)
At December 31, 1995
Amount outstanding $1,213,372 59,834 1,273,206
Weighted-average
interest rate 5.83% 5.32% 5.81%
For the year ended
December 31, 1995
Highest amount
at a month-end $1,944,924 524,359
Daily-average
amount outstanding 1,176,935 246,560 1,423,495
Weighted-average
interest rate 5.91% 5.95% 5.92%
========= ======= =========
At December 31, 1994
Amount outstanding $ 695,665 669,185 1,364,850
Weighted-average
interest rate 6.07% 6.02% 6.05%
For the year ended
December 31, 1994
Highest amount
at a month-end $1,829,630 1,038,502
Daily-average
amount outstanding 1,432,845 339,676 1,772,521
Weighted-average
interest rate 4.12% 4.38% 4.17%
========= ======= =========
At December 31, 1993
Amount outstanding $1,381,335 720,332 2,101,667
Weighted-average
interest rate 3.41% 2.97% 3.26%
For the year ended
December 31, 1993
Highest amount
at a month-end $2,434,239 720,332
Daily-average
amount outstanding 1,639,537 282,989 1,922,526
Weighted-average
interest rate 3.06% 2.93% 3.04%
========= ======= =========
-70-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
8. Borrowings, continued
At December 31, 1995, First Empire, M&T Bank and The East New York Savings
Bank ("East New York"), a wholly owned subsidiary of First Empire, had lines of
credit under formal agreements as follows:
First M&T East
Empire Bank New York
------ ---- --------
(in thousands)
Outstanding borrowings $ - 16,834 -
Unused 25,000 615,894 257,598
======= ======= =======
Long-term borrowings were as follows:
December 31
1995 1994
---- ----
(in thousands)
Subordinated notes of
M&T Bank:
8 1/8% due 2002 $ 75,000 75,000
7% due 2005 100,000 -
Advances from Federal Home
Loan Bank of New York 16,834 20,701
Other 957 486
-------- ------
$192,791 96,187
======== ======
The subordinated notes of M&T Bank are unsecured and are subordinate to
the claims of depositors and other creditors of M&T Bank. Advances from the
Federal Home Loan Bank of New York had fixed and variable rates of interest
ranging from 4.74% to 8.60% at December 31, 1995 and 1994. Such advances mature
at various dates through 2006 and are secured by residential mortgage loans.
Long-term borrowings at December 31, 1995 mature as follows:
Year ending December 31 (in thousands)
1996 $ 14,683
1997 221
1998 533
1999 128
2000 339
Later years 176,887
-------
$192,791
========
-71-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
9. Preferred stock
The 9% cumulative preferred stock is convertible at any time into shares of
First Empire's common stock at a conversion price of $78.90625 per share,
subject to certain adjustments. First Empire has the right to redeem the
preferred stock, in whole, but not in part, on or after March 31, 1996 at a
price of $40,000,000 plus accrued and unpaid dividends. On February 9, 1996,
First Empire notified the preferred stockholder of its intention to redeem the
preferred stock. On February 13, 1996, the preferred stockholder advised First
Empire of its intention to convert the preferred stock into shares of common
stock of First Empire. The conversion is anticipated to result in the issuance
from treasury stock of 506,930 common shares.
The preferred stock is not considered to be a common stock equivalent.
Preferred stock dividends are deducted from net income when calculating primary
earnings per common share. The calculation of fully diluted earnings per common
share assumes that the preferred stock was converted to 506,930 shares of common
stock at issuance and that no preferred stock dividends were paid.
10. Disclosures about fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that financial institutions disclose the estimated "fair value" of their
financial instruments. "Fair value" is generally defined as the price a willing
buyer and a willing seller would exchange for a financial instrument in other
than a distressed sale situation. Disclosures related to fair value presented
herein are as of December 31, 1995 and 1994.
With the exception of marketable securities, certain off-balance sheet
financial instruments and one-to-four family residential mortgage loans
originated for sale, the Company's financial instruments are not readily
marketable and market prices do not exist. The Company, in attempting to comply
with the provisions of SFAS No. 107, has not attempted to market its financial
instruments to potential buyers, if any exist. Since negotiated prices in
illiquid markets depend greatly upon the then present motivations of the buyer
and seller, it is reasonable to assume that actual sales prices could vary
widely from any estimate of fair value made without the benefit of negotiations.
Additionally, changes in market interest rates can dramatically impact the value
of financial instruments in a short period of time.
The estimated fair value of investments in readily marketable debt and
equity securities were based on quoted market prices at the respective year-end.
In arriving at estimated fair value of other financial instruments, the Company
generally used calculations based upon discounted cash flows of the related
financial instruments. In general, discount rates used for loan products were
based on the Company's pricing at the respective year-end. A higher discount
rate was assumed with respect to estimated cash flows associated with nonaccrual
loans.
-72-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
10. Disclosures about fair value of financial instruments, continued
As more fully described in note 3, the carrying value and estimated fair
value of investment securities were as follows:
Carrying Estimated
value fair value
-------- ----------
(in thousands)
December 31
1995 $1,769,295 1,770,937
1994 1,791,040 1,784,554
========== =========
The following table presents the carrying value and calculated estimates
of fair value of loans and commitments related to loans originated for sale:
Carrying Calculated
value estimate
-------- ----------
(in thousands)
December 31, 1995
Commercial loans and leases $1,992,325 1,989,483
Commercial real estate loans 3,599,202 3,615,964
Residential real estate loans 1,999,540 2,030,175
Consumer loans and leases 1,964,782 1,980,559
---------- ---------
$9,555,849 9,616,181
========== =========
December 31, 1994
Commercial loans and leases $1,659,532 1,650,138
Commercial real estate loans 3,352,600 3,261,013
Residential real estate loans 1,653,552 1,609,921
Consumer loans and leases 1,551,609 1,554,609
---------- ---------
$8,217,293 8,075,681
========== =========
As described in note 17, in the normal course of business, various
commitments and contingent liabilities are outstanding, such as loan
commitments, credit guarantees and letters of credit. The Company's pricing of
such financial instruments is based largely on credit quality and relationship,
probability of funding and other requirements. Commitments generally have fixed
expiration dates and contain termination and other clauses which provide for
relief from funding in the event of significant deterioration in the credit
quality of the customer. The rates and terms of the Company's loan commitments,
credit guarantees and letters of credit are competitive with other financial
institutions operating in markets served by the Company. The Company believes
that the carrying amounts are reasonable estimates of the fair value of these
financial instruments. Such carrying amounts, which are comprised principally of
unamortized fee income and are included in other liabilities, totaled $2,757,000
and $2,400,000 at December 31, 1995 and 1994, respectively.
-73-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
10. Disclosures about fair value of financial instruments, continued
SFAS No. 107 requires that the estimated fair value ascribed to
noninterest-bearing deposits, savings deposits and NOW accounts be established
at carrying value because of the customers' ability to withdraw funds
immediately. Additionally, time deposit accounts are required to be revalued
based upon prevailing market interest rates for similar maturity instruments.
The following summarizes the results of these calculations:
Carrying Calculated
value estimate
-------- ----------
(in thousands)
December 31, 1995
Noninterest-bearing deposits $1,184,359 1,184,359
Savings deposits and NOW accounts 3,533,860 3,533,860
Time deposits 4,596,053 4,611,060
Deposits at foreign office 155,303 155,303
========== =========
December 31, 1994
Noninterest-bearing deposits $1,087,102 1,087,102
Savings deposits and NOW accounts 3,846,637 3,846,637
Time deposits 3,106,723 3,088,666
Deposits at foreign office 202,611 202,611
========== =========
The Company believes that deposit accounts have a value greater than
that prescribed by SFAS No. 107. The Company feels, however, that the value
associated with these deposits is greatly influenced by characteristics of the
buyer, such as the ability to reduce the costs of servicing the deposits, and
the expected deposit attrition which is customary in acquisitions. Accordingly,
estimating the fair value of deposits with any degree of certainty is not
practical.
As more fully described in note 16, the Company had entered into
interest rate swap agreements for purposes of managing the Company's exposure to
changing interest rates. The estimated fair value of interest rate swap
agreements represents the amount the Company would have expected to receive or
pay to terminate such swaps. The following table includes information about the
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes:
Gross Gross Estimated
Notional unrealized unrealized fair value -
amount gains losses gain (loss)
-------- ---------- ---------- ------------
(in thousands)
December 31
1995 $2,378,358 38,682 (1,645) 37,037
1994 2,388,000 - (119,079) (119,079)
========== ====== ======== ========
As described in note 16, the Company also uses certain derivative
financial instruments as part of its trading activities. Interest rate swaps
entered into for trading purposes had notional values and estimated fair value
gains of $50 million and $80,000, respectively, at December 31, 1995 and $40
million and $3,000, respectively, at December 31, 1994. The Company also entered
into foreign exchange and other option and futures contracts totaling $539
million and $296 million at December 31, 1995 and 1994, respectively. Such
contracts were valued at a gain of $2,603,000 and at a loss of $19,000 at
December 31, 1995 and 1994, respectively. All trading
-74-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
10. Disclosures about fair value of financial instruments, continued
account assets and liabilities are recorded in the Consolidated Balance Sheet at
estimated fair value.
Due to the near maturity of other money-market assets and short-term
borrowings, the Company estimates that the carrying value of such instruments
approximates estimated fair value. The carrying value and estimated fair value
of long-term borrowings were $192,791,000 and $202,746,000, respectively, at
December 31, 1995 and $96,187,000 and $93,277,000, respectively, at December 31,
1994.
The Company does not believe that the estimated fair value information
presented herein is representative of the earnings power or value of the
Company. The preceding analysis, which is inherently limited in depicting fair
value, also does not consider any value associated with existing customer
relationships nor the ability of the Company to create value through loan
origination, deposit gathering or fee generating activities.
Many of the fair value estimates presented herein are based upon the use
of highly subjective information and assumptions and, accordingly, the results
may not be precise. Management believes that fair value estimates may not be
comparable between financial institutions due to the wide range of permitted
valuation techniques and numerous estimates which must be made. Furthermore,
since the fair value is estimated as of the balance sheet date, the amounts
actually realized or paid upon maturity or settlement of the various financial
instruments could be significantly different.
11. Stock option plan
The stock option plan allows the grant of stock options and stock appreciation
rights (either in tandem with options or independently) which are exercisable
over terms not exceeding ten years and one day, and at prices which may not be
less than the fair market value of the common stock on the date of grant. When
exercisable, the stock appreciation rights issued in tandem with stock options
entitle grantees to receive cash, stock or a combination equal to the amount of
stock appreciation between the dates of grant and exercise. Stock appreciation
rights issued independently of stock options contain similar terms as the stock
options, although upon exercise the holder is only entitled to receive cash
instead of purchasing shares of First Empire's common stock. Of the stock
options outstanding at December 31, 1995, 619,776 were granted with limited
stock appreciation rights attached thereto. A summary of related activity
follows:
-75-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
11. Stock option plan, continued
Cash-only
Stock appreciation
options rights Exercise price per share
outstanding outstanding Range Average
----------- ----------- ------- ---------
1993
Beginning balance 431,197 121,200 $ 23.00-131.88 $ 62.13
Granted 119,725 - 133.88-141.50 134.00
Exercised (40,540) (5,800) 35.25-105.13 50.78
Cancelled (3,150) (2,200) 53.00-133.88 96.87
------- ------ ------------ -----
At year-end 507,232 113,200 23.00-141.50 76.55
1994
Granted 142,449 - 139.50-150.50 139.96
Exercised (33,944) (22,600) 35.25- 70.00 52.43
Cancelled (4,500) - 105.13-139.50 131.24
------- ------ ------------ -----
At year-end 611,237 90,600 23.00-150.50 91.01
1995
Granted 165,185 - 140.00-198.00 143.39
Exercised (47,175) (29,000) 23.00-139.50 64.33
Cancelled (9,250) - 105.13-140.00 133.82
------- ------ ------------ ------
At year-end 719,997 61,600 35.25-198.00 104.17
======= ====== ============ ======
Exercisable at
December 31, 1995 315,612 61,600 35.25-150.50 69.21
======= ====== ============ =====
At December 31, 1995 and 1994, respectively, there were 481,786 and
137,721 shares available for future grant. During 1995, the number of shares
authorized for issuance under the stock option plan was increased to 2,000,000
shares from 1,500,000.
12. Pension plans and other postretirement benefits
The Company has a noncontributory defined benefit pension plan covering
substantially all full-time employees. Pension benefits accrue to participants
based on their level of compensation and number of years of service. With
respect to employees added as a result of the acquisitions completed in 1995 and
1994, service with the acquired entities was counted in the pension formula for
vesting, but not for benefit accrual purposes. The Company contributes to the
pension plan amounts sufficient to meet Internal Revenue Code funding standards.
Net periodic pension cost consisted of the following:
1995 1994 1993
---- ---- ----
(in thousands)
Service cost $ 3,304 4,148 3,075
Interest cost on projected benefit
obligation 6,026 5,823 4,904
Actual return on assets (19,666) 1,487 (8,217)
Net amortization and deferral 11,390 (9,541) 293
-------- ----- -----
Net periodic pension cost $ 1,054 1,917 55
======== ===== =====
-76-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
12. Pension plans and other postretirement benefits, continued
Data relating to the funding position of the pension plan were as follows:
1995 1994
---- ----
(in thousands)
Vested accumulated benefit obligation $(72,377) (60,307)
Total accumulated benefit obligation (74,635) (62,351)
Projected benefit obligation (91,222) (75,735)
Plan assets at fair value 108,316 88,215
-------- -----
Plan assets in excess of projected
benefit obligation 17,094 12,480
Unrecognized net asset (2,059) (2,917)
Unrecognized past service cost (493) (538)
Unrecognized net (gain) loss (2,317) (284)
-------- -----
Pension asset $ 12,225 8,741
======== =====
The assumed rates used in the actuarial computations were as follows:
1995 1994
---- ----
Discount rate 7.00% 8.00%
Rate of increase in future
compensation levels 5.00% 5.00%
Long-term rate of return on assets 8.00% 8.00%
==== ====
In addition, the Company has an unfunded supplemental pension plan for
certain key executives. Net periodic pension cost was $290,000, $341,000 and
$159,000 in 1995, 1994 and 1993, respectively.
The Company also provides health care and life insurance benefits for
qualified retired employees who reached the age of 55 while working for the
Company. Substantially all salaried employees are covered in the plan.
Net postretirement benefit cost consisted of the following:
1995 1994 1993
---- ---- ----
(in thousands)
Service cost $ 94 136 94
Interest cost on projected benefit obligation 1,022 1,059 1,094
Actual return on assets (547) (1) (364)
Net amortization and deferral 16 (452) (281)
------ ----- -----
Net postretirement benefit cost $ 585 742 543
====== ===== =====
Data relating to the funding position of the plan were as follows:
1995 1994
---- ----
(in thousands)
Accumulated benefit obligation:
Retirees $12,732 12,611
Active employees
Fully eligible 1,261 1,477
Other 996 800
Plan assets at fair value (7,046) (7,580)
------ -----
Accumulated benefit obligation in
excess of plan assets 7,943 7,308
Unrecognized net loss (2,009) (2,019)
Unrecognized past service cost 2,447 2,651
------- ------
Accrued postretirement benefit cost $ 8,381 7,940
======= ======
-77-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
12. Pension plans and other postretirement benefits, continued
The Company on occasion funds a portion of these postretirement benefit
obligations through contributions to a Voluntary Employee Benefit Association
trust account.
The assumed rates used in the actuarial computations were as follows:
1995 1994
---- ----
Discount rate 7.0% 8.0%
Long-term rate of return on assets 8.0% 8.0%
Medical inflation rate 11.5% 14.0%
==== ====
The medical inflation rate was assumed to gradually reduce to 5% over
thirteen years.
The Company's 1995 service cost, interest cost and accumulated benefit
obligation assuming a 1% increase in the medical inflation rate assumption are
as follows:
(in thousands)
Accumulated postretirement benefit obligation $16,018
Service cost 94
Interest cost 1,133
=======
13. Income taxes
The components of income tax expense were as follows:
1995 1994 1993
---- ---- ----
(in thousands)
Current
Federal $79,194 58,801 69,744
State and city 18,303 21,251 25,487
------- ------ ------
Total current 97,497 80,052 95,231
------- ------ ------
Deferred
Federal (7,875) (3,424) (18,124)
State and city 515 558 (5,576)
------- ------ ------
Total deferred (7,360) (2,866) (23,700)
------- ------ ------
Total income taxes
applicable to pre-tax income $90,137 77,186 71,531
======= ====== ======
The Company files a consolidated federal income tax return reflecting
taxable income earned by all subsidiaries. East New York may elect to compute
its bad debt deduction for tax purposes as a percentage of taxable income.
Applicable federal tax law allows qualified savings banks the option of
deducting as bad debt expense 8% of their taxable income. However, failure to
maintain savings bank status as defined by the Internal Revenue Code or charges
to the reserve established by these deductions for other than bad debt losses
would create taxable income, subject to the applicable tax rates in effect at
that time. At December 31, 1995, East New York's bad debt reserve for federal
tax purposes was $46,717,000. No actions are planned which would cause this
reserve to become wholly or partially taxable.
The portion of income tax expense attributable to gains on sales of bank
investment securities was $1,872,000 in 1995, $53,000 in 1994 and $392,000 in
1993. No alternative minimum tax expense was recognized in any year.
-78-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
13. Income taxes, continued
Total income taxes differed from the amount computed by applying the
statutory federal income tax rate to pre-tax income as follows:
1995 1994 1993
---- ---- ----
(in thousands)
Income taxes at statutory rate $77,411 68,068 60,733
Increase (decrease) in taxes:
Tax-exempt income (2,195) (5,758) (2,066)
State and city income taxes,
net of federal income
tax effect 12,232 14,176 12,942
Other 2,689 700 (78)
------- ------ ------
$90,137 77,186 71,531
======= ====== ======
Deferred tax assets (liabilities) were comprised of the following at
December 31:
1995 1994 1993
---- ---- ----
(in thousands)
Interest on loans $ 5,335 6,513 7,115
Gain on sales of loans - 1,041 2,207
Depreciation and amortization 5,943 4,367 3,477
Losses on loans and other assets 102,183 97,502 76,783
Postretirement and other
supplemental employee benefits 7,041 6,382 5,969
Incentive compensation plans 10,932 9,242 9,247
Unrealized investment losses 2,343 37,966 -
Other 6,990 7,781 3,060
------- ------- -------
Gross deferred tax assets 140,767 170,794 107,858
------- ------- -------
Retirement benefits (5,194) (3,801) (4,904)
Leasing transactions (71,717) (69,469) (72,019)
Restructured interest rate
swap agreements (13,746) (16,950) -
Capitalized servicing rights (7,981) - -
Unrealized investment gains - - (6,657)
Other (226) (5,159) -
------- ------- -------
Gross deferred tax liabilities (98,864) (95,379) (83,580)
------- ------- -------
Net deferred asset $ 41,903 75,415 24,278
======= ======= =======
The Company believes that it is more likely than not that the net deferred
tax asset will be realized through taxable earnings or alternative tax
strategies.
The income tax credits shown in the Statement of Income of First Empire in
note 20 arise principally from operating losses before dividends from
subsidiaries.
-79-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
14. Other income and other expense
The following items, which exceeded 1% of total revenues in the respective
period, were included in either other revenues from operations or other costs of
operations in the Consolidated Statement of Income:
1995 1994 1993
---- ---- ----
(in thousands)
Other income:
Transfer of investment securities
to charitable foundation $ 10,439
Other expense:
Professional services
Data processing 6,893
Other 10,748
Advertising 11,067 9,069
Charitable contributions 15,652
======= ====== =====
15. International activities
The Company engages in certain international activities consisting primarily of
purchasing Eurodollar placements, collecting Eurodollar deposits and engaging in
a limited amount of foreign currency trading. Assets identified with
international activities amounted to $86,580,000 and $7,172,000 at December 31,
1995 and 1994, respectively.
16. Derivative financial instruments
As part of managing interest rate risk, the Company has entered into several
interest rate swap agreements. The swaps modify the repricing characteristics of
certain portions of the Company's loan and deposit portfolios. In general, under
terms of the agreements the Company receives a fixed rate of interest and pays a
variable rate based on London Inter-Bank Offered Rates ("LIBOR"). Interest rate
swap agreements are generally entered into with counterparties with substantial
net worth and most contain collateral provisions protecting the at-risk party.
The Company considers the credit risk inherent in these contracts to be
negligible. Information about interest rate swaps entered into for interest rate
risk management purposes summarized by type of financial instrument the swaps
were intended to modify follows:
-80-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
16. Derivative financial instruments, continued
Weighted-average rate
Average --------------------- Estimated
Notional expected Fixed Variable fair value-
amount maturity (receive) (pay) gain(loss)
-------------- ---------- --------- -------- --------------
(in thousands) (in years) (in thousands)
December 31, 1995
- -----------------
Variable rate
loans:
Amortizing $ 365,782 1.12 5.93% 5.80% $ (287)
Non-amortizing 834,576 3.02 5.81% 5.89% 9,086
---------- ---- ---- ---- ---------
1,200,358 2.44 5.85% 5.86% 8,799
Fixed rate time
deposits:
Non-amortizing 1,178,000 1.35 6.55% 5.66% 28,238
---------- ---- ---- ---- ---------
$2,378,358 1.90 6.19% 5.76% $ 37,037
========== ==== ==== ==== =========
December 31, 1994
- -----------------
Variable rate
loans:
Amortizing $1,000,000 2.46 5.84% 6.12% $ (57,332)
Non-amortizing 575,000 4.46 5.96% 6.10% (39,947)
---------- ---- ---- ---- ---------
1,575,000 3.19 5.88% 6.11% (97,279)
Fixed rate time
deposits:
Non-amortizing 813,000 1.95 6.21% 5.98% (21,800)
---------- ---- ---- ---- ---------
$2,388,000 2.77 5.99% 6.07% $(119,079)
========== ==== ==== ==== =========
The estimated fair value of interest rate swap agreements represents the
amount the Company would have expected to receive (pay) to terminate such
contracts. Since these swaps have been entered into for interest rate risk
management purposes, the estimated market appreciation or depreciation should be
considered in the context of the entire balance sheet of the Company. The
estimated fair value of interest rate swaps entered into for interest rate risk
management purposes is not recognized in the consolidated financial statements.
The notional amount of an amortizing swap may, following an initial
lock-out period, vary depending on the level of interest rates or the repayment
behavior of mortgage-backed securities to which the swap is indexed. The
notional amount of a non-amortizing swap does not change during the term of an
agreement.
At December 31, 1995 the notional amount of interest rate swaps
outstanding was expected to mature as follows:
Amortizing Non-amortizing
---------- --------------
(In thousands)
Year ending December 31:
1996 $191,229 $ 725,000
1997 93,111 323,845
1998 81,442 254,731
1999 - 314,000
2000 - 395,000
-------- ----------
$365,782 $2,012,576
======== ==========
-81-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
16. Derivative financial instruments, continued
The net effect of interest rate swaps was to increase net interest
income by $884,000, $12,481,000 and $34,242,000 during the years ended December
31, 1995, 1994 and 1993, respectively. The average notional amount of interest
rate swaps impacting net interest income which were entered into for interest
rate risk management purposes were $2,536,329,000, $1,627,454,000 and
$1,213,886,000 during the years ended December 31, 1995, 1994 and 1993,
respectively.
During 1995 and 1994, the Company restructured several interest rate
swap agreements with notional amounts of $260 million and $500 million,
respectively, from amortizing to non-amortizing. The purpose of the
restructurings was to enhance the effectiveness of the swaps in managing the
Company's exposure to changing interest rates in future years. Losses resulting
from the early termination of the amortizing swaps and equal amounts of purchase
discount received on the restructured non-amortizing swaps were recognized as a
result of these transactions and included in the carrying amount of loans which
the swaps modified. The deferred losses and purchase discounts totaled $32.9
million and $35.2 million, respectively, at December 31, 1995. Such amounts were
each $40.2 million at December 31, 1994. The deferred losses are being amortized
and the purchase discounts accreted to interest income over the remaining terms
of the original swaps and restructured swaps, respectively. Such amortization
and accretion were $11.1 million and $8.8 million, respectively, in 1995. The
restructuring transactions did not have a significant effect on interest income
in 1994.
The net increase (decrease) in interest income in future years from
amortization and accretion of balances resulting from interest rate swap
restructurings is as follows:
Year ending December 31: (in thousands)
1996 $(2,310)
1997 (1,674)
1998 (104)
1999 5,960
2000 403
Derivative financial instruments used for trading purposes included
foreign exchange and other option contracts, foreign exchange forward and spot
contracts, interest rate swap agreements and financial futures. The following
table includes information about the estimated fair value of derivative
financial instruments used for trading purposes:
1995 1994
---- ----
(in thousands)
December 31:
Gross unrealized gains $5,867 1,673
Gross unrealized losses 3,184 1,689
Year ended December 31:
Average gross unrealized gains $8,356 1,842
Average gross unrealized losses 7,374 1,558
====== =====
Net gains (losses) arising from derivative financial instruments used for
trading purposes were $1,375,000, $(336,000) and $219,000 during the years ended
December 31, 1995, 1994 and 1993, respectively.
-82-
FIRST EMPIRE STATE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements, continued
17. Commitments and contingencies
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as commitments to extend credit guarantees and "standby"
letters of credit (approximately $185,667,000 and $150,219,000 at December 31,
1995 and 1994, respectively) which are not reflected in the consolidated
financial statements. No material losses are expected as a result of these
transactions. Additionally, the Company had outstanding loan commitments of
approximately $2.1 billion and $1.6 billion at December 31, 1995 and 1994,
respectively. Because many loan commitments and almost all credit guarantees and
"standby" letters of credit expire without being funded in whole or part, the
contract amounts are not estimates of future cash flows. Commitments to sell
one-to-four family residential mortgage loans totaled $222,772,000 at December
31, 1995 and $74,614,000 at December 31, 1994.
In the opinion of management, the potential liabilities, if any, arising
from all lawsuits pending against the Company at December 31, 1995 will not have
a materially adverse impact on the Company's consolidated financial condition.
Moreover, management believes that the Company has substantial defenses in such
litigation, but that there can be no assurance that the potential liabilities,
if any, arising from such litigation will not have a materially adverse impact
on the Company's consolidated results of operations in the future.
18. Regulatory restrictions
Payment of dividends by First Empire's banking subsidiaries is restricted by
various legal and regulatory limitations. Dividends from any banking subsidiary
to First Empire are limited by the amount of earnings of the banking subsidiary
in the current year and the preceding two years. For purposes of this test, at
December 31, 1995, approximately $192,499,000 was available for payment of
dividends to First Empire from banking subsidiaries without prior regulatory
approval.
Banking regulations prohibit extensions of credit by the subsidiary banks
to First Empire unless appropriately secured by assets. Securities of affiliates
are not eligible as collateral for this purpose.
The banking subsidiaries are required to maintain noninterest-earning
reserves against deposit liabilities. During the maintenance periods that
included December 31, 1995 and 1994, cash and due from banks included a daily
average of $174,028,000 and $158,342,000, respectively, for such purpose.
19. Revolving credit agreement of First Empire
First Empire has a revolving credit agreement with an unaffiliated commercial
bank whereby First Empire may borrow up to $25,000,000 at its discretion through
November 24, 1998. The agreement provides for a facility fee assessed on the
entire amount of the commitment (whether or not utilized) ranging from .08% to
.187% depending on the credit rating of the subordinated notes of M&T Bank. A
usage fee equal to .10% per annum is assessed if the balance of outstanding
loans exceeds 50% of the commitment amount during any quarter. Under the
revolving credit agreement, First Empire may borrow at either a variable rate
based upon the higher of the Federal funds rate plus 1/2 of 1% or the lender's
prime rate, or a fixed rate based upon a premium over LIBOR ranging from .15% to
.30% depending on the credit rating of the subordinated notes of M&T Bank. At
December 31, 1995, there were no outstanding balances under such agreement.
-83-
20. Parent company financial statements
See other notes to financial statements.
CONDENSED BALANCE SHEET
December 31
Dollars in thousands 1995 1994
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Cash
In subsidiary bank $ 161 175
Other 18 18
- --------------------------------------------------------------------------------
Total cash 179 193
Due from subsidiaries
Money-market assets 7,215 1,257
Current income tax receivable 965 6,792
- --------------------------------------------------------------------------------
Total due from subsidiaries 8,180 8,049
Investments in subsidiaries
Banks 828,157 706,801
Other 6 6
Other assets 10,739 9,030
- --------------------------------------------------------------------------------
Total assets $ 847,261 724,079
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Short-term borrowings $ - 3,000
Accrued expenses and other liabilities 1,008 83
- --------------------------------------------------------------------------------
Total liabilities 1,008 3,083
- --------------------------------------------------------------------------------
Stockholders' equity 846,253 720,996
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 847,261 724,079
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
Year ended December 31
Dollars in thousands, except per share 1995 1994 1993
- --------------------------------------------------------------------------------
Income
- --------------------------------------------------------------------------------
Dividends from bank subsidiaries $ 88,358 59,300 23,000
Other income 812 11,493 665
- --------------------------------------------------------------------------------
Total income 89,170 70,793 23,665
- --------------------------------------------------------------------------------
Expense
- --------------------------------------------------------------------------------
Interest on short-term borrowings 556 3 29
Other expense 2,365 17,739 1,979
- --------------------------------------------------------------------------------
Total expense 2,921 17,742 2,008
- --------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiaries 86,249 53,051 21,657
Income tax credits 944 7,087 688
- --------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 87,193 60,138 22,345
- --------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries
- --------------------------------------------------------------------------------
Net income
Bank subsidiaries 132,201 116,457 102,642
Other subsidiaries - - 5
Less: dividends received (88,358) (59,300) (23,000)
- --------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries 43,843 57,157 79,647
- --------------------------------------------------------------------------------
Net income $131,036 117,295 101,992
- --------------------------------------------------------------------------------
Net income per common share $18.79 16.35 13.87
-84-
20. Parent company financial statements, continued
CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31
Dollars in thousands 1995 1994 1993
- ----------------------------------------------------------------------------------------
Cash flows from operating activities
- ----------------------------------------------------------------------------------------
Net income $ 131,036 117,295 101,992
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiaries (43,843) (57,157) (79,647)
Dividend-in-kind from subsidiary (11,858) - -
Provision for deferred income taxes (221) (206) (82)
Net gain on sales of assets (179) (128) -
Net change in accrued income and expense 7,616 (6,570) 5,009
Transfer of noncash assets to charitable foundation - 5,213 -
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 82,551 58,447 27,272
- ----------------------------------------------------------------------------------------
Cash flows from investing activities
- ----------------------------------------------------------------------------------------
Investment in subsidiary (20,248) - -
Other , net 871 (8,199) (1,809)
- -----------------------------------------------------------------------------------------
Net cash used by investing activities (19,377) (8,199) (1,809)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities
- -----------------------------------------------------------------------------------------
Net increase (decrease) in short-term borrowings (3,000) 3,000 (3,500)
Purchases of treasury stock (37,374) (43,964) -
Dividends paid - common (16,224) (14,743) (13,054)
Dividends paid - preferred (3,600) (3,600) (3,600)
Other, net 2,968 1,049 1,788
- ----------------------------------------------------------------------------------------
Net cash used by financing activities (57,230) (58,258) (18,366)
- ----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 5,944 (8,010) 7,097
Cash and cash equivalents at beginning of year 1,450 9,460 2,363
Cash and cash equivalents at end of year $ 7,394 1,450 9,460
- ----------------------------------------------------------------------------------------
Supplemental disclosure of cash flow
information
- ----------------------------------------------------------------------------------------
Interest received during the year $ 279 932 658
Interest paid during the year 558 1 46
Income taxes received during the year 7,393 510 5,462
- ----------------------------------------------------------------------------------------
In connection with reorganizing certain lines of business in 1995, loans
and other assets aggregating $11,858,000 were transferred among First Empire's
banking subsidiaries. To accomplish such transfers, the loans and other assets
were distributed to First Empire in the form of dividends-in-kind. First Empire,
in turn, contributed those assets to other banking subsidiaries.
-85-
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure. None.
PART III
Item 10. Directors and Executive Officers of the Registrant. The
identification of the Registrant's directors is incorporated by
reference to the caption "NOMINEES FOR DIRECTOR" contained in the
Registrant's definitive Proxy Statement for its 1996 Annual
Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission on or about March 14, 1996. The
identification of the Registrant's executive officers is presented
under the caption "Executive Officers of the Registrant" contained
in Part I of this Annual Report on Form 10-K.
Disclosure of compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, by the Registrant's directors and
executive officers, and persons who are the beneficial owners of
more than 10% of the Registrant's common stock, is incorporated by
reference to the caption "STOCK OWNERSHIP BY DIRECTORS AND
EXECUTIVE OFFICERS" contained in the Registrant's definitive Proxy
Statement for its 1996 Annual Meeting of Stockholders.
Item 11. Executive Compensation. Incorporated by reference to the
Registrant's definitive Proxy Statement for its 1996 Annual Meeting
of Stockholders, which will be filed with the Securities and
Exchange Commission on or about March 14, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Registrant's definitive Proxy
Statement for its 1996 Annual Meeting of Stockholders, which will
be filed with the Securities and Exchange Commission on or about
March 14, 1996.
Item 13. Certain Relationships and Related Transactions. Incorporated by
reference to the Registrant's definitive Proxy Statement for its
1996 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission on or about March 14, 1996.
-86-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial statements and financial statement schedules filed
as part of this Annual Report on Form 10-K. See Part II, Item
8. "Financial Statements and Supplementary Data".
The financial statement schedules required by Rule 9-07 under
Regulation S-X are omitted because the required information is
not applicable.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
fiscal quarter ended December 31, 1995.
(c) Exhibits required by Item 601 of Regulation S-K.
The exhibits listed on the Exhibit Index on pages 91 and 92 of
this Annual Report on Form 10-K have been previously filed,
are filed herewith or are incorporated herein by reference to
other filings.
(d) Additional financial statement schedules.
None.
-87-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 14th day of March,
1996.
FIRST EMPIRE STATE CORPORATION
By: /s/ Robert G. Wilmers
---------------------------------
Robert G. Wilmers
Chairman of the Board,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Principal Executive
Officer:
/s/ Robert G. Wilmers Chairman of the Board,
- --------------------- President and
Robert G. Wilmers Chief Executive Officer 3/14/96
-------
Principal Financial
and Accounting Officer:
/s/ James L. Vardon Executive Vice President
- ------------------- and Chief Financial Officer 3/14/96
James L. Vardon -------
-88-
A majority of the board of directors:
/s/ Brent D. Baird 3/14/96
- -------------------------------------- -------
Brent D. Baird
/s/ John H. Benisch 3/14/96
- -------------------------------------- -------
John H. Benisch
/s/ C. Angela Bontempo 3/14/96
- -------------------------------------- -------
C. Angela Bontempo
/s/ Robert T. Brady 3/14/96
- -------------------------------------- -------
Robert T. Brady
/s/ Patrick J. Callan 3/14/96
- -------------------------------------- -------
Patrick J. Callan
/s/ David N. Campbell 3/14/96
- -------------------------------------- -------
David N. Campbell
/s/ James A. Carrigg 3/14/96
- -------------------------------------- -------
James A. Carrigg
/s/ Barber B. Conable, Jr. 3/14/96
- -------------------------------------- -------
Barber B. Conable, Jr.
/s/ Richard E. Garman 3/14/96
- -------------------------------------- -------
Richard E. Garman
/s/ James V. Glynn 3/14/96
- -------------------------------------- -------
James V. Glynn
- -------------------------------------- -------
Roy M. Goodman
/s/ Patrick W.E. Hodgson 3/14/96
- -------------------------------------- -------
Patrick W.E. Hodgson
- -------------------------------------- -------
Samuel T. Hubbard, Jr.
/s/ Lambros J. Lambros 3/14/96
- -------------------------------------- -------
Lambros J. Lambros
/s/ Wilfred J. Larson 3/14/96
- -------------------------------------- -------
Wilfred J. Larson
- -------------------------------------- -------
Jorge G. Pereira
-89-
/s/ William C. Shanley, III 3/14/96
- -------------------------------------- -------
William C. Shanley, III
/s/ Raymond D. Stevens, Jr. 3/14/96
- -------------------------------------- -------
Raymond D. Stevens, Jr.
/s/ Richard D. Trent 3/14/96
- -------------------------------------- -------
Richard D. Trent
- -------------------------------------- -------
Herbert L. Washington
/s/ John L. Wehle, Jr. 3/14/96
- -------------------------------------- -------
John L. Wehle. Jr.
/s/ Robert G. Wilmers 3/14/96
- -------------------------------------- -------
Robert G. Wilmers
-90-
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of First Empire State
Corporation dated April 19, 1989, filed by the Secretary of
State of New York on April 20, 1989. Incorporated by reference
to Exhibit No. 19 to the Form 10-Q for the quarter ended March
31, 1989 (File No. 1-9861).
3.2 Certificate of Amendment of the Certificate of Incorporation
of First Empire State Corporation dated March 13, 1991, filed
by the Secretary of State of New York on March 14, 1991.
Incorporated by reference to Exhibit No. 19 to the Form 10-Q
for the quarter ended March 31, 1991 (File No. 1-9861).
3.3 By-Laws of First Empire State Corporation as last amended on
July 16, 1991. Incorporated by reference to Exhibit No. 3.2
to the Form 10-K for the year ended December 31, 1991 (File
No. 1-9861).
4 Instruments defining the rights of security holders, including
indentures. Incorporated by reference to Exhibit Nos. 3.1,
3.2, 3.3, 10.1 and 10.2 hereof.
10.1 Revolving Credit Agreement, dated as of November 24, 1995,
between First Empire State Corporation and The First National
Bank of Boston. Filed herewith.
10.2 First Empire State Corporation 1983 Stock Option Plan as
amended and restated. Incorporated by reference to Exhibit
No. 10 to the Form 10-Q for the quarter ended March 31, 1995
(File No. 1-9861).
10.3 First Empire State Corporation Annual Executive Incentive
Plan. Incorporated by reference to Exhibit No. 10.4 to the
Form 10-K for the year ended December 31, 1992 (File No. 1 -
9861).
Supplemental Deferred Compensation Agreements between
Manufacturers and Traders Trust Company and:
10.4 Robert E. Sadler, Jr. and James L. Vardon, each dated as of
March 7, 1985. Incorporated by reference to Exhibit Nos.
(10)(d) (A) and (B), respectively, to the Form 10-K for the
year ended December 31, 1984 (File No. 0-4561);
10.5 Harry R. Stainrook dated as of December 12, 1985. Incorporated
by reference to Exhibit No. (10)(e)(ii) to the Form 10-K for
the year ended December 31, 1985 (File No. 0-4561);
10.6 William C. Rappolt dated as of March 7, 1985. Incorporated by
reference to Exhibit No. (10)(e)(iv) to the Form 10-K for the
year ended December 31, 1987 (File No. 1-9861);
10.7 William A. Buckingham dated as of August 7, 1990.
Incorporated by reference to Exhibit No. 10.8 to the Form 10-K
for the year ended December 31, 1990 (File No. 1-9861); and
10.8 Brian E. Hickey dated as of July 21, 1994. Filed herewith.
10.9 Supplemental Deferred Compensation Agreement, dated July 17,
1989, between The East New York Savings Bank and Atwood
Collins, III. Incorporated by reference to Exhibit No. 10.11
to the Form 10-K for the year ended December 31, 1991 (File
No. 1-9861).
-91-
10.10 First Empire State Corporation Supplemental Pension Plan.
Incorporated by reference to Exhibit No. 10.12 to the Form 10-
K for the year ended December 31, 1994. (File No. 1-9861).
10.11 First Empire State Corporation Supplemental Retirement Savings
Plan. Incorporated by reference to Exhibit No. 10.13 to the
Form 10-K for the year ended December 31, 1994. (File No. 1-
9861).
11 Statement re: Computation of Earnings Per Common Share.
Filed herewith.
21 Subsidiaries of the Registrant. Incorporated by reference to
the caption "Subsidiaries" contained in Part I, Item 1 hereof.
23.1 Consent of Price Waterhouse re: Registration Statement No.
33-32044. Filed herewith.
23.2 Consent of Price Waterhouse re: Registration Statements Nos.
33-12207, 33-58500 and 33-63917. Filed herewith.
27 Article 9 Financial Data Schedule for the year ended December
31, 1995. Filed herewith.
99.1 First Empire State Corporation Retirement Savings Plan and
Trust Financial Statements and Additional Information for the
years ended December 31, 1995 and 1994. Filed herewith.
-92-